Home' Trinidad and Tobago Guardian : December 17th 2015 Contents DECEMBER 17 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
REGIONAL | BG17
Tens of thousands of Brazilians
take to the streets of major
cities to call for the impeach-
ment of left-wing President
Dilma Rousseff. Jillian Kitch-
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 fueled 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
Well, at least in Argentina and Venezuela,
they can t help but to. Both those countries
had embraced what economists Rudi Dorn-
busch and Sebastian Edwards called "macro-
economic 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.
Why would they do that? The question
answers itself: because it had worked before.
In the 1990s, it became much more mar-
ket-oriented and cured its congenital inflation
by pegging its peso to the dollar. But this sta-
bility 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 govern-
ment could do about it. Things got bad enough
that investors started pulling their money out
of the country in case it did ditch its dollar
peg, which, in turn, made it more likely to do
so since the only alternative was to raise rates
to try to convince people to keep their money
there---making its recession even worse in the
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
At which point it recovered fast. Now, it
didn t hurt that Argentina s exports got a boost
from China s then-insatiable demand for com-
modities, but by far the biggest part of its
bounce back was the fact that its government
had the freedom to help the economy, rather
than being forced to hurt it.
In other words, it was the right time for a
little populism. You can see, though, how this
could become a problem.
The government took this success as a sign
that it should keep doing what it was---printing
money to pay its bills---even when that didn t
make sense anymore. It tried to deny this
reality by doctoring its inflation stats and pre-
venting people from turning their pesos into
dollars, but, as growth has slowed down, it
finally caught up to them at the polls.
It was a slightly different story in Venezuela.
It never really "needed" populism like Argentina
did. Instead, the Chavez regime had the, well,
revolutionary idea of taking the country s oil
money---it has the largest reserves in the
world---and giving it to the poor. And for awhile
As the Centre for Economic and Policy
Research points out, Venezuela s poverty rate
actually fell by 40 per cent between the time
Chavez took power in 1999 and 2011.
The only problem is you need to actually
have an economy to make this work, and
Venezuela doesn t anymore. That s because
the Chavez regime didn t just want to control
the oil money, but rather all the money in the
economy. It tried to do that first by telling
businesses how much were allowed to charge,
and second by telling businesses which of
them were allowed to even restock their shelves.
That last part was the result of the Byzantine
currency system the government set up, where
certain companies were given cheap dollars
that they were then supposed to use to buy
the imports they needed.
By and large, though, they didn t since they
could make more money reselling their dollars
in the black currency market than they could
reselling their imports to customers. 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 every-
thing 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.
The result was that, by 2013, Venezuela s
oil production was about 25 per cent lower
than it was in 1999. But far worse has been,
well, how far oil prices have fallen the past
year. Venezuela depends on oil revenues for
95 per cent of its exports, and can t get the
dollars it needs to buy much of anything with
oil at less than US$40-a-barrel.
Nor can the government afford to pay out
all the benefits it has promised, not without
just printing the money---which, of course, is
exactly what it has done. That has turned into
at least 68 per cent inflation---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 per cent next year. And on top of that,
the economy is probably shrinking something
like 10 per cent right now.
It s no surprise, then, that Venezuela s gov-
ernment 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 compar-
atively well-managed, but still finds itself star-
ing into an economic abyss. Now, like
Venezuela, it had fought persistent poverty by
just giving people money, but, unlike Venezuela,
it did that in the context of market-friendly
policies that kept its economy growing---at
least until now.
Not only is it facing 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 buy-
ing bonds in 2010, and that had set off a lend-
ing boom. And, like most of them, it has turned
out badly. That has made Brazil s economy
contract 4.5 per cent the past year, its worst
performance since the 1930s, at the same time
that its currency has plummeted by 50 per
cent against the dollar as money is now moving
out of the country.
That, in turn, has left it with 10 per cent
inflation even though unemployment is spiking.
That would be enough to sink even the most
popular politician, but new president Dilma
Rousseff is far from that. She s being impeached
as part of a corruption scandal.
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 their prices soared and
the coffers of commodity-based economies
did too. That gave South American govern-
ments 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.
South America is
staring down an
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