Sunday, June 03, 2018

Why does help lead to problems?

"Venezuela is in the news again. Through unprecedented treachery, President Nicolas Maduro awarded himself victory in the presidential election on 20 May," wrote Prof R Hausmann and J Hinz. Venezuela is in an economic crisis with inflation estimated at 18,000% in April. Maduro, and his predecessor Hugo Chavez, are directly responsible for this mess and Maduro has corrupted every institution in the country, from the electoral council to its parliament and its Supreme Court. Yet, Maduro has his supporters among the poor who say that they are still better off under this government than previously. Is it a case of economic envy because the rich are suffering as well? This was amply demonstrated in India during demonetization, when all high value notes were withdrawn suddenly without warning. This hit the unorganised sector, which employs 80% of India's workforce and works only on cash, the hardest. Even though the poor, who work mainly in the unorganised sector, suffered the most they were happy because the rich also must have suffered some monetary losses. How dire is the situation in Venezuela? "Food prices have soared by a factor of 100 in the year to April 2018, and by more than 200% in the last month alone. The price of the dollar has increased by a factor of over 100 since July 2017." Venezuela has the largest largest oil reserves in the world, but "oil production has declined by 27% in the 12 months to April of 2018. It now stands at 1.4 million barrels per day (bpd), two million bpd below where it was when Maduro's predecessor and patron, Hugo Chavez, took power in 1999. The minimum wage, which is earned by the median worker, buys less than 900 calories a day -- not enough to feed a person, let alone a family. The Catholic Church charity Caritas Venezuela projects that 280,000 children will die of hunger this year." Shocking, but not unique. In neighboring Nicaragua, President Daniel Ortega has changed the constitution to remain president for life. Although its economy is doing nicely with steady growth with low inflation there are armed skirmishes between supporters and opponents of Ortega. In Argentina the interest rate has been raised to 40% to protect the peso and President Macri requested the IMF for a loan. Brazil has suffered a deep recession since 2014 which has seen its GDP contract by 8%. Former president Lula de Silva has been sentenced to 12 years in prison for accepting a bribe from a contractor, which is almost certainly politically motivated, wrote V Prashad. It was Lula's social policies that makes him so popular with the poor but costs 35% of the budget. Every good economic policy seems to have an opposite bad effect. 

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