Reading chapter five on the components of GDP, I can't help but think about an article that I read in the Economist back in January, which talked about the effects of a drastic devaluation in the Venezuelan currency.
"OFFICIALLY it is an “exchange-rate adjustment” to make the country more competitive. But Venezuelans have been here before, and they know what to do. Within hours of a presidential decree on January 8th devaluing the currency by up to 50%, long queues formed outside household-appliance shops in Caracas, the capital. The minority with a little spare cash wanted to swap it as fast as possible for something of more durable value."
I think that this was effectively a case of the government sacrificing long-term GDP growth for short-term economic benefits. The article speculated that the devaluation may have been conducted in order to leave Venezuelan president Hugo Chavez to reverse recent government spending cuts (caused by a decrease in oil revenues, Valenzuela's predominant export and source of 90% of the country's hard currency). By devaluing the currency, the Venezuelan government turned a 6-8% budget deficit into a budget surplus, and the government was allowed to increase government spending once again.
However, while an increase in government spending, the "G" component of GDP, and the temporary surge in consumer spending no doubt helped to boost GDP an perceived economic well-being in the short-run, I'd like to see the long terms effects that inflation had on the economy. Inflation, by reducing the value of money, effectively reduces the incentive to hold and save money. While this caused the temporary boost in consumer spending spoken of in the article, it would have drastically reduced another, critical portion of Venezuela's GDP, investment (I); an area of GDP already discouraged by, as the article put it, "Mr Chávez’s price controls, punitive regulation and threats of expropriation...". Moreover, as the article also mentioned, government harassment of business owners would likely have prevented exports from benefiting from a devalued currency (as is the case with China) and left Venezuela as reliant upon oil exports as ever. And as oil prices are down, this would leave another portion of Venezuela's GDP, the net exports (NX) with little or no boost.
I'm thus of the opinion that if the Venzuelan governments devaluation of its currency hasn't contributed to lower GDP by now, it almost surely will in the future. What are your thoughts on the matter? Devaluation of a nation's currency was, after all, one of the options for eliminating national debt. Would devaluing our currency like Hugo Chavez devalued Venezuela's be a good idea?
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I almost see devaluation as "cheating." It means you can pay back a loan without actually paying back the full amount owned. Also, as the article indicated, the citizens of Venezuela are not going to benefit at all from the devaluation. I hope Venezuela finds a better solution, soon, because this is not going to help their economic crisis at all.
ReplyDeleteIntentional devaluation would be a horrible decision, and for more reasons than those experienced by the poor in Venezuela. As the primary reserve currency of ~60% of the world, decreased trust in the U.S. dollar could lead to countries turning to alternatives. This is unlikely to happen in any significant amount anytime soon, given the enduring nature of the status quo, but devaluation would be a big step down that road. That's also why no one is seriously considering it.
ReplyDeleteDevaluation does seem like an easy out. Instead of allocating resources properly, Venezuela decided to just put more money in people's pockets, more specifically, the government's, so they could keep doing what they needed to. Devaluation does seem like cheating, but it's really cheating themselves because they don't have a long term plan that will get them out of their more serious economic problems. T
ReplyDeleteWhile Venezuela's monetary devaluation may be stimulating their economy in the short run, will it really be beneficial in the long run? Venezuela is taking the easy road out of their economic problems by devaluing money. No one will take the economy serious if government keeps resorting to monetary devaluation. People will stop investing and less people will be willing to go into
ReplyDeletebusiness. This plan will hurt GDP more than help it. A
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