Democracy Lab Weekly Brief, February 12, 2013

On Thursday we debuted our newest feature: Lab Reports. It's a series of in-depth country reports designed to help readers gain insight into the complex issues entailed by democratic transitions. The first set of reports will focus on Ukraine, Kenya, Burma, and Venezuela. Read our first country overview of Ukraine by Askold Krushelnycky.

We also introduced our new blogger from Libya, Mohamed Eljarh, who explains why the conventional wisdom about Libya's impending collapse doesn't wash.

Sulome Anderson profiles the Ultras, the group of soccer "hooligans" who have become a major political player in Egypt's revolution.

In a reflection on the ominous murder of a leading Tunisian opposition leader, Editor Christian Caryl looks at the historical consequences of political assassinations.

Daniel Lansberg-Rodriguez reports on the believers in Venezuelan religion who hope that magic can cure ailing president Hugo Chavez.

Mohamed El Dahshan deconstructs events following the brutal beating of an Egyptian protestor by police.

Endy Bayuni covers the continuing struggle against corruption in Indonesia.

And Karen Coates uses the disappearance of an activist as a prism for the lingering political mystery that is communist Laos.

And now for this week's recommended reads:

To mark Democracy Lab's first anniversary, the Legatum Institute hosted a presentation by former Afghan finance minister Ashraf Ghani in which he discussed economic factors in post-conflict transitions. You can see it here.

Florence Martin-Kessler and Anne Poiret of The New York Times present a wry video report retracting the 12 steps toward the formation of South Sudan, the world's newest country.

The International Business Times reports that Harvard social scientists will be using India's recent religious mega-festival, the Maha Kumbh Mela, as a case study on chaos and logistics. Our photo of the week (above) shows a woman recovering from a stampede on Sunday that killed 36 people on their way home.  

Democracy Lab contributor Anne Applebaum, writing in the Washington Post, argues that well-qualified alternate elites are an important precondition for countries that are embarking on democratic transitions.

Democracy Digest reports on new U.S. Secretary of State John Kerry's pledge to advance Venezuelan democracy.

Chatham House discusses the steps that Uganda should take to avoid the resource curse as it prepares to embrace its new oil wealth.

The International Crisis Group's Christian Voelkel explains why the centralized peace process in Colombia ends up causing more problems than it solves.

In a new report on press freedom in Libya, Reporters without Borders warns that threats and violence against journalists have reached alarming levels.

The Reuters Institute for the Study of Journalism explores the transformation of Egyptian journalism in the wake of the revolution.

Photo by Sanjay Kanojia/AFP/Getty Images


Venezuela's Devaluation has China written all over it

In a widely expected move, the Venezuelan government announced last Friday that it would devalue its currency by 32 percent. The Venezuela Bolívar (BsF) will now trade at 6.3 BsF per U.S. dollar, up from 4.3 BsF per dollar. This costly move was probably influenced by events that took place halfway around the world, in Beijing.

The first question a casual observer might ask is why the government needed to devalue. The answer is simple, and it relates to the peculiar role the state plays in Venezuela's economy.

The government-owned oil monopoly is the only significant exporter in the country, and thus is also the only supplier of hard currency into the market. Since 2003 (and following a long tradition that dates to Chávez's predecessors), the Venezuelan state has set the price of the dollar far below the market price as a way of subsidizing everything the country imports, which includes pretty much everything. Since most of its spending is in the local currency, the price at which it sells its petro-dollars determines much of the government's income. In effect, Venezuela's currency regime and its fiscal policy are one and the same.

Selling dollars at below-market prices is tremendously costly for the state, which last year ran a record-setting deficit of 15 percent of GDP. Even though it cut spending immediately after the October presidential elections in order to reduce the deficit, further cuts may prove politically costly, considering Venezuela will likely hold another presidential election in the coming months, pending Chávez's health.

A more pressing problem the government is facing is the scarcity of basic food staples, as evidenced by a recent video showing consumers scrambling for chicken in a supermarket that quickly went viral.

Importers realized that cheap dollars were on their way out. Currently, dollars are being sold on the black market at 21BsF per dollar. Therefore, if you are a businessman or a government bureaucrat lucky enough to nab a few greenbacks, you have every incentive to sell them in the black market instead of using them to import the goods you were supposed to be importing. This creates a situation whereby dollars assigned to import basic staples are used for financial arbitrage -- causing a shortage of everyday items. Ordinary Venezuelans also instinctively understand the relationship between the dollar and their personal economics, and demand for dollars typically shoots up when they suspect that a devaluation is in the pipes. As if on cue, immediately after this latest devaluation, Venezuelans flocked to electronics stores and airlines agencies to buy whatever they could that was still priced at the old dollar rate.

By devaluing, the government is lowering the budget deficit, which still lies at a hefty 5.3 percent of GDP, according to estimations by the Bank of America. Narrowing the gap between the official and black market exchange rate lessens the incentive to engage in arbitrage instead of importing goods, which may ameliorate the scarcity problem.

However, the move will prove costly. This measure alone means Venezuelan real wages have fallen, in terms of dollars, and inflation is sure to shoot up. One is left wondering what other options the government had but failed to enact.

This is where the Chinese angle comes in.

In the last few weeks, reports have surfaced that the Chinese, the main underwriters of last year´s enormous fiscal deficit, are growing frustrated with their Venezuelan counterpart; they are in no mood to continue lending to the government, and felt that Venezuela sacrificed productive investments for cheap pre-electoral spending. In spite of this, reports surfaced that Venezuela is asking China for more cash.

Last week, newly-appointed Foreign Minister Elías Jaua traveled to Beijing, returning with a vague statement that the Chinese ratified their interest "in continuing to cooperate with Venezuela" and that President Xi Jinping sent "a hug" to Hugo Chávez.

Too bad, because he wasn't sent to Beijing to fetch "hugs." What Jaua did not say is that he failed to secure new funding from China -- and this may have triggered the move to devalue.

As I have already argued, Venezuela is like a Ponzi scheme: Continued returns to lenders rely on getting fresh new funding. Once the funding dries up, the losses begin to accumulate.

After last week's devaluation, it looks like the loss is borne on the backs of ordinary Venezuelans, who woke up earning less and paying more for practically everything.

Juan Nagel is the Venezuela blogger for Transitions. Read the rest of his posts here.


Photo by LEO RAMIREZ/AFP/Getty Images