Tag Archives: inflation

President Dilma Rousseff’s No Win Situation

Brazil's President Dilma Rousseff REUTERS/Adriano Machado

Brazil’s President Dilma Rousseff REUTERS/Adriano Machado

In September 2013, President Dilma Rousseff addressed the U.N. General Assembly. She delivered a fervent criticism of the U.S.’s NSA spying program.  She scolded the U.S. for violating international law by indiscriminately spying on citizens and foreign governments. Anti-American members of the General Assembly wildly applauded her remarks. To stir up sentiment against the U.S., President Rousseff reminded the diplomats that in the 70s she served with the Brazilian guerrillas. When captured by the ruling military authorities, she was imprisoned and tortured. The diplomats understood the President’s implied David and Goliath analogy. President Rousseff went on to praise Latin America’s battle against authoritarianism and the disregard for the right to privacy. The Brazilian leader basked in her moment of fame. Those cheering Rousseff’s speech could never have imagined how her political fortunes would change over the next two years. At the time of her U.N. speech, she had to have known that the Brazilian economy was slowing down and that the Petrobras SA scandal was growing.

Like other developing countries, Brazil has its share of pressing  social issues . Countless motions pictures have been made about the country’s sprawling favelas. Visitors to the country see poverty and blight while standing in the midst of glamour and glitz. It is common for brutal crimes to occur in crowded public places while onlookers look on with indifference. Demonstrators often take to the streets to complain about the country’s much neglected public transportation infrastructure. Local Brazilian politicians demand that their leaders address these issues and not grandstand on the international stage.

Upon taking office, President Rousseff promised to continue the policies and work of her predecessor, Luiz Inacio Lula. Brazil achieved real social and economic development under Lula’s stewardship. Millions of Brazilians entered the middle class. Quality education reached millions who had previously not had access to it. Businesses appreciated former President Lula’s policy of “spreading the wealth around.” In general, Brazilians believed that better times had finally arrived. Former President Lula’s endearing charm and genuine advocacy of the developing world pushed Brazil a to the forefront of international politics. Every politician knows that good times can turn into bad times with little warning.

Many commentators and economists questioned Lula’s reliance upon governmental subsidies to finance social problems. President Rousseff was not one of the skeptics. Influential economists warned that the economy would cool off, thus hindering the government’s ability to finance the promised social changes.  Many Latin American countries turn to state-owned companies to financial social change. Unfortunately, using state-owned companies to subsidize social programs tends to sap the companies’ economic vitality and turn them into breeding grounds of corruption. Former President Lula ignored the dangers of using the country’s state-owned and run oil, company, Petrobras SA, as the government’s piggybank. Though President Rousseff graduated college with a degree in economics, she chose to disregard her education and, upon assuming the Presidency, continued to plunder Petrobras SA. to finance her socialist agenda. The scandals that have erupted around the state-owned company have paralyzed the country and dragged the economy further down. President Rousseff cannot escape the consequences of her connection to the Petrobras scandals; she served as Chairman of Petrobras SA under former President Lula. Regardless of her political connections, President Rousseff, in my opinion, lacked the experience or technical knowledge to run Petrobras SA as a real business.

According to Fortune’s (2014) Biggest Losers of the Global 500, Petrobras SA comes in at #3. The company’s debt of 125 billion is the highest among all international oil companies. Due to mismanagement, falling commodity prices and rampant corruption the company’s finances are a mess. Brazilians are waiting for someone to step up and sacrifice themselves to save Petrobras SA from itself. Most Brazilians believe that President Rousseff should be that person.

The never-ending arrests and reports of illegal activity at Petrobras SA are rattling the country to its political core. Recently, the police conducted a second mass arrest operation of those accused of corruption. A year ago police arrested 35 oil executives who had been charged with bribery, money laundering and other corruption-related charges. Newly installed Petrobras executives recently admitted that the company is facing uncertain times.

It is not difficult to imagine how the average Brazilian feels about the Petrobras SA mess; they have lost confidence in their government officials to faithfully execute the laws that they were elected to enforce. The extent of the corruption makes it impossible for President Rousseff to claim that she was not attuned to the culture of corruption at a company she chaired. I do not think she can function effectively as the country’s chief executive.

Concerning Brazil’s present-day problems, financial experts, political scientist and policy formulating economists debate how best to put the country back on track. The Petrobras scandal has caused a lack of confidence across the board. This, in turn, has led to a downturn in the economy.

Some experts argue that the economic problems that the country now face are largely independent of the Petrobras scandal.  What all agree upon is that Brazil is caught in a pincer: the economy is in a full-blown recession and the Petrobras scandal keeps growing.

Venezuela’s Latest Currency Devaluation

Venezuela is South America’s forth largest economy. Many people forget that it was one of the founding countries of OPEC. By the early 1990s Venezuela was the third largest oil producing  nation in the world. These facts get lost in the never-ending debate over the effects of President Hugo Chavez’s push towards socialism.

The late Hugo Chavez was considered a defender of the poor. He was admired by many of his contemporaries because of his ability to stand up to Western imperialism. The left-leaning South American presidents supported President Chavez’s efforts to lead Venezuela down a path to socialism. In my opinion no head of state of any South America country have Chavez’s political sophistication or ability to manipulate public opinion. For years President Chavez convinced his supporters that their lot in life had improved because of his leadership. Without Chavez’s imposing personality and fiery rhetoric it is likely that Venezuelans will start to question the nation’s economic health. The Venezuelan community be surprised to learn that President Chavez ruined the nation’s oil industry by using its revenues like a piggy bank to fund his socialist experiment. It is time for Venezuelans to ask where the government gets the money to fund so many expensive social programs.

After waging a long battle with cancer Hugo Chavez died on March 5, 2013. According to a statement released by the military he died of a massive heart attack. Most commentators believe that he had returned from Cuba because no further treatment would arrest the progress of his disease. If is safe to assume that Chavez knew that his time was up. I do not believe that Chavez was actually in charge of the country’s daily operations during his last few weeks. The late president was probably consulted on major policy decisions and actions.

On February 8, 2013 the government devalued its currency by 32%. At that time it was suggested that this action was designed to clear the decks for a new economic regime. Most economists concluded that the devaluation by itself would not lead to an appreciable improvement in the economy. I think that the devaluation was part of a strategy to give the President’s presumptive successor a political advantage in the soon to be held elections.  I do not believe that this monetary action was taken to improve the lives of poor Venezuelans. 

Generally speaking the value of a given currency is determined by its relativity to the value of another currency. This exchange rate is normally based upon the amount of the home currency which is needed to purchase one unit of the foreign currency. It is common for countries to base their currencies upon the U.S. dollar or Eurozone euro. Currencies rise and fall depending on movements in the financial markets. Today major currencies are said to “float” along with market conditions.

Many third world nations have elected to fix the value of their currencies. The New York Fed. Reserve Bank explains how this method of evaluating a country’s currency works:

 “Under a fixed exchange rate system, only a decision by a country’s government or monetary authority can alter the official value of the currency. Governments do, occasionally, take such measures, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate, reduces the currency’s value; in contrast, a revaluation is an upward change in the currency’s value.”

Venezuela’s national currency is the bolivar. Its exchange rate is fixed to the US dollar. Many of the world’s Third World Nations’ currencies are fixed. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves to purchase all offers of its currency at the established rate. Because of the Venezuela’s political and economic isolation the country has always had problems maintaining an adequate amount of foreign reserves. Over the last few years Venezuela has not been able to support (defend) its currency. The country has devalued the Bolivar numerous times the last decade. Most commentators and financial experts believe that Venezuela’s economic problems cannot be addressed by constantly devaluing the Bolivar.