We recently noted the decision of the voters in Chilé to elect a socialist to become that country’s next President, saying:
(F)ollowing the center-right presidency of Mr Piñera, under which Chile’s economy has prospered, the voters have decided to change things. The lure of socialism has always been strong amongst poorer people, who see socialism as a way in which their station in life can be improved. Of course, the promises of socialism as far as economic development and raising the lifestyles of the lower classes have never been kept. Income inequality has often been addressed, but rather than leading to a wider sharing of prosperity, such normally makes the wealthier people — except for the connected class — poorer, but doesn’t make the poor concomitantly richer. The rewards of socialism are best exemplified by Venezuela, an oil-rich nation which is nevertheless an economic basket case.
Now, from The Wall Street Journal:
Ford Expects Major Venezuelan Devaluation in 2014Ford Motor Co. expects Venezuela’s currency to lose almost half its value next year and could take a $350 million financial hit as a result.
By Vipal Monga, Senior Editor, CFO Journal. | December 18, 2013, 1:53 PM ET
The automotive company on Wednesday released its outlook for next year and said it expects the exchange rate to fall to 12 bolivars to the U.S. dollar from 6.3 currently.
Ford had $802 million in investments in Venezuela at the end of September, according to a filing with the Securities and Exchange Commission. The company lost $186 million in February, when Venezuela devalued the bolivar to 6.3 from 4.3.
Ford had previously expected to turn a profit in South America but now expects to only break even in the region as a result of the difficulties in Venezuela.
General Motors Co., Ford’s rival, reported earlier this year that the devaluation cost it $200 million in the first quarter.
More at the link.
We don’t hear much about Venezuela these days, now that firebrand socialist President Hugo Chavez has gone to his eternal reward,1 but the state socialist system installed by Señor Chávez remains in place, and its economic results have been nothing short of disastrous.2
Maduro’s balancing act
Adjustment and reform are economically essential but politically impossible
September 28th 2013 | CARACAS | From the print edition
It is a remarkable achievement. Amid the longest oil boom in history Venezuela has in many respects the worst-performing economy in the Americas, even though it has (it claims) the world’s biggest reserves of the black stuff and gets 94% of its export earnings from it. That is the legacy of 14 years of “21st-century socialism” under the late Hugo Chávez. Inflation is over 45% a year and supermarket shelves are bare of many staple goods. Even Nelson Merentes, the finance minister, concedes that Mr Chávez’s revolution has yet to achieve economic success. But oil revenues of $90 billion a year allow Nicolás Maduro, Mr Chávez’s successor as president, the luxury of debating whether or not to change course.
After contracting for several months, the economy grew in the second quarter. August’s inflation of 3% was half the monthly rate in May. But most economists do not believe a sustainable recovery has begun. The growth spurt appears to come from a fiscal splurge; the budget deficit is probably around 10% of GDP. A decade and a half of hyper-regulation, including ever more stringent price and exchange controls, has inflicted “terrible distortions” which will be hard to correct, even given the political will, says José Manuel Puente of IESA, a business school in Caracas.
Foreign exchange has been largely allocated by government fiat since 2003. On the black market, the dollar commands more than six times the official exchange rate of 6.3 bolivares. The government handed out more hard currency in the second quarter, which may have boosted growth. Mr Merentes is more pragmatic than his predecessor Jorge Giordani, a Utopian Marxist. Following a 32% devaluation in January there is talk of another, or even of floating the bolívar, though Mr Giordani, who is now planning minister, opposes this. Opportunists who delight in the profits to be made from graft and arbitrage, are happy to go along with him.
The government’s main response to the scarcity of food and other staples, such as toilet paper and toothpaste, is a conspiracy theory. It blames an “economic war” waged by the United States and its “fascist” allies in the Venezuelan opposition. On September 20th it sent the national guard to occupy a big toilet-paper factory. Officials said the “temporary” takeover was needed to check for irregularities in production and distribution.
More at the link. But when the Venezuelan economy, bolstered by huge oil sale revenues, still has trouble providing food and basic necessities, something is very, very wrong. The country’s huge petroleum reserves and production enable Venezuela to, in effect, import the wealth production of people outside of the country, making — in theory — Venezuela wealthier than it should be based on its own productivity.
Your Editor looks around, and he sees what the other oil exporting countries have achieved in terms of wealth. Saudi Arabia, Kuwait, and the United Arab Emirates have become fabulously wealthy, seemingly having more money than they know what to do with, and having absolutely no pretensions to socialism to weigh them down. Other oil exporting countries, like Mexico, are weighed down by more or less socialist and corrupt governments, and despite raking in billions of other people’s production, remain mired in poverty. The United States became wealthy in no small part due to the production of oil and an economy based on capitalism.
Socialism, regardless of the variations made to Karl Marx’ formulae, has produced not the sharing of wealth and productivity promised for it, but a sharing of the poverty it created. Capitalism has not made every poor person living under it prosperous, but has enabled most people to achieve a decent standard of living; socialism takes prosperity and converts it into poverty.