THE TALE OF TWO COUNTRIES - ARGENTINA AND VENEZUELA

By Ruma Dubey

When one takes a look at the economic woes of Argentina and Venezuela, the plight of the people living there, for once, we should be thankful for whatever we have. We Indians do have our set of fiscal turbulences but they are not as sickening as those in these two Latin American countries. These two countries, indeed seem to epitomize the label of ‘banana republic’.

A few days ago, markets and currencies in Asia crashed against the dollar due to the free fall of the Argentinean Peso. And Venezuela remains on at the tip of a precipitous cliff, a small wind is enough to push it off.  Today, we live in a flat world and it is at times like these that we rue at the perils of this ‘global world’. One part of the economy on the world map tumbles; it automatically poses risk for rest of the world.  A lot of our Indian business is now dependent on Latin America, right from IT, pharma and other desi FMCG companies. Thus what happens there, matters here.

The problem with Argentina and Venezuela is a completely blotched set of fiscal and economic policies. To keep the currency rate overvalued, its inflation rate is shown at unrealistic levels. But in both these countries, there exists a parallel unofficial black market for exchanging dollars. Incoming tourists could either exchange the dollars for peso in Argentina at the officially pegged exchange rate, which is ‘set’ by the Govt and not the market forces. Or else, most opt for the unofficial rate, which till some weeks ago was 10 peso’s more than the official rate. Ditto for Venezuela, where its currency, bolivars, got 10 times the Govt rate. In both these countries, the black market rate factors in inflation, which government officials intend to hide by setting a fixed, artificial rate. The places to exchange greenbacks at the unofficial rate, known in Argentina as the “dollar blue” rate are spread all over; a thriving business.

Both the countries have been blithely playing and partying with the forex money coming in for their two prime commodities, soya for Argentina and oil for Venezuela. Both used central bank and administrative controls to keep a tight leash on inflation, keeping it low at unrealistic levels and thus keeping the currency at unusually high rates. They have been shoving things under the carpet for some time and it is now coming up from the other end, showing the entire ugliness of their so-called pretty picture. The unofficial inflation rate of Argentina is at around 28% and till mid-Jan, its currency against the dollar fetched 70% more dollars to the peso in the black market.  In Venezuela, after the demise of Hugo Chavez, their central bank got into a frenzy to print money; its inflation now stands somewhere around 56% and a dollar fetches 7-8 times more than the official rate in the black market. After consistently dipping into their reserves, that too now stands dwindles, leaving few options for their irresponsible Govt’s to dip into.

Consequently, things finally had to give and thus we saw the Argentinean peso plunge over 15% within one week. It then introduced a set of rules to stop flight of money from the country. It has been jarred awake and now to do everything possible to close the gap between the official and the unofficial rates. But then that would mean dipping more into reserves to prop up the peso in the official rate. The gap has indeed come down a bit but this poses risk of currency devaluation and very high inflation. Its central bank raised rates at one go by a whopping 6% but it still remains much below the inflation rate. High subsidies and unsustainable pay hikes to Govt employees have perpetuated the problem. Yet, in the midst of this crisis, when their Govt should be thinking of cutting down expenses, it went ahead and announced a 11 billion pesos education fund for the people.

Venezuela last week hiked rates for import for non-essential items but left that rate same for Govt imports, thus in the process, nullifying the entire purpose of this rate hike. The Govt owes more than $3 billion to foreign airliners and around $9 billion for private sector imports which could not be paid due to shortage of dollars. These two, the Govt has put up its hands and said that it cannot pay.

Due to these lopsided policies, many airlines have suspended operations to the country, many drugs are unavailable, car parts and batteries are rare commodities, medical spare parts are not available and many newspapers are closing down as paper has become scarce. The Govt has brought in strangulating laws – slash in remittances to relatives abroad and restricted companies profits to 30% of costs.

Instead of allowing a free economy, bringing in more foreign investment, allow private-public participation, both these countries unsuccessful socialist experiments would be something the capitalists would gloat over. Handing out largesse’s to win votes, with other people’s money never works, in no country. India’s political party too might learn this lesson soon.