Friday, March 27, 2009

Fonden, TARP, what's the difference? 

Recently some people have been having an apoplectic fit because they don't know down to the last Bolivar how much money is in Venezuela's National Development Fund. Of course, if they paid any attention at all, even to the very media sources that absolutely detest Chavez, they would know that at year end 2008 there was about $6 billion dollars in it and that another $12 billion was deposited to it in January. So it has roughly $18 billion dollars less what has been spent in the past couple of months.

Unfortunately, that just isn't good enough for some very demanding types who insist that because they don't have audited financial reports delivered to their doorsteps on it every week it must be some big Madoff like ponzi scheme where the money simply doesn't exits.

And of course, even if it probably does exist this not knowing up to the minute balances on it is very opaque and, well, banana republicish.

That may be true and in fact only serves to feed my suspicion that the United States is rapidly moving into banana republic territory. I mean, its one thing to lose track of a fund with a few tens of billions in it but losing track of a fund that has $700 billion in it?!?!? It takes the expertise of the U.S. government to do that:

WASHINGTON -- The Treasury has tried to revamp its $700 billion financial-rescue program, promising "a new era of accountability, transparency and conditions." But the Treasury isn't answering a key question: How much is left in the rescue fund?

Based on Dow Jones Newswires' reporting and calculations, it appears that Treasury has, at most, $52.6 billion left in its rescue fund. That would mean about 92% is already committed. That assumes the Treasury spends $100 billion in TARP funds to rid bank balance sheets of toxic assets.

The Treasury has yet to provide an official accounting.

On Wednesday, Treasury Secretary Timothy Geithner twice was asked to specify how much remains in the Troubled Asset Relief Program. The question arose amid the series of new programs the Obama administration has announced in the past several weeks to boost ailing financial markets. In both instances, the secretary avoided a direct answer.

The first time came after Mr. Geithner delivered remarks to the Council on Foreign Relations Wednesday morning. The moderator asked the basic question: How much is left in TARP? Mr. Geithner's reply: "Very, very reasonable amounts of money -- significant enough money."

Mr. Geithner gave a similar response a couple of hours later in a CNBC television interview.

Then again, maybe we are all just angsting too much. I mean do we really need to know if it is $2 billion or $200 billion left in any of these funds as long as we know its a "very reasonable" amount? After all, as long as it is "significant enough" what else matters?


Wednesday, March 25, 2009

Here is another way not to go about trying to develop. 

Over the past several years it has become clear to me that the Chavez administration in not pursuing a successful development strategy.

However, as much as I think the Chavez government has been stupid, incompetent, and indifferent to really developing the country it must also be remembered taking what is presently an underdeveloped country and moving it to developed status isn't easy. Further, there is more than one way to fail at it.

Take the case of Mexico. While Venezuela could be the poster child for the "resource curse" or "Dutch Disease" Mexico is the poster child for the failure of neo-liberal policies or the "Washington Consensus".

Lets take a look at some of Mexico's problems as described by the New York Times:

Mexico’s former president, Carlos Salinas, used to promise that free trade and foreign investment would jump-start this country’s development, empowering a richer and more prosperous Mexico “to export goods, not people.”

Fifteen years after the North American Free Trade Agreement took effect, only the first part of that promise has been realized.

Mexico’s exports have exploded under Nafta, quintupling to $292 billion last year, but Mexico is still exporting people too, almost half a million each year, seeking opportunities in the United States that they do not have at home.

Secretary of State Hillary Rodham Clinton will arrive in Mexico on Wednesday and President Obama will visit next month. Both are expected to emphasize the successes of American-Mexican economic cooperation, but it will be hard to ignore how much in Mexico has not changed under Nafta.

Economists here say much of the blame lies with Mexican leaders, unable or unwilling to take on oligarchs and unions controlling key sectors of the economy like energy and telecommunications. But they say some blame goes to the unintended consequences of Nafta.

In some cases, Nafta produced results that were exactly the opposite of what was promised.

For instance, domestic industries were dismantled as multinationals imported parts from their own suppliers.

Local farmers were priced out of the market by food imported tariff-free. Many Mexican farmers simply abandoned their land and headed north.

Although one-quarter of Mexicans live in the countryside, they account for 44 percent of the migrants to the United States. The contradictions of Nafta are apparent in Guadalajara and the rich farmland around it.

On the road from the airport to the city, Mexico’s second-largest, a well-worn sign welcomes visitors to Mexico’s Silicon Valley. After Nafta went into effect, the comparison seemed ambitious but not out of reach.

Global giants spent billions of dollars turning Guadalajara into a manufacturing hub for the information technology industry. The industry boomed, spurred by cheap labor and the sense that Nafta guaranteed investor-friendly policies. Today the city is ringed with low-slung factories that churn out everything from BlackBerrys to digital tape storage libraries for Sun Microsystems.

But investors came because the city was already a center of technology. I.B.M, Hewlett-Packard and others had come in the 1960s and 1970s when Mexico’s market was closed.

After Nafta, the new factories imported parts from their global suppliers, wiping out local companies that had sold printed circuit boards or assembled computers under tariff protection, said Kevin P. Gallagher, a Boston University professor who has written about the Guadalajara information technology industry.

Here is aptly described the results of Mexico's number one problem. It thought it could develop through free trade - open your borders, open your markets, welcome foreign investors, and development will automatically follow, or so goes the thinking of some.

In reality nothing of the sort happens. As happened in the case of Mexico foreign companies come looking for a new market and to exploit cheap labor. They have no interest in truly helping the host country develop, they transfer no technology, they very much remain foreign companies to the host company, and they wipe out already existing local industries.

Sure, there are plenty of car factories and semi-conductor foundries in Mexico. But there is no Mexican ability to design either cars or semi-conductors much less to build their own car or semi-conductor factories. Being nothing more than a cheap labor workshop for foreign companies only gets you so far - just as limiting itself to selling only oil only gets Venezuela so far.

Developing your own local industry is absolutely key to true development. And it is absolutely critical that that local industry be assisted by the government and protected from outside competition during its initial phases of development.

Sure that makes local consumers somewhat worse off initially but lets remember that before you can be a consumer you have to be a producer and fostering companies that will provide gainful and high wage employment is what will ultimately make a nation of happy consumers.

Things grew worse when the tech bubble burst, the American economy cooled and the companies moved to China, where they could pay even lower wages. Once China entered the World Trade Organization, Mexico lost much of the edge in exporting to the United States that Nafta had given it. Employment in Guadalajara’s I.T. factories dropped 37 percent in 2001 and continued to slide for two years.

That is the problem with trying to compete solely based on low wages. Once you develop even a little bit and your wages rise slightly your un-rooted foreign industry moves elsewhere.

“The agreement could have brought investment with more value here,” including research, testing and design, said Jesús Palomino, the general manager at Intel’s design center in Guadalajara. “But we did not know how to define or negotiate or take advantage of it.”

Mr. Palomino argues that attracting multinational manufacturers was too limited a focus. He oversees about 300 young engineers who test future Intel products and carry out research and development. The sophisticated Intel design center is an exception to the city’s assembly plants. Those factories mostly hire low-wage labor.

“A new phenomenon has grown up under Nafta — high-productivity poverty,” said Harley Shaiken, chairman of the Center for Latin American Studies at the University of California, Berkeley.

Low wages means low purchasing power. “It is not a successful strategy for globalization,” Mr. Shaiken said.

Again, Mexico thought others would develop it when in fact they would do no such thing. If you want to develop you have to do it yourself - with your own capital, your own educated workforce, and by fighting hard to obtain new technologies.

Even Nafta’s greatest success — exports — has become a liability, as Mexico feels the full brunt of declining consumption in the United States. The auto industry, for example, which has flourished under Nafta, has ground to a virtual standstill. Over all, Mexican auto exports fell more than 50 percent in the first two months of this year compared with 2008, and production dropped almost 45 percent.

The central bank forecasts that as many as 340,000 people could lose their jobs this year, and some investment banks predict the economy could contract as much as 5 percent.

That weakness has driven down the peso, which has lost about a quarter of its value in the last six months. Foreign direct investment fell last year to $18.6 billion from $27.2 billion in 2007.

Still, economists here say much of the responsibility for the lack of development in the last decade and a half lies largely with Mexican leaders and their unwillingness or inability to enact real reforms. “We have an economy that has atrophied because of the lack of reform,” said Gerardo Esquivel, an economist at the Colegio de México.

Other developing countries benefited from globalization, particularly in Asia. But in Mexico, economic growth has averaged about 3 percent a year since Nafta took effect, far below what is needed to create jobs for the million young people who enter the work force each year and the millions more who barely scrape by.

Here the Times mistakenly fails to see the link between problems. They point out that Mexico's economy is now in decline because of its dependence on exports to the U.S. Fair enough.

But there are other countries that depended even more on exports to the United States and yet are still growing. The prime example is China. Why is China doing better than Mexico?

Simple, by fostering domestic industry, protecting its own market, mastering technologies, and having very high rates of investment it has had a growth rate MUCH higher than Mexico's (10% versus 3%) and has built up huge cash reserves which it can now use to invest and maintain its economy even through this recession.

Mexico's problem isn't the current recession. It is its failed development strategy that led to a paltry 3% annual growth over the past 15 years.

Summarizing we can clearly see that the path followed by Mexico (and note this is the path advocated by most of the Venezuelan opposition) fails for the following reasons:

1) Emphasizing foreign investment rather than investing in yourself. This leaves the country's industrial base at a very primitive assembly plant level with technology and high value added processes dominated by others. Instead of following this route countries must insist on building up their own local companies which will over time control all facets of design and production.

2) Your own domestic market must be protected if you don't want to see your own local industries and agriculture wiped out by vastly more efficient competitors before they have a chance to become more efficient themselves. What we saw above with Mexico very clearly illustrates the importance of this. Yes, many people may not initially like buying inferior locally produced products but that is a price that must be paid at least initially if you want the long term gains that come only from true development.

3) You must work very hard at improving the educational level of your population and in particular building up a highly trained workforce capable of mastering and developing new technologies. Doing points 1 and 2 will be impossible without this.

4) You must have very high rates of investment. The 3% annual growth Mexico has had over the past 15 years is obviously inadequate. You must have higher rates of growth and getting that requires very high rates of investment.

Just as there is more than one way to skin a cat there is more than one way to screw up a country's development. We've been watching the slow motion self-destruction of Venezuela's economy on this blog for some time. Today we glimpsed Mexico's different path but similar failings. Although they have very different circumstances and are taking different paths they are almost certain to wind up in the same place - perpetual underdevelopment.


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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