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"Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money. This caused the currency to lose 98% of its value in the last three years. By the time oil prices fell in 2014, the country was in no position to take the hit, with collapsing domestic production and capacity to import, leading to the current disaster. "
Thanks for the info I haven't had time to understand what happened in Venezuela. I assume they should have saved the USD from oil and spent their own currency instead?
Thanks for the info I haven't had time to understand what happened in Venezuela. I assume they should have saved the USD from oil and spent their own currency instead?
The people running the country likely *have it all backwards* and have made the country dependent upon oil exports to maintain and boost the standard of living, rather than developing a vibrant domestic sector with good competitive markets to keep costs down. Once oil revenue dries up you run out of basics.
The situation is likely the result of focusing on exports and not realising that the power comes from owning the real resource, oil, that others desperately want rather than selling it.
Venezuelan President Nicolas Maduro threatened legal action against Kennedy School of Government professor Ricardo Hausmann on Thursday, accusing Hausmann of attempting to destabilize the country’s economy by suggesting it consider defaulting on its debt.
Maduro’s comments came in the wake of the publication, on Sept. 5, of an article co-written by Hausmann that argued the country should contemplate defaulting on its debt and using the money previously reserved to pay creditors to support its struggling domestic economy. Venezuela is facing widespread shortages of basic domestic goods and has one of the highest inflation rates in the world.
The article by Hausmann, a former planning minister for Venezuela, concluded that Maduro’s government is too corrupt to make such a decision and ease those shortages. According to Maduro, Hausmann’s article was responsible for the sharp decline in the country’s bond prices last week.
“The fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude,” Hausmann and HKS researcher Miguel Angel Santos wrote of the country’s decision to service foreign debt rather than default on its foreign bonds. “It is a signal of its moral bankruptcy.”
Hausmann's to economics and development economics in which he specializes is neoclassical. The problems of development economics are in no way close to being solved. The only developing economy that has done exceptionally well is China and can foresee developed status on a par with the developed economies. But it is a huge country that has been investing in military technology with a spillover into domestic technology. These is how the USSR developed from a peasant-based agricultural economy to be able to hold off the military might of the West and withstand the Nazi invasion.
Here is his notion of "original sin" in developmental economics from the Wikipedia article on him:
The expression original sin was first used in international finance in a 1999 article by Barry Eichengreen and Hausmann.[2] The authors define original sin as a situation in which the residents (or government) of a country are unable to borrow in their own domestic currency. In other words, a poor country is forced to borrow funds denominated in foreign exchange (e.g. the U.S. dollar, the euro, or the yen). Based on their measure of original sin the authors show that original sin was present in most of the developing economies and independent from histories of high inflation and currency depreciation. This is seen as problematic because if the borrowing country's domestic currency depreciates, the loan will become more difficult to pay back, since their currency is now worth less relative to the loan.
Later research has mainly focused on the international component of original sin: the inability of most countries to borrow abroad in their own currency. Barry Eichengreen, Hausmann and Ugo Panizza show that almost all of the countries (except US, Euro area, Japan, UK, and Switzerland) suffered from (international) original sin over time.[3] The authors argued that this international component of original sin has serious consequences. It makes debt riskier, increases volatility, and affects a country's ability to conduct an independent monetary policy. This is because original sin is likely to cause a currency mismatch in the national balance sheet of a country: the currencies of its assets and those of its liabilities do not correspond. Thus, large swings in the real exchange rate will have an effect on aggregate wealth and it will be more difficult for the country to service its debt. In other words, original sin tends to make the fiscal balance dependent on the real exchange rate and the short term real interest rate.
Criticism on the concept of original sin has been twofold. On the one hand, Morris Goldstein and Philip Turner claim that original sin is not a sufficient condition for a currency mismatch, and thus cannot account for the large output losses due to the currency mismatches during financial crises .[4] On the other hand, Carmen Reinhart, Kenneth Rogoff and Miguel Savastano claim that the main problem of emerging market economies is to learn how to borrow less rather than learn how to borrow more in their domestic currency.[5] They assumed that the problems of emerging markets were not due to original sin, but to so-called debt intolerance: the inability of emerging markets to manage levels of external debt that, under the same circumstances, would be manageable for developed countries. Eichengreen, Hausmann and Panizza respond to both criticisms in a paper elaborating the difference between currency mismatches, debt intolerance and original sin.[6]
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Wren Lewis links to this on twitter tom:
https://www.project-syndicate.org/commentary/heterodox-economics-venezuela-collapse-by-ricardo-hausmann-2016-05
loooool!
"Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money. This caused the currency to lose 98% of its value in the last three years. By the time oil prices fell in 2014, the country was in no position to take the hit, with collapsing domestic production and capacity to import, leading to the current disaster. "
Thanks for the info I haven't had time to understand what happened in Venezuela. I assume they should have saved the USD from oil and spent their own currency instead?
Thanks for the info I haven't had time to understand what happened in Venezuela. I assume they should have saved the USD from oil and spent their own currency instead?
The people running the country likely *have it all backwards* and have made the country dependent upon oil exports to maintain and boost the standard of living, rather than developing a vibrant domestic sector with good competitive markets to keep costs down. Once oil revenue dries up you run out of basics.
The situation is likely the result of focusing on exports and not realising that the power comes from owning the real resource, oil, that others desperately want rather than selling it.
Hausmann and Maduro had a spat. Hausmann was pre-Chavez government minister in Venezuela, now a Harvard professor.
Venezuelan President Threatens Kennedy School Professor
Venezuelan President Nicolas Maduro threatened legal action against Kennedy School of Government professor Ricardo Hausmann on Thursday, accusing Hausmann of attempting to destabilize the country’s economy by suggesting it consider defaulting on its debt.
Maduro’s comments came in the wake of the publication, on Sept. 5, of an article co-written by Hausmann that argued the country should contemplate defaulting on its debt and using the money previously reserved to pay creditors to support its struggling domestic economy. Venezuela is facing widespread shortages of basic domestic goods and has one of the highest inflation rates in the world.
The article by Hausmann, a former planning minister for Venezuela, concluded that Maduro’s government is too corrupt to make such a decision and ease those shortages. According to Maduro, Hausmann’s article was responsible for the sharp decline in the country’s bond prices last week.
“The fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude,” Hausmann and HKS researcher Miguel Angel Santos wrote of the country’s decision to service foreign debt rather than default on its foreign bonds. “It is a signal of its moral bankruptcy.”
Hausmann's to economics and development economics in which he specializes is neoclassical. The problems of development economics are in no way close to being solved. The only developing economy that has done exceptionally well is China and can foresee developed status on a par with the developed economies. But it is a huge country that has been investing in military technology with a spillover into domestic technology. These is how the USSR developed from a peasant-based agricultural economy to be able to hold off the military might of the West and withstand the Nazi invasion.
Here is his notion of "original sin" in developmental economics from the Wikipedia article on him:
The expression original sin was first used in international finance in a 1999 article by Barry Eichengreen and Hausmann.[2] The authors define original sin as a situation in which the residents (or government) of a country are unable to borrow in their own domestic currency. In other words, a poor country is forced to borrow funds denominated in foreign exchange (e.g. the U.S. dollar, the euro, or the yen). Based on their measure of original sin the authors show that original sin was present in most of the developing economies and independent from histories of high inflation and currency depreciation. This is seen as problematic because if the borrowing country's domestic currency depreciates, the loan will become more difficult to pay back, since their currency is now worth less relative to the loan.
Later research has mainly focused on the international component of original sin: the inability of most countries to borrow abroad in their own currency. Barry Eichengreen, Hausmann and Ugo Panizza show that almost all of the countries (except US, Euro area, Japan, UK, and Switzerland) suffered from (international) original sin over time.[3] The authors argued that this international component of original sin has serious consequences. It makes debt riskier, increases volatility, and affects a country's ability to conduct an independent monetary policy. This is because original sin is likely to cause a currency mismatch in the national balance sheet of a country: the currencies of its assets and those of its liabilities do not correspond. Thus, large swings in the real exchange rate will have an effect on aggregate wealth and it will be more difficult for the country to service its debt. In other words, original sin tends to make the fiscal balance dependent on the real exchange rate and the short term real interest rate.
Criticism on the concept of original sin has been twofold. On the one hand, Morris Goldstein and Philip Turner claim that original sin is not a sufficient condition for a currency mismatch, and thus cannot account for the large output losses due to the currency mismatches during financial crises .[4] On the other hand, Carmen Reinhart, Kenneth Rogoff and Miguel Savastano claim that the main problem of emerging market economies is to learn how to borrow less rather than learn how to borrow more in their domestic currency.[5] They assumed that the problems of emerging markets were not due to original sin, but to so-called debt intolerance: the inability of emerging markets to manage levels of external debt that, under the same circumstances, would be manageable for developed countries. Eichengreen, Hausmann and Panizza respond to both criticisms in a paper elaborating the difference between currency mismatches, debt intolerance and original sin.[6]
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