By Matt O’Brien
There has been a political earthquake in South America, and it started in China. In just the last few weeks, Argentina and Venezuela’s left-wing governments have lost at the polls and Brazil’s is looking wobbly. That’s what happens when the commodity boom that had fuelled your social spending turns to bust — due, in large part, to China’s slowdown. The question, though, is whether the continent’s right-of-centre parties can do any better.
Well, at least in Argentina and Venezuela, they can’t help but to. Both those countries had embraced what economists Rudi Dornbusch and Sebastian Edwards called “macroeconomic populism,” basically the belief that since printing money and running deficits are sometimes good ideas, that they always are. That has turned what would have already been tough times into borderline catastrophic ones.
Take Argentina. In the 1990s, it became much more market-oriented and cured its congenital inflation by pegging its peso to the dollar. But this stability came at the cost of giving up its ability to fight recessions by, yes, printing money or running big deficits. So when its economy did get hit by a big shock in 1998, there was nothing its government could do about it. Argentina actually stuck it out for a few years as it spiraled down into a Depression-level slump, but, after a bank run destroyed what little was left of its economy, it had no choice but to default on its debt and devalue its currency. At which point it recovered fast. The government took this success as a sign that it should keep doing what it was even when that didn’t make sense anymore. It tried to deny this reality by doctoring its inflation stats and preventing people from turning their pesos into dollars, but, as growth has slowed down, it finally caught up to them at the polls.
The only problem is you need to actually have an economy to make this work, and Venezuela doesn’t anymore. That’s because the Chávez regime wanted to control not only the oil money but rather all the money in the economy. It tried to do that first by telling businesses how much they were allowed to charge, and second by telling businesses which of them were allowed to even restock their shelves. So it’s not profitable for unsubsidized companies to stock their shelves and not profitable enough for the subsidized ones to do so either. And that’s why Venezuela has shortages of everything from food to butter to even toilet paper.
Now, Venezuela’s government could keep this dysfunction to at least a livable level as long as it had enough oil money to throw at the problems it was creating. But it doesn’t have that anymore, either. It mismanaged the state-owned oil company, which had previously enjoyed a fair amount of autonomy, by cutting back on the investment it needed to keep wells online and replacing people who knew what they were doing with ones who didn’t and wouldn’t complain about this. Venezuela depends on oil revenue for 95 percent of its exports and can’t get the dollars it needs to buy much of anything with oil at less than $40 a barrel.
Nor can the government afford to pay out all the benefits it has promised, not without just printing the money that was how high it was when the government stopped reporting the figures a year ago — and, according to the International Monetary Fund, as high as 204 percent next year. And on top of that, the economy is probably shrinking something like 10 percent right now. It’s no surprise, then, that Venezuela’s government lost the latest legislative elections despite the fact that it controls the media, has jailed opposition leaders, and even tried to trick voters by putting a fake party on the ballot that sounded just like their opponent’s name. Still, it’s not clear if the opposition has enough seats to change things or if the regime will abide by that if they do.
Then there is Brazil. It has been comparatively well managed, but still finds itself staring into an economic abyss. It is facing not only the global commodities bust but also a wider credit bust at home. Investors, you see, had poured a lot of money into the country in search of higher returns, especially after the Federal Reserve began buying bonds in 2010, and that had set off a lending boom. That has made Brazil’s economy contract 4.5 percent the past year, its worst performance since the 1930s, at the same time that its currency has plummeted by 50 percent against the dollar as money is now moving out of the country. In other words, a butterfly flapped its wings in China and caused a political hurricane in South America. Between 2000 and 2014, China’s demand for raw materials of every kind was so great that prices soared and the coffers of commodity-based economies did, too. That gave South American governments the money they needed to redistribute to their poor, and they did. But a combination of bad luck and bad management has left them without much margin for error today — which they need now that commodity prices have come down as a result of China slowing down. In a global economy, politics is, too.
Washington Post
By Matt O’Brien
There has been a political earthquake in South America, and it started in China. In just the last few weeks, Argentina and Venezuela’s left-wing governments have lost at the polls and Brazil’s is looking wobbly. That’s what happens when the commodity boom that had fuelled your social spending turns to bust — due, in large part, to China’s slowdown. The question, though, is whether the continent’s right-of-centre parties can do any better.
Well, at least in Argentina and Venezuela, they can’t help but to. Both those countries had embraced what economists Rudi Dornbusch and Sebastian Edwards called “macroeconomic populism,” basically the belief that since printing money and running deficits are sometimes good ideas, that they always are. That has turned what would have already been tough times into borderline catastrophic ones.
Take Argentina. In the 1990s, it became much more market-oriented and cured its congenital inflation by pegging its peso to the dollar. But this stability came at the cost of giving up its ability to fight recessions by, yes, printing money or running big deficits. So when its economy did get hit by a big shock in 1998, there was nothing its government could do about it. Argentina actually stuck it out for a few years as it spiraled down into a Depression-level slump, but, after a bank run destroyed what little was left of its economy, it had no choice but to default on its debt and devalue its currency. At which point it recovered fast. The government took this success as a sign that it should keep doing what it was even when that didn’t make sense anymore. It tried to deny this reality by doctoring its inflation stats and preventing people from turning their pesos into dollars, but, as growth has slowed down, it finally caught up to them at the polls.
The only problem is you need to actually have an economy to make this work, and Venezuela doesn’t anymore. That’s because the Chávez regime wanted to control not only the oil money but rather all the money in the economy. It tried to do that first by telling businesses how much they were allowed to charge, and second by telling businesses which of them were allowed to even restock their shelves. So it’s not profitable for unsubsidized companies to stock their shelves and not profitable enough for the subsidized ones to do so either. And that’s why Venezuela has shortages of everything from food to butter to even toilet paper.
Now, Venezuela’s government could keep this dysfunction to at least a livable level as long as it had enough oil money to throw at the problems it was creating. But it doesn’t have that anymore, either. It mismanaged the state-owned oil company, which had previously enjoyed a fair amount of autonomy, by cutting back on the investment it needed to keep wells online and replacing people who knew what they were doing with ones who didn’t and wouldn’t complain about this. Venezuela depends on oil revenue for 95 percent of its exports and can’t get the dollars it needs to buy much of anything with oil at less than $40 a barrel.
Nor can the government afford to pay out all the benefits it has promised, not without just printing the money that was how high it was when the government stopped reporting the figures a year ago — and, according to the International Monetary Fund, as high as 204 percent next year. And on top of that, the economy is probably shrinking something like 10 percent right now. It’s no surprise, then, that Venezuela’s government lost the latest legislative elections despite the fact that it controls the media, has jailed opposition leaders, and even tried to trick voters by putting a fake party on the ballot that sounded just like their opponent’s name. Still, it’s not clear if the opposition has enough seats to change things or if the regime will abide by that if they do.
Then there is Brazil. It has been comparatively well managed, but still finds itself staring into an economic abyss. It is facing not only the global commodities bust but also a wider credit bust at home. Investors, you see, had poured a lot of money into the country in search of higher returns, especially after the Federal Reserve began buying bonds in 2010, and that had set off a lending boom. That has made Brazil’s economy contract 4.5 percent the past year, its worst performance since the 1930s, at the same time that its currency has plummeted by 50 percent against the dollar as money is now moving out of the country. In other words, a butterfly flapped its wings in China and caused a political hurricane in South America. Between 2000 and 2014, China’s demand for raw materials of every kind was so great that prices soared and the coffers of commodity-based economies did, too. That gave South American governments the money they needed to redistribute to their poor, and they did. But a combination of bad luck and bad management has left them without much margin for error today — which they need now that commodity prices have come down as a result of China slowing down. In a global economy, politics is, too.
Washington Post
