Transitions

Democracy Lab Weekly Brief, March 17, 2014

To catch Democracy Lab in real time, follow us on Twitter: @FP_DemLab.

Jeffrey Tayler argues that Vladimir Putin isn't crazy to worry about Western encroachment in Eastern Europe. Michael Cecire contends that inviting Georgia into NATO is the best response to Russian intervention in Crimea.

Christian Caryl offers some guidelines on how to identify a genuine fascist.

Askold Krushelnycky describes the Orwellian world of pre-referendum Crimea.

Graeme Reid reports on the latest attempt by Malaysia's ruling party to discredit opposition leader Anwar Ibrahim by accusing him of sodomy.

Daniel Lansberg-Rodríguez examines the Venezuelan opposition's increasingly mystical bent. Juan Nagel analyzes the Venezuelan government's latest economic decree -- and arrives at some surprising conclusions.

Mohamed El Dahshan describes the challenges facing online education in Arab states.

Anna Nemtsova attends a lecture by the Russian dissident Mikhail Khodorkovsky in Kiev, who is trying to build bridges between the two countries.

Alina Rocha Menocal, Gina Bergh, and Laura Rodríguez-Takeuchi ask what people most value in their governments.

And now for this week's recommended reads:

In the New York Review of Books, Christopher de Bellaigue provides a handy summary of the political battles that are tearing Turkey apart.

Democracy Digest wonders whether the United States "should give up on Arab democracy."

The Guardian's Simon Jenkins scolds the West for talking tough on Crimea despite the lack of realistic options for action.

Writing for the Atlantic Council, Mohammed Alaa Ghanem and Shlomo Bolts explain why barrel bombs in Syria are a U.S. national security issue.

In the latest issue of Foreign Policy, Francis Wade shadows Burma's filmmakers, who, after decades of censorship, are finally able to make the movies they want. Over at the Irrawaddy, Esther Htusan reports on rising drug abuse in Burma's opium-growing regions.

Writing in Financial Times, Amy Kazmin finds that Indian Muslims are increasingly nervous about the approaching general election. (In the photo above, Arvind Kejriwal, head of India's Aam Aadmi Party, attends a road show to support the party's candidates.)

At African Arguments, Aly Verjee offers a vivid reporter's postcard from South Sudan.

Human Rights Watch urges the Rome Ministerial conference to address arbitrary detention and displacement in Libya.

And in a new report, the Wilson Center explores opportunities available to women in the Middle East today -- and the obstacles that persist.

PUNIT PARANJPE/AFP/Getty Images

Transitions

Venezuela's Government Flirts with Market Economics

The Venezuelan government published a seemingly obscure statute last week, which they've called "Foreign Exchange Agreement No. 27." Casual observers might be tempted to think this is just another set of arcane rules governing Venezuela's tangled web of currency and exchange controls.

Casual observers, however, would be wrong. This is the first real attempt by Venezuelan authorities to turn away from heavy-handed policy toward some sort of market-like mechanism. The new rules set in place a currency exchange system that is remarkably open when compared to Venezuela's prevailing system. It has the potential to significantly reduce Venezuela's economic mess.

Ever since protests erupted a month ago, the media has focused on its root causes. High on the list is Venezuela's soaring inflation, which, coupled with widespread scarcity of basic staples such as toilet paper, has made life miserable for most. (In the photo above, a father and daughter look on as hundreds of Venezuelans stand in line to buy basic foodstuffs at a local grocery store.)

Venezuela's problems stem, at least in part, from currency exchange controls put in place more than ten years ago by the late Hugo Chávez. The government severely restricts who can buy the dollars it earns from oil exports, and which it chooses to sell at an artificially low price. The end result is that bargain dollars end up in politicians' offshore bank accounts or in the country's burgeoning black market instead of being used to import basic staples. Add in severe price controls that discourage increases in domestic supply, and you have an economic perfect storm.

With the black market dollar fetching several times more than the official rate, many economists had suggested some combination of devaluation and liberalization of the market was in order. Few of them expected the government to actually embrace these ideas.

Yet that is what it appears to have done. The new statute sets up a new currency exchange mechanism, the unappealingly titled "SICAD II," named after a scheme introduced a few months ago.

SICAD II places few restrictions on currency buyers. As opposed to existing schemes, where the participants are hand-picked based on their closeness to the government, the new system imposes few restrictions on who can participate in the new system. Although the government initially said they would sell $30 million per day in the new system, far less than demand, recent statements suggest this amount could go up.

One of the significant features of the new system is that Venezuelan debt can be bought and sold both internally as well as overseas. This goes a long way toward liberalizing severely restricted capital flows, providing an escape valve for investors with holdings trapped in local currency. The statute also allows exporters to hold a significant portion of their earnings in foreign currency, instead of requiring them to sell their profits to the government at a cheap price, as current rules mandate.

The new system is also much more transparent. The Central Bank will, supposedly, allow transaction prices to be set by market forces, and will publish the average exchange rate every day. There are pledges that transactions will be finalized within 48 hours, a stark contrast to the current delay-plagued system.

In a sign of how different the tone of the six-page law is, the word "market" appears eight times, the word "demand" five times, while the world "fatherland" does not appear at all -- surely a first for chavista legislation.

Initial reaction has been mixed to positive. While some local economists have praised the overture, they are cautious as to its effects. They warn that it is, in effect, a devaluation of the currency, and that without fiscal discipline, voracious government spending will simply translate into capital flight, and the new market-based dollar may well go through the roof.

Foreign entities were more bullish about the change. In a research note, Bank of America Merrill Lynch praised the statute for limiting the discretionary actions of the government, highlighting the apparent commitment of many of the government's economic officers to interfere as little as possible. Barclay's was equally upbeat, saying the new system could "potentially" lead to an eventual recovery of the country's economy.

There are still many details to be worked out, and the move could surely backfire if other measures are not put in place. Moreover, a sharp devaluation or a prolonged contraction of the economy could convince policy makers that this is a mistake, and they could scrap the whole idea altogether. Nevertheless, this is the first sign of rational economic thinking from the Venezuelan government in years, and it comes not a moment too soon.

Juan Nagel is the Venezuela blogger for Transitions, editor of Caracas Chronicles, and author of Blogging the Revolution. Read the rest of his posts here.

John Moore/Getty Images