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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

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Democracy on the cheap

The arrest last week of the top leader of the Islamist Prosperous Justice Party (PKS) on corruption charges is a reminder of the precarious financial situation that all Indonesian political parties face. Operating with limited financial resources, parties may have gotten a little too creative in raising funds for the likes of the country's anti-graft commission.

PKS President Luthfi Hasan Ishaaq is the latest in a list of top elected Indonesian politicians implicated in corruption scandals. Those before him have included politicians from the Democratic Party of President Susilo Bambang Yudhoyono, who ironically enough, was elected in 2004 and again 2009 on an anti-corruption platform.

None of the big parties are free from corruption scandals. One possible reason is that the politicians running the parties are often tasked with raising money for the party's coffers. Even Golkar -- which is the most financially well-endowed of all Indonesian parties, as it is backed by the diversified Bakrie business group, with former chairman, Aburizal Bakrie, also sitting as Golkar party chairman -- has not been spared from graft scandals.

With Indonesia heading into an election in 2014, these parties will likely be scrambling for more money to finance their campaigns. And as long as the issue of party finances is not resolved, parties will likely be forced to circumvent the law in their efforts to come up with the money. They somehow seem to think that they won't get caught.

Indonesia has organized three free and fair elections since the downfall of strongman Suharto in 1998. Its multi-party electoral system, however, is costly for the state to run, and also costly for the various parties to contest. In 1999, 48 parties contested in the election; in 2004, 24 parties; and in 2009, 44. Things were a lot simpler and easier to finance during the 30 years under Suharto, when only three parties were allowed to run in elections that were geared to ensure victory for the ruling party.

After 2009, there was a consensus that Indonesia needed a simpler electoral system. The House of Representatives has since come up with a new electoral law, but it is difficult for newcomers to join. The Electoral Commission ruled that only 10 parties, including nine that already have representation in the House, qualified to contest in the national polls next year.

But the law does not address the important question of party financing, an important element for a democracy to work. It says only that parties can raise money from members and from individual and corporate donations. While campaign funds are subject to independent auditing, parties' finances are not, except for the pittance of taxpayers' money that they receive from the state.

With membership fees and donations unlikely to cover the huge cost of running a political party and its secretariat, many politicians have tripped as they used their power and influence to help raise money for their parties.

The Corruption Eradication Commission (KPK), an independent state agency which has been aggressive in going after the corruption within political parties, has focused its investigation on individual politicians, as if they and they alone are to blame for the corruption. All court convictions in these corruption cases have stopped with the individual politicians. Their respective parties have not only been spared, but are even prepared to sacrifice the implicated politicians.

Luthfi was replaced as president of the PKS -- the country's fourth largest party -- the day after he was named a suspect in a corruption case regarding state procurement of beef imports from Australia. He has since also lost his seat in the House.

President Yudhoyono is coming under a lot of pressure from the Democratic Party's rank-and-file to remove Chairman Anas Urbaningrum, as his name repeatedly came up in court testimonies over financial scandals involving other party seniors. They say the president's reluctance to act is costing the party its public standing, and may jeopardize the party's prospects for the 2014 polls. 

The party's chief treasurer, Muhammad Nazaruddin, has already been sentenced to seven years (raising the sentence from five) in jail for corruption, and he is determined not to go down alone. One prominent Democrat politician, Angelina Sondakh, has already been sentenced, and another, former minister of youth and sports Andi Alfian Mallarangeng, will soon be tried on charges of corruption over the construction of a huge sports complex near Jakarta.

Five of the six parties in Yudhoyono's coalition government have felt the brunt of the KPK.

A Golkar senior politician was recently named in a court document of profiting from the government's procurement of a special Quran; the chairman of the National Awakening Party (PKB), Muhaimin Iskandar, has been named in several corruption cases within the Ministry of Labor and Resettlement, which he heads. Suryadharma Ali, the chairman of the United Development Party (PPP) and minister of religious affairs, is increasingly under the KPK spotlight as more cases of massive corruption within the ministry emerge. Minister of Agriculture Suswono, also from the PKS, will now have to answer questioning about his role in the allocation of a beef imports quota following Lutfhi's arrest.

Even the Indonesian Democratic Party of Struggle (PDIP), the main opposition party, has seen many of its top representatives convicted for corruption.

No one can accuse the KPK of playing favorites, but many are asking why the KPK has not sought to trace where all the graft money has gone. What happened to the money that Muhammad Nazaruddin and Angelina Sondakh raised? Is it sitting in their bank accounts, or was it transferred to their party's treasures? Did they steal the money for themselves, or were they working to raise money for the party?

In the end, it may be just as well that the KPK has not pursued the investigation beyond the involvement of the individual politicians. The consequences of revealing the complicity of the political parties may just be too big of a problem for the nascent democracy to handle.

If the parties were found guilty of such massive corruption, the court system would be forced to shut them down. Indonesia may then be left with only a handful parties in 2014, which is not necessarily good for its democracy either. Outlawing these parties may raise serious questions about the legitimacy of the politicians who supported their entering the elections, including President Yudhoyono himself.

No one warned Indonesia that running a democracy would be this costly, and this complicated.

Photo by BAY ISMOYO/AFP/Getty Images