"These include the assumptions that the markets are perfectly competitive...and that there are no government subsidies or export requirements. If this were a true picture of our trade in tyres with China, then imposing tariffs would truly be harmfully protectionist and not be justified.
But this is not even close to the reality of our trade with China, which far from embracing orthodox free trade has openly adopted a neo-mercantilist, export-led economic growth strategy." (Financial Times)
Very true. As I mentioned last week, our economic relationship to China is deeply colored by both the artificially cheap RMB and their massive dollar holdings. Every action becomes invested with political significance, symbolizing some larger movement or principle.
Venezuelan Coffee Industry Suffering - Financial Times
A little different from my usual topics, but these kind of stories are a good indicator of what happens when a government tries to decree how every aspect of the economy works. It doesn't matter whether it's currency or coffee beans - price controls lead to shortages, supply and demand get distorted, and a black market springs up.
"But analysts say many of the problems confronting coffee production - and the private sector in general - are caused by precisely this kind of government intervention. Such expropriations, as well as an aggressive land reform campaign, have generated a climate of uncertainty that has damped investment.
Price controls have made matters worse. Increasing amounts of coffee - and many other goods - are smuggled abroad to be sold at international prices. "Of course there's contraband. What does Chávez expect when you can sell coffee in
for double or triple the price?" said one coffee producer, who requested anonymity." (Financial Times) Colombia
As we saw in the case of Black Market Bolivars, that means expensive, imported coffee. In trying to organize and protect domestic industries with the blunt instrument of state policy, Chavez has once again fallen prey to the law of unintended consequences. Although not identical, currency controls can undermine trust in the local fiat currency, prompting flight to quality. The coffee situation bears some resemblance.
There hasn't been a drought or a change in growing conditions, and global coffee prices have generally increased over the past years. Of course, coffee isn't money - it's not totally fungible, and beans from Brasil aren't the same as those from
Because of this, Venezuelan coffee is a distinct brand, differentiated from the competition. But
"Food imports have quadrupled in the past 10 years, from about $60 to more than $250 per person per year, says Hiram Gaviria, former agriculture minister. Imports cover about two thirds of food consumption in a country that boasts vast areas of unused, fertile land.
While production of some foodstuffs such as maize and rice has increased in this period, the production of beef and sugar, in which
used to be self-sufficient, is today barely half national consumption." (Financial Times) Venezuela
The market is there, globally - but it's been badly distorted. In trying to fix domestic coffee production, the Venezuelan leader has exacerbated the very problem he set out to cure. Shame on Mr. Chavez.
'Why save? It will be worthless in a few months. It's better to just spend the money and enjoy yourself while you can,' said Maria Elena Blanco."
Economy Minster Amado Boudou has hinted that
Regardless, it's going to be a rocky road back to economic respectability for the battered Argentine government. The Paris Club of creditors has been particularly incensed with them in the past, and they will not accept an offer like the 36-cent settlement of 2005. Nine years of accrued interest on Argentine debt mean that lenders will expect at minimum of 45 cents more.
Venezuelan President Hugo Chávez's brand of crony-socialism, and populist anti-US rhethoric goes by the name of "Chavismo". Chávez has squandered Venezuela's oil wealth to get geopolitical influence. Venezuela's economy has also suffered from the nationalization of important sectors, now run by Chávez's toadies . Uncertainty has caused human and financial capital to flee and made Venezuela more reliant on volatile oil earnings. Inflation has soared and the bolivar has been devalued de-facto, if not de-jure. The IIF (Institute of International Finance), estimates that Brent crude prices below $70 per barrel during much of the next two years could put into doubt Venezuela's servicing of its foreign debt. The miseries of Chavismo are not purely economic, it has intimidated political opponents and critics, some of which are in exile.
Brazil's President Luiz Inácio Lula da Silva, widely known as "Lula", has created his own political fashion. "Lulismo" entails populist posturing that rivals Chavismo's in ridiculousness, if not in intensity, but is tempered by economic orthodoxy. Under Lulismo, Brazil has benefited from the recent commodity boom. It amassed foreign reserves of $200 billion while paying for Lula's Bolsa Familia subsidy to poor families. The World Bank puts Bolsa Familia among the world's best targeted poverty relief programs. Lulismo's support of sound monetary policies, under Central Bank President Henrique Meirelles, has helped create the opposite of Chavismo's capital flight; Brazil battles an influx of foreign money seeking high interest rates and a currency appreciating against the dollar. While payment on Venezuela's foreign obligations are threatened, Brazil has investment-grade bond ratings. Lulismo's merits cannot overshadow its inanities that range from Lula's racial theories (he blamed the Sub-prime Crisis on "white men with blue eyes") to political corruption that reached into the President's family. Unlike Chavismo, Lulismo has no economic or political refugees.
Daniel Ortega, former guerilla leader and President of Nicaragua, has nationalized no private asset in his second presidency. Conflicts have arisen with international companies, but these have been resolved through negotiations. Ortega's Nicaragua claims to be open to foreign investments. It is implementing an economic program agreed with the IMF. New incentives are in place to attract investments in tourism and energy. Labor arrangements that are more business-friendly are being negotiated to respond to the global downturn. However, inconvenient alliances with Chavez, Iran and even Russia, has investors worried and uncertain, particularly Nicaraguans. Furthermore, accusations of fraudulent municipal elections have led the US and European countries to cut off aid. In the opinion of a former government official, Ortega is not adopting the economic aspects of Chavismo, though he seems willing to borrow some of its political tactics. Ortega seeks to chart a course between Lulismo and Chavismo; a difficult task given the long-run incompatibility of political intimidation and economic freedom.
The spectacular rally in emerging markets "looks like another bubble in the making" says Robert P. Smith, author of "Riches Among the Ruins, Adventures in the Dark Corners of the Global Economy". Smith, a pioneering trader and investor in emerging markets, believes the rally that brought the MSCI EM Index up almost 70% since early March 2009, is based on an expectation of growth ocurring in emerging economies despite depressed consumer demand in developed countries, particularly in America. This assumption relies on the theory of "decoupling" that posits developing economies growing independently of those in the developed world. Proponents of decoupling point to the expected growth from China's stimulus program, which together with an overhaul of the healthcare system, represent over 16% of China's 2008 GDP. Smith is sceptical that so much money can be quickly spent in an efficient manner, "much of the stimulus may be going to politically connected loss-making enterprises and thus will result in no lasting growth. We may discover in a few months that the rich valuations at which we now buy EM shares are unsupported by the risk adjusted prospects for earnings and experience sharp losses."