Tag Archives: inflation

Price Controls, Trade Restrictions, and Global Competition

Venezuela’s economy has been hit hard in recent years by the sharp decline in global oil prices. According to OPEC, oil accounts for about 95 percent of all of Venezuela’s export earnings and about a quarter of its total gross domestic product. Declining oil revenue has sparked an economic crisis in the country, leading to anti-government protests. In an effort to stem discontent, the government has imposed currency controls and limited the prices of key consumer goods—all in an effort to stabilize the economy and limit inflation estimated at about 60 percent.

But broad economic policies are felt on the ground as shortages of key commodities and long lines for basic supermarket goods. The unintended consequence of price controls combined with high inflation has led to shortages and hoarding. Meanwhile, the government of Venezuela asserts that the country’s economic collapse has been driven by US efforts to destabilize the regime, once seen as an alternative to American influence in the region.

What do you think? What was the primary cause of the crisis? What balance of international and domestic factors explain the crisis? How might Venezuela address its ongoing economic crisis? And how might it be resolved?

The IMF’s Policy Shift

IMF Board

IMF Managing Board

Last Friday, the International Monetary Fund released a staff position note  (basically, a working paper) entitled “Rethinking Macroeconomic Policy.” The impetus for the paper, writing in a surprisingly clear and jargon-free tone, seemed clear enough. In the introduction, the authors argue that macroeconomists and policymakers had been lulled into a false sense of complacency about how to conduct macroeconomic policy. The onset of the global economic crisis—or perhaps more accurately, the inability of our macroeconomic policy toolkit to address the crisis—challenged that complacency, creating the need to rethink our policies.

But the surprising part doesn’t come from the paper’s assertion that we need to think about what our post-crisis macroeconomic policy might look like. Rather, the surprising part—and the part that has generated considerable discussion in the blogosphere—are the recommendations themselves. The report recommends that central banks and the International Monetary Fund make several key changes in their policy outlook:

  1. Increasing the inflation target from 2 to 4 percent.
  2. Automatic lump sum payments should be introduced for poorer families if unemployment crosses a pre-determined threshold.
  3. Exchange rate intervention should be permitted for developing countries heavily dependent on international trade.
  4. Central banks should be granted greater regulatory authority and capacity.

These proposals represent a dramatic departure from the Washington Consensus [glossary] that dominated international economic policy since the early 1980s. Indeed, the Financial Times noted that, “The suggestion that inflation targets should be raised to 4 per cent will cause many central bankers to choke on their breakfasts, since they have spent their whole careers gaining and preserving the creditability of keeping inflation at levels close to 2 percent.”

Needless to say, the proposal has sparked considerable coverage. While Ben Bernanke still seems to be committed to keeping inflation under the 2 per cent target, Paul Krugman and James Vreeland have both already chimed in the on discussion, offering some important contributions. (Krugman importantly notes that the current financial crisis facing Greece and the other PIIGS countries has its roots in this low-inflation policy). And Joseph Stiglitz has written several books critiquing the Consensus. But the new position note comes from within the IMF, suggesting a more dramatic policy shift may be on the horizon.

So why the move? The argument presented in the position note concludes that because the inflation targets were set so low, there was no room for central banks to maneuver once the global economic downturn hit. Central banks quickly lowered interest rates, attempting to stimulate the economy. But when this did not work, monetary policy provided few good options for addressing eh economic crisis.

Five Stories You Might Have Missed

The U.S. political scene this week was dominated by coverage of Sonia Sotomayor’s confirmation hearings in the Senate. After the hearings, Sotomayor appears to be headed for an easy confirmation to the U.S. Supreme Court, a fact conceded by Republican Senator Lindsay Graham on the first day of the hearings.

Also on the domestic political scene, the battle over President Barack Obama’s proposed health care reform heated up this week, with both sides spending increasingly large sums of money on television advertising. So far, Obama has been content to allow Congressional Democrats to lead the reform effort, but that strategy appears to be in danger after several moderate Democrats expressed hesitation over the bill introduced in the House last week.

In news from outside the United States last week:

1. A suicide bomb attack in Jakarta, Indonesia, killed 9 people and injured more than 50 on Friday. Although no group has yet claimed responsibility for the bombing, the police investigation is focusing on Jemaah Islamiyah, a terrorist group with ties to al Qaeda. The group was responsible for a series of attacks between 2002 and 2005, including the 2002 Bali bombings, which killed more than 200 people.

2. The standoff between President Manuel Zelaya and the leaders of the military coup in Honduras remains unresolved. On Friday, Zelaya attempted to return to Honduras, only to be denied entry. He is currently in Nicaragua. Meanwhile, Venezuelan President Hugo Chávez, a close ally of Zelaya, has become increasingly vocal in his condemnation of the coup, accusing it of being backed by the United States. On Thursday, Chávez said, ““The Honduran army wouldn’t have gone forward without the approval of the state department. I don’t think they told [US president Barack] Obama, but there’s an empire behind Obama.” The de facto government of Honduras has filed a complaint against Venezuela with the United Nations Security Council, claiming that the Chávez government is interfering in its domestic affairs. But the Security Council has so far refused to deal with the complaint.

3. It’s been a month of relatively good economic news out of Zimbabwe. Although efforts at developing a new constitution to deal with the ongoing political standoff between the country’s two leading political parties appear to have stalled, the economy is slowly recovering. Finance Minister Tendai Biti announced on Thursday that the government would have a balanced budget this year, with total spending increasing 39 percent to U.S. $1.39 billion. After peaking at more than 231 million percent last year, inflation has been brought under control and the economy has effectively been dollarized, with foreign currencies used for most transactions. Nevertheless, the government is forecasting a sharp increase in agricultural production and a smaller increase in tourist revenues, which should offset a decline in mining revenue caused by the global economic crisis. Meanwhile, the International Monetary Fund issued a statement describing Zimbabwe as experiencing a “nascent economic recovery” facilitated by “a more liberal economic environment, price stability, increased financial intermediation and grater access to foreign credit lines.”

4. The Russian economy is currently experiencing its worst economic decline since the transition from communism in the early 1990s. According to a Financial Times report issued on Wednesday, the Russian economy contracted by 10.1 percent in the first half of 2009, a much sharper decline than the 7.9 percent forecast by the World Bank just one month ago. Russia’s current economic woes have been caused largely by the sharp decline in global oil prices, which have recovered to $60 per barrel after falling as low as $35 per barrel earlier this year. Russia is also experiencing its own financial crisis, as commercial banks there are bogged down with bad loans. The Russian government may be forced to turn to international markets, barrowing to offset the sharp decline in tax revenues caused by the economic downturn. Based on the new figures, its projected deficit for 2010 could reach as much as 7.5 percent of GDP, a figure far above the 5 percent originally projected. Unemployment has increased from 6 to 10 percent and continues to grow. Meanwhile, many Russians are responding to the economic crisis by returning to the soil, growing their own food on small plots just outside the city.

5. Natalia Estemirova, a human rights activist in Chechnya, was murdered on Wednesday. Estemirova was kidnapped as she left her house in Chechneya on Wednesday morning, and was found shot to death in Ingushetia, a neighboring Russian republic. Protestors fathered in Moscow on news of her murder, and the international community has condemned her death. Russian President Dmitry Medvedev has promised those responsible for Estemirova’s death would be punished, but the Russian human rights community remain skeptical of his reassurances. Estemirova was the third human rights activist killed this year. She was also a close friend of Anna Politkovskaya, the Russian journalist murdered in Moscow in 2006. No one has yet been punished for any of the deaths. Estemirova’s murder, however, raises concerns that the Caucasus region may be headed toward greater instability.

Five Stories You Might Have Missed

The death of Michael Jackson dominated news coverage this week, pushing other major developments aside. Indeed, with so much popular interest generated that popular sites like Twitter and Facebook were overwhelmed with traffic and unable to keep up with bandwidth demands. By Sunday morning, networks were slowly returning to other coverage.

In other news from the previous week:

1. British Foreign Secretary David Miliband issued a statement expressing “deep concern” over the decision of the Iranian government to arrest eight local employees working in Tehran. The eight Iranian employees at the British embassy were charged with involvement in the ongoing protest over the outcome of Iran’s presidential elections. The arrests follow developments last week in which Britain and Iran each expelled two of the other’s diplomats. The arrests (and the continuing deteriorating relationship more generally) will likely be a topic for informal discussions at the G8 meeting this weekend.

2. Meetings between NATO and Russian foreign ministers over the weekend set the stage for greater cooperation in Afghanistan, counter-terrorism, and nuclear proliferation. Relations between Russia and the west had deteriorated after the Georgian war last year. The Russian government also announced plans to restructure the country’s military.

3. Taro Aso, Japan’s prime minister, is facing increasing pressure to resign from his post ahead of general elections which must be held by October. Aso’s ruling Liberal Democratic Party of Japan has dominated post-war Japanese politics, ruling the country for all but 11 months of the last 53 years. But Japan’s ongoing economic crisis, combined with allegations of corruption and political infighting within the LDP, has led to a sharp decline in popular support for the party—and a potential radical shift in Japanese politics, with the opposition Democratic Party of Japan poised to seize the opportunity.

4. Lebanon’s new prime minister, Saad al-Hariri, has begun the task of forming a new parliament for the country. Hariri won a surprising victory over rival Hizbollah last month, but now faces the daunting task of uniting Lebanon’s three rival factions, the Sunnis, Shi’as, and Christians. In order to maintain good relations between Lebanon’s three factions, Hariri has proposed to establish a government of national unity. (glossary) But Hizbollah has so far refused to accept the possibility of a unity government unless it is granted veto power, a development which Hariri opposes. Hariri was the favored candidate of the United States and Saudi Arabia, but was sharply opposed by Syria. Stable relations between the three countries are seen as vital to the maintenance of peace and stability in Lebanon.

5. Human Rights Watch accused the government of Zimbabwe of engaging in murder, forced labor, and torture in its diamond mining operations in the Marange district in the eastern part of the country. The accusations come shortly after a campaign by the country’s prime minister, Morgan Tsvangirai, failed to secure the western economic aid it had hoped for. Zimbabwe faces considerable challengesin its attempt to address the ongoing economic and political crisis which has plagued the country for more than a year. While inflation has come down from its record 231 million percent last year, the political standoff between President Robert Mugabe, who has ruled Zimbabwe since its independence in 1980, and his political rival, Prime Minister Tsvangirai, remains unresolved.

Five Stories You Might Have Missed

The annual meeting of the World Economic Forum took place in Davos, Switzerland, over the weekend.  The forum is intended to provide world economic leaders an opportunity to meet to discuss issues of global importance.  The meeting is normally incredibly cordial, as the economic focus of the conference provides an opportunity to move beyond traditional political wrangling that characterizes official meetings of heads of state.  This year, however, the Gaza crisis prompted the Turkish prime minister to leave the meting in protest and tension filled the air.  In general, this year’s forum has been dominated by discussion of the global economic crisis  British Prime Minister Gordon Brown warned against a rising tide of protectionism similar to the trend that occurred leading into the Great Depression, while bankers cautioned the U.S. government against political interference in banking operations

In news outside Davos this week:

1.  Provincial elections in Iraq on Saturday were generally peaceful.  Although the final tally will take more than two weeks to complete, preliminary results indicate voter turnout was 51 percent, a slight decline from 2005.  Turnout in Sunni provinces, which had previously dismissed the electoral process as biased against their interests, was particularly high.  With more than 14,000 candidates competing for just 440 seats, there are bound to be a large number of disappointed political parties and candidates.  The question that worries observers now is: how do those who lose the vote respond?

2.  A last-ditch effort to craft a government of national unity in Zimbabwe appears to have been successful, as Morgan Tsvangirai’s Movement for Democratic Change agreed on Friday to join Robert Mugabe’s ruling Zimbabwe African National Union, Popular Front to govern the country.  Once one of the wealthiest and most productive countries in the region, Zimbabwe has gradually collapsed into economic chaos.  With the unemployment rate at an estimated 95 percent, the World Food Programme estimates that up to 70 percent of the country’s population may require food aid in the next six months.  In an effort to deal with the crisis and bring the country’s rampant inflation—currently believed to be running as high as a quadrillion percent (that’s 1,000,000,000,000,000%, incase you’re wondering) under control, the government last week also removed restrictions on using foreign currencies for economic transactions within Zimbabwe.  It is now possible—indeed likely—that bread, gas, and other basic commodities will be priced in U.S. dollars, pound sterling, South African rand, or other foreign currencies.

3.  The crisis over the future of South Ossetia and Abkhazia, which was at the heart of a diplomatic standoff between the United States and Russia lat year, has once again reemerged on the international stage.  Russia has announced plans to construct a new naval base in Abkhazia, a move which Georgia claims will undermine its national sovereignty.  Meanwhile, in an apparent overture to the west, Russia has suspended plans to deploy a missile station in Kaliningrad.  Russia had announced its intention to deploy cruise missile batteries in the enclave last year after the United States moved forward with plans to deploy its missile defense shield in Eastern Europe. 

4.  The Mexican government announced on Tuesday that the country is likely headed into recession, with the economy estimated to contract by as much as 1.8 percent in 2009.  The Mexican economy is heavily dependent on exports to the Untied States, with exports to the U.S. accounting for 80 percent of all Mexican exports and representing about 25 percent of all economic activity in the country.  Already, Mexico’s central bank has cut interest rates in an attempt to stimulate the domestic economy.  Meanwhile, an ongoing conflict between powerful drug cartels and the central government has led some analysts to forecast that Mexico could achieve “failed state” status if it is unable to assert control over the cartels.

5.  Although the fragile ceasefire in Gaza has officially held, a number of fractures are beginning to appear.  On Thursday, Hamas launched rockets into Israel in response to an Israeli airstrike against a suspected arms factory in Gaza on Wednesday.  President Barack Obama named George Mitchell his Middle East envoy, and Mitchell appears to have his work cut out for him.  Arab states are demanding an investigation into alleged war crimes committed by Israel during the conflict in which more than 1,300 Palestinians were killed and more than 5,000 were injured. 

And in a bonus story this week:

6.  A moderate Islamist leader, Sheikh Sharif Ahmed, was declared the winner of Saturday’s presidential elections in Somalia.  Ahmed was the head of the country’s sharia court system that brought stability to southern Somalia in 2006.   But the withdrawal of Ethiopian troops earlier this year has led to even more instability in Somalia, and the political process, now to be led by Ahmed, has been dislocated from the country, now based in neighboring Djibouti.  Somalia has become a haven for piracy in recent months, and the World Food Program was forced to halt shipments to the country due to insecurity.

Daily Life in Harare

This week, the BBC published a collection of diary entries from Esther (a pseudonym), a 28 year old professional living and working in Harare.  The diary chronicles her daily struggles living in the capital of Zimbabwe as the country collapses around her.  The diary makes for fascinating reading and provides a real (and particularly human) insight into the collapse of the country that was—at one point—the shining future of southern Africa, highlighting the problems of runaway inflation, the hope (and subsequent disappointment) surrounding the elections, and the recent slate of abductions.  The story is definitely worth a read

Staying with Zimbabwe, the BBC also carried a story on the increasing dollarization of the economy.  After re-issuing its currency and stripping ten zeros from denominations in August—such that $10 trillion become $100 overnight— the government issued a new $500 million note on DATE.  The bigger problem, however, is the fact that inflation continues to rage out of control.  According to some estimates, annual inflation in Zimbabwe currently floats somewhere between the official estimate of 231 million percent and parallel market rates of up to 200 billion percent.  Now, the economy of Zimbabwe has effectively been dollarized, as many purchases now have to be made in U.S. dollars or other hard currencies.  For the estimated 20 percent of the population with access to U.S. dollars, this means that goods are once again available in supermarkets.  But for the estimated 80 percent of the population without access to international currencies, life remains untenable. 

This is a far cry from the Harare I remember.  At the time of my last visit in 2001, the crisis was only beginning to break.  Gasoline was in short supply, and petrol cues were part of daily life.  But the supermarkets were still full, the water was still safe to drink, and people were able t go about daily life without significant difficulties.  And most importantly, there was hope in the air. 

Here’s hoping the new year brings a return to stability and prosperity in Zimbabwe.

Five Stories You Might Have Missed

The U.S. Presidential elections are in their final days, and the candidates are busy touring swing states in last minute pitches to undecided voters.  Early voting is already underway, and some 20 million people have already voted.  Most analysts are projecting a win for Obama, but McCain is still in position to pull off the upset.  Tuesday is the big day, so all Americans should be sure to exercise their right to vote!

In other news from around the world:

1.  The conflict in the Democratic Republic of the Congo, which reignited in late summer after the rebel leader Laurent Nkunda announced his intention to cancel the ceasefire under which the country had effectively been operating since 2002.  The latest round of fighting, centered in the eastern part of the country known as North Kivu, has sparked a humanitarian crisis of epic proportions, as an estimated one million refugees have fled their homes.  On Wednesday, a new ceasefire was announced after four days of intense fighting, and now the European Union is considering sending troops and aid to the Congo.

2. Ukraine became the latest victim of the global financial crisis on Friday, as its parliament was forced to adopt a package of legislation imposed by the International Monetary Fund as a condition for receiving an emergency $16.5 billion loan from the international organization.  Ukraine’s turn to the IMF for a rescue package follows on the heels of similar moves in Iceland and Hungary, signaling the wide scope of the crisis.  More generally, the Eurozone seems to be facing falling inflation and rising unemployment—with some national variation—as the economic crisis expands.

3.  The global economic crisis is also being felt in China, where projections for annual GDP growth have been cut from 12 percent to 9-9 percent.  Chinese companies are slashing production output, as worldwide demand slides.  Some larger Chinese companies are cutting production by as much as 50 percent, while smaller companies are going out of business altogether.  In an effort to rekindle the economy, the Chinese government announced it would cut the benchmark one-year deposit rate

4.  A U.S. raid into Syria last week has provoked a sharp response from within Syria, as protestors demonstrated against the action.  Syria’s foreign minister condemned the move as an act of “criminal and terrorist aggression.”  The U.S. claimed that Syria had been home to foreign fighters moving into Iraq, saying hat the raid had successfully targeted Abu Ghadiya, who U.S. officials described as “one of the most prominent foreign fighter facilitators in the region.”  As a result of the attack, U.S.-Syrian relations have soured and anti-U.S. demonstrations forced the temporary closure of the American Embassy in Damascus

5.  In another development highlighting the continuing efforts of the Russian government to reassert itself on the global stage after the Cold War, Russia is negotiating the construction of a new naval base in Libya.  Russia envisions the base as a necessary counterbalance to American interests in the region.  In recent weeks, Libya has increasingly opened its economy to foreign investment and has dramatically improved relations with the West.