Tuesday, March 24, 2009

Time to stick a fork in it. 

It is often said that the last thing to die is hope. Well, my hope for the government of Hugo Chavez to change course and take Venezuela on a path out of dependence on oil and to full development just died.

Things started looking really bad in 2007 as urgently needed economic reforms that should have taken place right after Chavez's re-election in December 2006 never happened. But there was still hope, at least a little.

That hope spent pretty much all of 2008 on life support as again needed reforms never happened and the imbalances grew worse and worse. And lets be clear - things getting bad in Venezuela had nothing to do with the world recession as Venezuela had record oil income right up through the third quarter of that year. Venezuela's problems really came from a very bad case of the Dutch Disease where booming oil revenues prop up a radically overvalued currency which in turn causes tradeable sectors of the economy to go into decline.

And sure enough, starting in the third quarter of 2008 manufacturing growth slowed to zero.

However, hope still was hanging in there, at least by a thread. That thread was Ali Rodriguez who became Finance Minister and who is a trusted confident of Chavez (i.e. a person who rather than just being completely dominated by Chavez as most people probably are can actually argue his case and maybe even win sometimes). Further, he is a competent and capable leader who was instrumental in reviving OPEC in the late 90s and in getting PDVSA through the oil strike/sabotage of 2002/2003.

So hope hung on in the form of nothing more and nothing less than Ali Rodriguez being able to understand the economic problems facing Venezuela and being able to prevail upon President Chavez to make the reforms needed to fix them.

Sadly, after Mr. Rodriguez's interview today with the international press we can forget him riding to the rescue of the Venezuelan economy. He said a number of things which were silly but let me cut to the chase on the worst of the non-sense.

When asked about a possible devaluation he replied:

No, a devaluation would not be good for the national economy. The risks to it greatly out number what would be fixed. Further, it isn't necessary. If it was, we would make adjustment.

So there you have it, they won't devalue because they don't have to. They apparently prefer to wait until the money literally runs out and the issue is forced - you know, do it like Russia did in 1998 or a previous Venezuelan government did in 1983.

Sadly, the worst of his remarks was yet to come:

We are an importing country. Basically we only export oil. A devaluation at this time will automatically make imports more expensive at a time when we have to take care of every last dollar due to the fall in oil prices.

Well, he sure has the "we only export oil part right".   He is also right in saying that devaluing the currency will make imports more expensive, but it was all down hill from there.   Here is the catch - he implies that it makes them more expensive in DOLLAR TERMS and that would be bad because Venezuela has to be very careful with the now fewer dollars it has.


If a pair of blue jeans from the United States cost $20 now it will cost $20 even after a devaluation. What changes is that if the exchange rate changes from 2 BsF to 4 BsF per dollar the price of those jeans (which again stays exactly the same in dollars) increases from 40 BsF to 80 BsF.

And guess what that means Mr Rodriguez?? It means that Venezuelans will buy fewer blue jeans from the United States because their price just doubled in Bolivares. And if people switch to buying Venezuelan blue jeans because imported ones are now so much more expensive guess what ???? - Venezuela will be spending less dollars buying imported items and hence it will save those precious dollars which it can't afford to waste.

Thus, reality is exactly the opposite of what the Finance Minister said - Venezuela needs to devalue PRECISELY SO IT CAN SAVE DOLLARS AND STOP WASTING THEM. This is economics 101 and that Ali Rodriguez said something that is the exact opposite of what anyone who knows a modicum of economics knows means either A) he is totally clueless about economics in which case he shouldn't be Finance Minister or B) he is a liar who is intentionally saying this non-sense because he doesn't want to give the real reasons for not devaluing. And really, does it matter if it is A or B? I don't think so.

Further, not only does he obviously not understand what a devaluation is and what it accomplishes he also apparently has no clue that one of the major reasons that Venezuela exports practically nothing besides oil is precisely because of this screwed up exchange rate.

So there you have it. What was in my view the last hope turned out to either be a clueless empty suit or a lying little lap dog for Chavez. Either way the ultimate collapse of all this is foretold.


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