Posted by: bklunk | March 25, 2007

I Used to be a Millionaire

This is a pretty standard ploy for dealing with inflation. Turkey dropped six zeroes from its currency and turned all the million lira bills into ones. However, the usual anti-inflationary policies generally involve very un-socialist adjustments.

A New Currency in Venezuela

Another striking change in the policies of Hugo Chavez occurred recently when he decided to introduce a new currency, or rather, take a few zeroes off the old one and bringing back some old coins.  What should be interesting to watch is how the new prices affect the economy and how confusing things might be. Furthermore, it will be important to see how long it takes for the old currency to come off the market and the new currency to replace it.  I believe it will be a long process and fairly difficult because of the status of the country, and the hurting economy.  Currently, Venezuela has the highest inflation rate in South America which has led Hugo Chavez to make these drastic changes in the economy.  Chavez believes that renaming the currency and the re-denomination will bring the economy back to the prosperity from decades ago.  Also, Chavez is bringing back a 12.5 cent coin to mimic one of the past involving Simon Bolivar.  It seems like this move by Chavez is just one to draw more nationalism from the Venezuelan.

 

 

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Responses

  1. Hugo Chavez is extreme, I think everyone can agree. The real question is, why does he still maintain such high support in Venezuela? Although his support seems like it may be starting to erode, a large portion of the country still views Chavez as the best option for them. This is rather disheartening; Chavez’s close ties with Iran, his belligerent attitude towards the United States, and his takeover of the oil-producing sector of the economy in Venezuela all point to a leader who is out of touch with international norms and customs.

    Although it is understandable that Chavez wants little or no United States influence in his region, given the results of past “interferences” in governments in South America, it is not “rational” that he would go so blatantly against the United States and all its allies in order to forge alliances with states such as Iran. I think that this situation alone is a good example of where political science’s Rational Actor Model fails miserably. While President Bush was just on a trip to South American to talk about, among other things, new initiaves in foreign aid from the US to South America, Chavez wanted nothing to do with it. This pull away from interaction with traditional world powers could indicate a move away from international norms and relations and into the realm of Iran and North Korea. It seems that this new currency is just another step on that path. Instead of dealing with the problem of an economy that relies too heavily on oil, Chavez ignores the real problem and blames the physical cash itself.

  2. I do think this move is an attempt to foster nationalism but that kind of maneuver can backfire wildly. I definitely agree with Haley that Chavez is ignoring the issues and merely implementing ghost solutions that may, on all outward appearances, look like he has the nation’s interests at heart but are really just to pacify the masses. Hopefully the people of Venezuela will start to see the trick being played on them as problems increase instead of getting better. Near the end of the Dirty war in Argentina, General Leopoldo Gualtieri attempted to disguise his crumbling state and mask the suffering of the people by entering into a war with Britain over the Falkland Islands. Ultimately, Argentina was embarrassed by the Brits and the people were once again enlightened to the poor state of their government. It even got them to make a change–they tossed Gaultieri and started to rebuild. If the war had gone the other direction it may have been enough to disguise the fact that the government was ignoring the problems of its people. Who knows how long that would have gone on….
    I think Chavez will eventually face this reality–especially if he continues to avoid tackling real issues and continues to toss “pretty” but ineffectual solutions at legitimate problems.

  3. To start off, I have to say that I am extremely interested in Latin American politics and strictly find Chávez’s actions in Venezuela a step backwards for development in the region. However, I fear in this instance we are suffering some biases and misperceptions about analyzing this situation. I would agree Chávez’s motives in the past seem like he is concerned with just his own power and not the people of Venezuela, and in my opinion, I believe this, too. Yet in this instance I think Chávez is actually trying to sincerely fight inflation for his country. The cause of most hyperinflation in countries is that a lack of production (probably due to nationalization the industries) which causes prices to rise. This destroys the purchasing power of the people and government causing them to have less money than they had before. Then to pay for expenditures the government prints more money and increases money supply and thus leading to the lowering of the currency. At this point foreign investors are dumping the plummeting currency causing more money supply and even more inflation. It’s a vicious circle.

    I know that the best way to fight inflation is to correct the roots of the problem, but it’s unlikely Chávez will privatize the industries or solve poverty overnight. It is common for countries to replace worthless currency (in Argentina, the currency was so worthless that families used it for wallpaper). Yet if the people feel the economy is unlikely to improve then the country will get stuck in the same cycle since they will not save but just spend the money (which actually hurts money supply as well). So the people’s confidence is important. This is why I feel Chávez is using nationalistic images to increase confidence and hope for the future. Although it’s probably a cheap trick and a very short-term solution, his methods are totally illogical; at least not to him.


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