I know Robert Mugabe’s Zimbabwe reasonably well – Hugo Chavez’s Venezuela not at all. For that reason I have hesitated to make comparisons between the two, even privately. Then I read this piece entitled Bono del Sur 3 postponed on the Salon blog The Devil’s Excrement (a reference to oil and the debilitating effect its wealth can have). It concerns a bond issue the Venezuelan government has floated – named the Bono del Sur 3 – that has run into difficulties. I’m not so concerned with the technical details of the bond issue as the reasons behind it- which are all quite familiar from my experience of Zimbabwe. Here is the crux of the matter with the bond:

“The reason that the issue was being questioned was the fact that with the uncertainty in the international markets with the sub-prime credit crisis, then volatility could make the price of the Argentinean bond swing dramatically and drop in price to the point that investors would lose money.”

In the end, the problem lies in the artificiality of the transaction: Nobody is “investing” in these bonds, people are simply buying them to make a quick profit by buying dollars at a rate cheaper than the parallel swap rate which is the only rate for which the average Venezuelan has access to.

There is a graph of the exchange rate for the Venezuelan Bolivar here that shows the rise of the parallel rate above the official exchange rate over the past 3 years. The point is that it has taken off exponentially to about double the official exchange rate of about 2100. This is exactly the kind of thing that happened in Zimbabwe in the nineties when the government tried to control the foreign exchange rates while inflating the money supply. When I first became involved with Zimbabwe in the late nineties the exchange rate was 12 to 1. Over the next couple of years the rate worked its was to over 50 and kept climbing. The government froze the official exchange rate at 55 but the parallel rate increased – exponentially. The last time I was in Zimbabwe in late 2001 it was around 300 and by 2004 it was around 800. By 2006, 600,000. Ignoring the 1000 times devaluation to the new Zim Dollar the current rate is something like 400 million [old Zim dollars] to one if I read this Wikipedia account of the train wreck correctly.

The underlying problem is that the government believes it has the power to inflate the money supply and not suffer the consequences. Here is The Devil’s Excrement again:

As the Government creates more and more strains in the Venezuelan economy, it becomes harder and harder to control their effects. The only reason why there was a rush to issue the Bono del Sur 3 was that the Government itself has been spending too much and increasing the money supply too fast, which increases the parallel swap rate and inflation. In the first half of the year it had to issue some US$ 10 billion in bonds to control this effect. Now, it is being forced to postpone this operation, which will only increase the pressures and strains in the Venezuelan economy until something blows up.

The sad thing about both countries is that they have real wealth and, managed half way competently, could have successful economies. They could pursue social democratic policies or any other policies that took their fancy as long as they stayed reasonably within their means. Instead both Zimbabwe and Venezuela are held hostage to the delusional economics of their autocratic rulers. Both are guilty of criminal economic negligence.

The Bolivar almost certainly wont fall as far as the Zimbabwe dollar simply because Chavez has oil. But Mugabe had gold and tobacco to generate foreign exchange and he systematically ruined both businesses while accusing Zimbabwe’s business community – mostly but not entirely of European origin – of economic sabotage. Pointing out the similarity between Chavez and Mugabe here Allan Sullivan, the Seablogger , says:

It’s much easier to destroy a nation than build one, but even the destruction takes some concerted effort, especially when there are judges, legislators, and businessmen to intimidate, co-opt, or eliminate……Hugo Chavez has his own demolition project well under way, though he may be able to disguise the consequences a bit longer, thanks to Venezuela’s oil wealth.

At the same time perhaps the people of Venezuela will manage to overthrow Chavez before things go as far as they have in Zimbabwe where over half the population is starving and a quarter has fled across the border. But don’t count on it. Here is a description of Mugabe’s reception at a recent meeting of African leaders:

Zimbabwean leader Robert Mugabe on Thursday got a hero’s welcome as a summit of a southern African bloc began in Zambia and was set to be dominated by international concerns over his country’s meltdown.

The embattled octogenarian leader received a thunderous applause as he walked into the summit of the Southern African Development Community (SADC) summit — in stark contrast to polite claps reserved for other heads of state.

It is interesting that Mugabe still enjoys the support of his fellow African leaders even though he he has pretty well lost the active support of the Western left. Even Chirac cooled to him by 2003. Chavez still enjoys support in Venezuela, Latin America and from the Western left. He also appears to be persisting in his delusional approach to economics just as Mugabe did and living on the drug of personal adulation. Politically he is proposing changes to the constitution than enhance his power, just as Mugabe has done. Likewise he is putting those who agree with him into every post – particularly those posts that give him greater control of the economy. The parallel exchange rate is however a direct indicator of the degree to which his economic policies have become unsustainable. Just watch the graph. The enterprising might want to take bets on when he will flinch, as Mugabe recently did, with futile price controls or some other fantasy solution.

I said at the end of my last post about Mugabe that I thought I had understood why this sort of regressive anti progress characterized certain Marxist regimes and I still intend to pursue that line of thought – so stay tuned.

5 Responses to “Criminal Economic Negligence”  

  1. 1 Alan Sullivan

    Thanks for the link.

    you final comment makes it sound as though you would exonerate some milder form of Marxism. I would not agree.

    Marxism is always and everywhere baneful. When in addition a dictator consolidates personal control of a Marxist regime the consequences are invariably monstrous.

  2. 2 admin

    Thanks for the comment Allen. That isn’t my intention in my final note at all. Believe me, I intend to talk about some less obvious reasons for Marxism’s terrible record besides the now obvious ones of its misdiagnoses of capitalism and the failure of communist economies. I wouldn’t exonerate the Soviets or Castro at all, but Mugabe and Chavez seem to be particularly culpable in their economic delusion just as Pol Pot was particularly culpable in his social delusion that mass execution was the royal road to socialism.

  3. 3 Tatyana

    Money speak – so it makes sense, periodically, to check political predictions against siters like Intrade, where people are willing to bet real money on their political calculations.
    It’s interesting though, that when I checked “Current Events->National Leaders, there is a trade referring to Mugabe, but nothing on Chavez. Do people underestimate him, or simply don’t count him as essentially important?

  4. 4 Peter Davies

    Thanks for a great article – I learned something about Venezuela from it. Just one small point about Mugabe’s Zimbabwe – I think you’ll find that the current (unofficial) exchange rate is about Z$400,000 to US$1 last I looked. But I guess it could reach Z$4 million soon! Cheers, Pete

  5. 5 admin

    Peter – Thanks for the comment. I think you will find that the exchange rate of 400,000 to one is based on the new or second Zimbabwe dollar. The old dollar was revalued in 2006 I believe, by factor of 1000 old dollars for 1 new one – hence my figure of 400 followed by six zeros or 400 million to one for the old dollar. The Wikipedia link is my source on this figure. On the ground evidently barter is replacing the use of currency and the rand – the South African currency – is preferred for money transactions. Even at 400,000 to one it would be had to tell what you were actually selling an ear of corn for. It is hard to imagine what transacting business is like under such conditions.

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