A Guide to Venezuela's Now Four-Tiered FX Rates

Just count 'em! How many bolivars do you need to exchange for 1 USD? Here's the handy-dandy IPE Zone guide for understanding the economic wasteland that is modern day Venezuela:

6.3 bolivars - official rate for "preferential" goods (read: largely for show; few can avail of it save for the well-connected).

11.36 bolivars - rate at the last weekly auction held for greenbacks known as "Sicad" (read: still not everyone can get into this auction).

??? bolivars - rate to be set at yet another round of auctions just announced that commentators dub 'Sicad 2.' Expectations are for the rate to be rather higher since only the Venezuelan government espouses that it has greenbacks left on an appreciable scale:

Maduro, who said that the new system would be known as “Sicad 2,” has blamed inflation and shortages on an “economic war” waged by the “parasitic bourgeoisie.” He gave businesses until Feb. 10 to cut prices to “fair” levels and reduce their profit margins to a maximum of 30 percent.

Venezuela will release $42.5 billion of foreign currency to the economy this year, including $11.4 billion through auctions in the Sicad system, as it tries to ameliorate dollar shortages that are causing irregular supply of imported goods ranging from shaving blades to milk. Maduro said yesterday that the country has sufficient foreign currency to meet its needs.

“There will be four exchange rates,” Asdrubal Oliveros, director of Caracas-based consultancy Ecoanalitica, said in a telephone interview. “When I hear Maduro say that Sicad 2 will be directed by the state, it makes me think that they are not going to let the rate float and that it will be at a weaker rate than Sicad 1, maybe around 25 bolivars per dollar.” 

86.92 bolivars - black market rate quoted (read: for the unlucky punters who fall into our category, which is everyone else.

Call me a lousy "parasitic bourgeoisie" even if I have no intention of holding bolivars, but why do I think 86.92 bolivars to the dollar is the only FX rate not plucked here from economic fantasyland? While we may be entertained by the utter folly of this four-tiered FX rate system, save a prayer for the people of Venezuela who are suffering considerable hardships from ruinous economic mismanagement.

Happy Valentine's Day

Source.

The PRC-India Trade Imbalance, c/o 'Shamsung'

Spot the fakery

When it comes to globalized commodities, you probably cannot outdo Chinese no-name electronics as PRC-sourced fakes are the wares of street hawkers the world over. Hence, the 'Shamsung':

Made-in-China products are also flooding into Indian markets served mainly by small and midsize local companies [read: mom-and-pop shops given limited inroads made by retail trade liberalization]. The deluge of Chinese imports is beginning to further strain a tense bilateral relationship, which is traditionally prickly because of a territorial dispute.

Indian consumers are for now embracing cut-price Chinese offerings. That may not be the case if they find themselves out of work because of relentless competition from low-cost manufacturers over the border.

Take a walk through an Indian market and the scale of the issue becomes clear. Fake Chinese cellphones are clearly visible in the sprawling black markets of Mumbai, the country's biggest commercial center. Legions of vendors spend their days selling counterfeit Samsung Electronics and Taiwan's HTC phones. Cheaper look-alikes can also be bought with little fuss. Hordes of eager shoppers bustle through the warren of cramped shops, haggling over prices.

That's at a local level. At the international level, it all adds up to an overwhelming trade balance in favor of China over India. Where have we heard this story before?

Indian companies typically import nonbrand products from China and sell them in India at extremely low prices, a senior executive at a Japanese appliance maker said. India's smartphone market is a microcosm of what is going on at a macro level. The country runs a chronic and growing trade deficit with China.

In the fiscal year through March 2013, India exported some $13.5 billion worth of goods to China and imported $52.2 billion's worth. The government in New Delhi wants to narrow the trade gap. Consumers in India benefit from the bargains, but the trade imbalance is a source of economic tension between the countries.

It's funny how the Chinese are now aping Koreans when the latter were famous for making fake European leather goods for the longest time. Meanwhile, Chinese firms don't particularly care who they are copying as long as they are able to sell their fakes. If imitation is the sincerest form of flattery, then South Korea has gone a long way. At any rate, the PRC-India trade imbalance isn't exactly improving as a result.

If Obamacare reduces labor supply, will it raise wages?

In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.

That sounds like reasonable, textbook economics. But I don't think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower labor supply means lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.

Perhaps the easiest way to think about this issue is in the context of a Solow growth model. In the Solow model, the steady-state real wage is a function of technology, the saving rate, and the population growth rate. If labor supply per person suddenly falls by, say, 2 percent and stays there, the real wage will rise initally, but it will eventually return to its former level. Steady-state income per person falls by the full 2 percent.

One effect that might occur is a change in the composition of labor income. If the Act reduces labor supply primarily among the low-skilled, while not having that effect among the highly-skilled, then we might get a change in the relative wages of skilled and unskilled. But an overall increase in real wages seems unlikely.

VW and 'Unionization' of Southern US Car Plants

There's much interesting politicking going on at the moment among Southern states in the US Sun Belt hosting foreign automobile plants. For a very long time, they have been drawing Japanese and European carmakers keen on avoiding the hassles American unions--in particular, the United Auto Workers--have introduced for their American counterparts in the Rust Belt. Large financial incentives for locating in the Sun Belt have certainly lured them there, too.

Now, however, one of the European biggies in Volkswagen seems to be encouraging the formation of labor representation in its plant in Chattanooga, Tennessee. One of the longstanding complaints about German firms is that while labor representation is considered important alongside capital owners and government in setting industrial policy, they are marginalized Stateside. After years and years, it seems Volkswagen is intending to do something about matters in introducing labor representation. However, it is not exactly the same sort of arrangement American unions are familiar with, but is intended to resemble the German variant of works councils:

This would also be something new for the United Auto Workers. They wouldn't have the same relationship with VW as they do with Chrysler, General Motors, and Ford. Rather, the idea is to create something called a "works council," which are widespread across Europe and enjoy tremendous influence over how plants are run. In America, that kind of body can't be established without a union vote -- but crucially, the works council would be independent of the union, meaning the UAW would give up some control as soon as it gained it.

While the details of the arrangement would be ironed out after the election, works councils -- which are elected by all workers in a factory, both blue and white collar, whether or not they belong to the union -- usually help decide things like staffing schedules and working conditions, while the union bargains on wages and benefits. They have the right to review certain types of information about how the company is doing financially, which often means that they're more sympathetic towards management's desire to make cutbacks when times are tough. During the recession, for example, German works councils helped the company reduce hours across the board rather than laying people off, containing unemployment until the economy recovered.

In other words, the German setup is not meant to be antagonistic since works councils are involved in making management-related decisions (especially those dealing with labor, obviously). Still, others in the Sun Belt do not seem to make this distinction, thinking that VW is "unionizing" Southern plants and that there is a domino effect that may follow, making the region unattractive to labor-averse foreign firms. So, plans are afoot among Tennessee lawmakers to roll back concessions granted to union-coddling carmakers like VW:

On Monday, state Republican leaders accused Volkswagen of supporting the UAW and they threatened to withhold any tax incentives for future expansion of the three-year-old assembly plant in Chattanooga if workers vote to join the UAW.

"Should the workers at Volkswagen choose to be represented by the United Auto Workers, then I believe any additional incentives from the citizens of the State of Tennessee for expansion or otherwise will have a very tough time passing the Tennessee Senate," State Sen. Bo Watson, R-Chattanooga, said in a statement sent to the Free Press.

A worker opposition group called Southern Momentum echoed that position in a statement. "Further financial incentives — which are absolutely necessary for the expansion of the VW facility here in Chattanooga — simply will not exist if the UAW wins this election," Maury Nicely, a Chattanooga labor lawyer representing Southern Momentum said.

Take that, VW pinkos! Actually, VW is currently in need of worker support at a time when sales Stateside are slipping--blame the weak-selling US-only Passat that trades European sophistication for American softness. VW is banking on the appeal of offering the opportunity to make these works councils to keep workers on their side.

Will it work? We'll know by Friday.

UPDATE 1: Hysterics from (mostly Republican) politicians aside, the vote does not seem to matter all that much to anyone else.

UPDATE 2: The vote lost anyway--and not by a small margin. So much for the renaissance of organized labor.

The Economics of Downton Abbey

From The Washington Post.

Unlike US, Why EU Doesn't Hurl Expletives at Russia

I strongly feel that the Sochi Olympics is a giant feast for the Western media to rip Russia to pieces. And as such, any detail, any mistake, anything negative at all no matter how small will be the centre of attention – and all the positive things will go unnoticed - Yulia Ivanova, Russian expat in London

Unfortunately for the Sochi Olympics, it seems most of the entertainment so far is not of the sporting variety. To no small extent, this is the Russian host's fault and not of Western media. While parading their (comely) female athletes in scantily-clad poses is not especially eyebrow-raising in this day and age, I think they would capture the world's attention more if they, er, actually managed to win some medals at this stage. They're athletes, right?

Another sideshow of Olympic dimensions has involved Ukranian President Viktor Yanukovych meeting his Russian counterpart Vladimir Putin at Sochi. Having eased out his rabidly pro-Russian Prime Minister Mykola Azarov in a bid to appease protesters, Yanukovych has incurred Putin's wrath and, as a result, further Russian emergency aid for Ukraine is currently in limbo. Before he left for Russia, American  officials now famously met with Yanukovych in Ukraine. And, unwisely using unencrypted phones, we have a recording of the now-infamous quote where Assistant Secretary of State Victoria Nuland says the US should ""f--k the EU" to the State Department representative in Ukraine. Whether Russia deliberately snooped on the conversation or simply pointed out that it was online, I suspect they are happy it exists. German Chancellor Angela Merkel is claming outrage over the statement. Divide and conquer (Westerners) and all that jazz.

It is perhaps unfortunately common that American "diplomats" pepper their conversations with foul language. Ask Susan Rice. Why is it though that we never hear of, say, EU officials expressing their frustrations using foul language?

(1) The EU is a multinational enterprise. Their officials are not as comfortable using expletives with Europeans of other nationalities who may misunderstand their intended meaning. Americans are comfortable using foul language among themselves since the intended meaning comes across clearly, having a common language and culture. European diplomats, however, must deal with far more linguistic and cultural diversity, and the chances of offending other Europeans is much greater. So, to be on the safe side, they stick to civilized communications even during private correspondence.

(2) Another obvious political economy consideration is that Western Europe is far more reliant on trade with Russia than the United States is and thus cannot afford to be so gung-ho on Russia. While it is busy diversifying its energy supplies, much of the EU is still dependent on natural gas being supplied by the giant to the east:

Of the EU's current annual demand for 485 billion cubic metres (bcm) of gas, Russia supplies some 150 bcm.

Demand could rise to 585 bcm by 2023 with the Russians supplying as much as 175 bcm, according to Reuters calculations based on data from governments and energy companies, as well as input from research firms and consultancies. This means that the amount of gas from Russia is not only set to rise, but Russia's share of Europe's gas market will remain stable around 30 percent.

So, don't hold your breath waiting for Baroness Ashton telling EU diplomats to "f--k Russia over Ukraine." Otherwise, do enjoy the Olympic sideshow. It didn't cost $50 billion to stage and yet it is providing superior entertainment so far.