Tag: Venezuela

Writing about financial repression in Venezuela with Carmen Reinhart

Barcelona GSE alum Miguel Ángel Santosalumni (ITFD ’11 and Economics ’12) is Senior Research Fellow at the Center for International Development at Harvard University. He recently won an award for a paper he has written with Harvard Professor Carmen Reinhart. In this post, he shares some background on the paper and some results.

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Background of our paper

I approached Carmen Reinhart last year, while I was a Mason Fellow at the Kennedy School. She said she would be very interested in writing something about Venezuela. It turns out that Venezuela is such an anachronic, chaotic economy, that it allows us to study some economic phenomena in a way no other place does.

My idea was writing about foreign debt sustainability and default probabilities, etc. Carmen suggested otherwise. After all, lots of people have been working on foreign debt sustainability, and it would not be interesting adding to that pile of work.

Instead, she suggested looking into domestic debt default via financial repression, and associating that to leakages in the capital account that in turn weakened the foreign asset position. It goes against some market analysts’ assessment that Venezuela can go wild internally, wild being able to serve its external debt without any trouble. So we used two modified formulas for estimating financial repression for the previous 30 years, differentiating free market years from years of exchange controls.

Our results

We proved that financial repression it is not only significantly higher in periods of exchange controls, but also that the sheer size in Venezuela was astounding, equivalent to more developed countries with much larger internal debt-to-GDP ratios. That is to say, with a smaller stock of domestic debt, the Venezuelan regime needs a lot more repression to collect that. So they actually engineer it, creating mechanisms to produce it: right now inflation is running at a rate five times higher than yields on domestic bonds or bank deposits.

We moved on to show that capital flight, conceived in broader sense, including the over-invoice of imports, was higher in periods of exchange controls. Since financial repression is rampant in periods of controls, people will run risks just to jump out of domestic currency and get into dollars (capital flight). They do that by two means:  buying dollar-denominated bonds that the government has been selling in exchange for domestic currency, and over-invoicing imports. We measured the latter by a very innovative process, contrasting Central Bank reported imports with the sum of imports reported at Venezuelan customs. The difference is not only significantly higher across years of controls, but over those years it is 3-4 standard deviations away from the distribution of this error worldwide.

I presented the paper two weeks ago in San Juan, Puerto Rico, within the Business Association of Latin American Studies (BALAS), where it was granted the Sion Raveed Award, given to the best paper of the conference.

Comments welcome from the Barcelona GSE community

CID has published the paper on their working paper series. All comments from the BGSE Alumni and scholars community are welcome at this point. It is a modest paper, dealing with a small, crazy economy. And yet I think it makes a significant contribution.

harvardwp

“From Financial Repression to External Distress: The Case of Venezuela”
Carmen Reinhart and Miguel Angel Santos
Paper abstract and download via Center for International Development at Harvard University

Meeting Chomsky

(Editor’s Note: The following post was written by alumnus Miguel Ángel Santos (ITFD ’11 and Economics ’12). Follow him on Twitter @miguelsantos12 or at his blog)

Photo by the author

The first time I heard of Noam Chomsky was in the early nineties. During my senior year in college I was assigned to read a small book, “The true thinkers of our time”(1989), a gallery of interviews with a select group of scientists from a wide array of disciplines. The author, a French journalist named Guy Sorman, had chosen them using three simple criteria: 1) once they showed up in their corresponding disciplines it became impossible to keep on thinking about it in the same way; 2) they had to be alive; and 3) they were willing to talk to him.

The book covered a wide spectrum, from the origins of the universe all the way to modern economic thinking. Each section presented two or three opposing views on the same topic, which were fiercely discussed and smartly presented, allowing amateurs to grasp the frontiers of human knowledge.

Chomsky had made his way into the group deservedly. He had revolutionized the field of linguistics, posing a theory that conceived language as a biological capacity. He identified common patterns to all languages (i.e. all made up plurals by adding characters in the end, none at the beginning) and hypothesized that while the environment allows our linguistic capacity to develop, it falls short of explaining its extraordinary complexity.

I mention this to highlight the thinker, the man working alone and facing the problems and puzzles of his time through a sheer exercise of athletic thought and intelligence. The fame and scientific status he earned by making his most relevant contributions early in his life (all date from around his thirties) would be applied later to bring the world’s attention on a set of political causes, most of them left-winged, all rooted in the United States plethora of foreign policy wreckages. He became an outcast, a role he obviously feels very comfortable with, always pointing towards the elephant in the room.

This latter version of Chomsky is the one most people are familiar with.

Continue reading “Meeting Chomsky”