Saturday, August 22, 2009

The problem with putting out fires is that sometimes something important gets burnt 

It is not surprising to any knowledegeable observer that that the economic strategy of this government is not so much communism, socialism, import substitution, liberalism (neo-), export, etc. But rather the continual counter-attacks whenever economic flashpoints arises, often time inadvertently creating new ones.

On the news that manufacturing shrunk 8.5% in the second trimester, the government realises that it must devalue the currency or else the fall would be catastrophic. Instead of creating a dual system like 80's Recadi wherin essential goods could remain at 2.15 Bs and the rest at a higher rate, they are studying whether to charge taxes on currency transactions for imports. Granted this IS better than the status quo, but I will explain the pro's and cons compared to a dual exchange system.

Lower political costs of increasing taxes as inflation still eats away at the currency. Lets say tomorrow the tax is 100% meaning 2.15 turns into 4.30 Bs per dollar, once inflation chips this away there is a much smaller political cost in anouncing a 200% tax to turn 2.15 into 6.45. Or ideally smaller increments that are more periodical.

Exports are still exposed and this system does nothing to alleviate this, unless they start resorting to the black market exports will inevitably reach 0 as inflation shows no sign of equalizing its rate with the rest of the world.

This is bad news if it does come to fruition, instead of adopting a sensible progressive policy the government will create an inferior solution simply because that is what the old government did.

That said if they do give "refunds" to exports at the same rate (100%, 200% etc) I will eat my words and actually clap that they found a sensible solution to a politically complicated problem. I doubt it though, but time will tell.


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