The Taiwan Banker

Tips: John Williams, CEO of the U.S. Federal Reserve Bank of San Francisco, called on all governments to pursue long-term economic growth and increase real natural interest rates through fiscal policy; and to address capital shortfalls in pension funds and social security as early as possible.The meeting between U.S. President Donald Trump and North Korea’s leader Kim Jong-un in Singapore on June 12 attracted global attention, but North Korea’s economic development also received attention at the same time. The well-known American online economic instruction website Marginal Revolution University asserted at this time that “institutional factors” played an important role in economic development. Alex Tabarrok, Professor of economics at George Mason University in Virginia, used night-time data on lighting from NASA to explain the great differences between the two Koreas. This method also highlights the differences between North Korea and Japan, Taiwan, and even the Chinese coast.Institutional factors influence national developmentThe main impact of institutional factors can be seen in one Latin American country: Venezuela, with its constantly changing lifestyle and prospects. The recent development course of Venezuela, which plays an important role in the global economy, yet is not familiar to Taiwan, is worthy of our consideration.Trump, in his speech to the U.N. General Assembly in September of last year, harshly criticized Venezuela for pursuing socialism, bringing poverty and calamity to its people. In order to combat the dictatorship of Venezuela’s government and its president Nicolas Maduro, the U.S. implemented a series of sanctions last year, including freezing the assets of certain leaders within the U.S. Early this year, transactions on Venezuela’s cryptocurrency, the Petro, were prohibited. More recently, in order to punish Maduro for fraud in his most recent election, further sanctions prohibited its sovereign bonds and accounts receivable from being transacted domestically.Venezuela has far more international economic influence than other Latin American countries, mainly because of its abundant oil and gas resources. It is one of the five founding members of the Organization of Petroleum Exporting Countries (OPEC). According to 2010 OPEC statistics, its oil reserves reached 296.5 billion barrels, even higher than those of Saudi Arabia, making it the country with most reserves in the world. According to data from the U.S. Department of Energy (DOE), its oil production reached 3.2 million barrels a day in 1997, and sustained 2.5 million barrels between 2004 and 2015. Only 23 years later, though, production has fallen. The latest OPEC data show daily production of 1.4 million barrels, and the DOE estimates that its production will continue declining until the end of 2019.Sluggish oil production is only one example of Venezuela’s economic deterioration. According to the global economic outlook of the International Monetary Fund (IMF), its per capita GDP dropped 12.5% from 2017, and 37% since 2013. It estimates that in 2018, it will fall 15%. In other words, in the five years since 2013, per capita income has fallen 50%, the worst recession in Latin America since the 1950’s, a situation rarely seen outside of war. Its inflation figures are even more appalling. After hitting a historical record of 13,379% in 2017, prices have already risen 24,571% in 2018, much higher than the 49.4% in 2013, not to mention 3.22% in 1973. Currently, food and supplies are in short supply, violence is rampant, and infant mortality has increased significantly due to drug shortages.Destitution caused by totalitarianism This economic collapse in Venezuela is closely related to it’s politics. Professor Polga-Hecimovich of the U.S. Naval Academy pointed out that although Venezuela became democratic as early as 1958, due to party restrictions and a lack of democratic maturity, in 1998, voters elected the populist Hugo Chavez. After taking power, Chavez implemented several measures to carry out the “socialist line”: 1) Nationalization of companies in oil, agriculture, finance, heavy industry, steel, telecommunications, electricity, transport, and tourism; 2) Price controls for daily goods; and 3) Foreign exchange controls. In addition, under the slogan of taking care of the people, large subsidies in health care, education, and food were enacted, without considering fiscal health. Meanwhile, in order to promote socialism, Venezuela vigorously developed relations with Russia and China, borrowing great amounts of debt from those countries in exchange for oil imports.President Chavez passed away in 2013, and his successor, Maduro, kept to the socialist road. Lacking Chavez’s connection to the people, however, Maduro chose to cooperate with the military, adopting even more dictatorial and authoritarian rule, arresting opposition figures and protestors without restraint. The Chavez-Maduro economic transformation nationalized private enterprises, not only reducing economic efficiency, but also causing foreign-invested companies to leave in succession, eventually leading to insufficient domestic investment. Price controls on daily goods also blocked circulation of supplies, making production unprofitable and causing shortages in goods. Similarly, aside from causing black market turmoil in U.S. dollars, foreign exchange controls caused shortages of imported goods and domestic price increases. For a long time, Venezuela had relied upon income from oil production and export for 50% of its national income, and for 95% of its total export revenues. The 2004 price rise helped it maintain its economy, but when prices dropped from US$ 120 per barrel to US$ 25 per barrel, its reliance on a single industry caused a national crisis. At that time, the government resisted reducing unproductive expenditure, but rather printed money to make up for the deficit, naturally leading to hyperinflation. This result has been seen before. It goes without saying that many “socialist factors” adversely affected Venezuela’s development.Social welfare and economic development: mutual assistance or conflict?Taiwanese people should consider two points from Venezuela’s story: the suitability of giving large subsidies to the public, and the long-term development of totalitarian counties. Speaking about the causes of slow global growth last year, San Francisco Fed CEO Williams called for governments to focus their fiscal policies on long-term growth and increase the natural real interest rate. Governments facing pension fund and social security shortcomings must respond early. If they cannot take necessary measures at present, they will inevitably pay a higher price later. Williams’ statement should make Taiwan think deeply about the issue of pensions for public servants. Meanwhile, President Trump has strongly attacked socialism and communism for the human disasters they bring, and totalitarianism is not particularly advisable. As Taiwan faces up to a trade war between the U.S. and China, and a past overconcentration of experts to China, taking its long-term development into consideration, changes should be made sooner rather than later.