Lucky for Venezuela 

The central challenge of socialism is keeping the production of goods and services from shrinking to dangerously low levels (See May 7th, A Parable of Equality and Efficiency). With the incentive to be productive and innovative weakened, putting enough food on the table can be a difficult problem.  

So, when president Hugo Chavez nationalized Venezuela's farming industry in 2008 and put price controls on crops, an easily predictable result was that farm output would fall. AND DID IT EVER! However, Venezuelan’s have not gone hungry. As reported in the Wall Street Journal article below, the food shortages Chavez created have been a boon to U.S. farmers who have stepped in to fill the gap. The collapse in Venezuelan farm production (and a lot of other production as well) has resulted in an increase in U.S. exports to Venezuela. Fortunately for Venezuela, there were greedy capitalists nearby who were willing to trade.

http://online.wsj.com/news/articles/SB10001424127887323681904578640291651501034

MM

August 18, 2013

U.S. Rice Farmers Cash In On Venezuelan Socialism

U.S. Exporters Benefit as Production Falls in Latin American Country

        By SARA SCHAEFER MUÑOZ

U.S. rice farmers are making large profits from exports to Venezuela, thanks to the impact of the late President Hugo Chavez's socialist policies. WSJ's Sara Schaefer Munoz reports.

STUTTGART, Ark.—Steve Orlicek, a rice farmer here, is living the American dream. He owns a thriving business; he vacations in the Bahamas.

His good fortune springs from many roots, including an unlikely one: He is a prime beneficiary of the socialist economic policies of Hugo Chávez, Venezuela's late president and critic of what he called U.S. "imperialism."

It is a paradoxical legacy of Mr. Chávez's self-styled socialist revolution that his policies became a moneymaker for the capitalist systems he deplored. During his 14 years in power, he nationalized large farms, redistributed land and controlled food prices as part of a strategy to help the poor.

But these policies turned Venezuela from a net exporter to a net importer of rice—from farmers like Mr. Orlicek. "The rice industry has been very good to us," Mr. Orlicek said, sitting in his newly renovated home, appointed with a baby grand piano played by his wife, Phyllis.

It isn't just rice. Production of steel, sugar and many other goods has fallen in Venezuela, leading to occasional shortages. Until recently, Venezuela was largely self-sufficient in beef and coffee. Now it imports both.

In this year's first half, the U.S. exported $94 million of rice to Venezuela, a 62% jump from a year-earlier, making Venezuela the U.S.'s fourth-largest rice market, according to the Department of Agriculture.

Overall, Venezuelan imports have quadrupled since Mr. Chávez took office, to $59.3 billion in 2012 from about $14.5 billion in 2000, according to Venezuela government figures and economists at Barclays PLC. Exports to Venezuela from the U.S. hit $12 billion in 2011, up 16% from the previous year, the latest U.S. government figures show.

Among the winners are the American aluminum company Alcoa Inc. Anglo-Swiss mining company Glencore Xstrata PLC and Brazilian firms like builder Odebrecht SA. In May, Venezuelan authorities announced they would import 50 million rolls of toilet paper. One supplier: Kimberly-Clark of the U.S.

"Chávez said, 'We are against capitalists and we are against big oligarchs,' " said Moisés Naím of Washington's Carnegie Endowment for International Peace. "But he left the country more beholden to foreigners and foreign companies than ever before."

Supporters of Mr. Chávez say his fiery populism empowered the poor and fought hunger and poverty by providing subsidized food, housing and medical clinics. Yet job prospects and wages have fallen. A recent World Bank report says that 30% of people who were originally considered "not poor" in Venezuela fell into poverty between 1992 and 2006. In most other Latin American countries, the middle class grew in that time.

Venezuela's import reliance will be a major headache for President Nicolás Maduro, Mr. Chávez's successor. His government's wallet is stretched. Venezuela's budget deficit reached 12% of GDP last year, according to analysts, higher than the troubled Euro-zone economies like Greece or Spain. Its annual inflation rate rose to 42.6% in July.

Mr. Maduro, like Mr. Chávez, blames food shortages on hoarding by private companies waging "economic war" against his government, a charge that the few remaining private firms have denied.

Despite Mr. Maduro's stance, however, he has moved to make more dollars available to importers—which could help farmers obtain supplies abroad. In May, in a hugely symbolic move, he reached out to the head of Venezuela's largest private food company to collaborate on food issues.

Oil, the only strong export that Venezuela enjoys, accounts for about half the government's income. If oil falls to $90 a barrel for a year, from the current $105, the government would have to slash imports, said David Rees, an emerging-markets specialist with Capital Economics in London. "That would have terrible repercussions in terms of everything, especially food," he said.

Venezuelan officials defend the country's record. A Ministry of Agriculture official directed questions to a recorded interview with Henry Silva, president of a state-owned food company. Mr. Silva said Mr. Chávez's polices "made available means of production to the people that function to nourish and meet the needs of our population."

Alongside agriculture, Venezuela's industrial output has faltered since 2006, when Venezuela said it would pursue an "endogenous," or self-sufficient, development model that shuns profit-making and focuses instead on cooperatives. The government took control of wide swaths of major industries including steel and cement.

"We've lost our national sovereignty in steel, aluminum and bauxite. It's an embarrassment," said Damian Prat, author of a book about Venezuelan industry. Production of bauxite, a key ingredient in making aluminum, fell 70% between 2007 and 2012, he estimates.

That loss has been others' gain. Exports from neighboring Brazil have soared to $5.1 billion dollars in 2012, compared with $800 million 10 years ago, according to Brazil's Foreign Trade Association. "Right now we have very little competition" from within Venezuela, said Jose Augusto de Castro, the association's president.

Among the biggest beneficiaries of Mr. Chávez's policies have been Mr. Orlicek and other U.S. farmers. Mr. Orlicek, who grew up farming, considered becoming a lawyer but decided he would rather be outdoors. So he went to work on the farm that had belonged to his wife's parents.

Thanks to strong exports and rising prices, Mr. Orlicek runs his farm with the latest technology. His state-of-the-art tractors, which cost around $230,000 apiece, carry $15,000 GPS systems that can drive the tractors themselves.

A few years ago, as export profits rose, he took the expensive step of starting to level his 800 acres of rice fields using laser technology. Doing so costs him $400 per acre, but it ensures level irrigation—saving water and increasing yields by around 20%.

"I really want to take care of this land so future generations can raise rice on it," Mr. Orlicek said recently, driving among vivid green rice fields. He hopes his daughter will someday come back and farm.

Mr. Orlicek acknowledges that he has benefited from Venezuela's socialist policies. But he empathizes with the country's farmers.

Mr. Chávez "really gutted" Venezuelan agriculture, he said. "I'd like to see it turn around, and I am sure the farmers there would, too."

One is rice farmer Eloy Alvarez. Born in Spain, Mr. Alvarez came to Venezuela in the 1940s and saw the promise in Venezuela's hot and wet central plains, land that lends itself to rice growing. He bought some land for a song, and he and his wife spent 60 years farming it

They eventually acquired 500 acres and raised two daughters and sent them to private school. In the early 2000s, the farm was producing its maximum of seven metric tons of rice a year.

But in recent years, Mr. Alvarez's fortunes changed. The government set prices for rice and other products. With prices fixed but inflation rising, it became harder to afford equipment. He stopped buying new tractors and instead tried to fix his old ones. Import controls, however, made even parts hard to come by.

The 2010 nationalization of Venezuela's main farm-supply company compounded the problems. Farmers say it is now often late in delivering basics, like fertilizer. That same year, weeds choked Mr. Alvarez's rice crop—the result, he says, of herbicide delays. He now produces about 30% less than in the past.

Recently on Mr. Alvarez's farm, a decades-old Ford tractor stood rusting in a shed. On a flat expanse of field, under a flock of circling white birds, another timeworn machine moved slowly, struggling to reap a rice field overrun with weeds.

"You can't get the herbicide," said Alexi Chambuco, 63 years old, one of Mr. Alvarez's farmhands, wiping his face with a handkerchief. "And now it's difficult to harvest."

Mr. Alvarez's wife died in May, and he carries a creased picture in his pocket, taken during their earlier years on the farm. Yet despite the hassles, many farmers like him don't quit farming. If they do, their idle land is at risk of being seized by the state.

"We have to pull out of this," Mr. Alvarez said of Venezuela's farming decline. "But there's been a lot of damage done."

So who’s reading this thing anyway?

I’ve been a blogger for a little over four months now. As stated in my first post, this was just a way to try to sneak some financial literacy into my kids -- but if anybody happened to stumble in, they were certainly welcome.

Well, amazingly a whole lot more bodies have stumbled in than I ever thought possible. I have no idea how so many readers found their way here. While I am not quite ready to quit my day job, I am very honored to count folks from the following countries among my readers: 

 

United States

Russia

Germany

South Korea

Brazil

Netherlands

Ukraine

Finland

France

New Zealand

Turkey

China

Italy

Malaysia

United Kingdom

Philippines

 

Welcome aboard everyone! It is a pleasure and an honor.  

MM

 

 

Why Trade?

Why do I buy my bread from Wegmans instead of making it myself? Why do I drive a Mercury Sable instead of building my own car? Why did I buy a house that somebody else built instead of building it myself? The answers are actually pretty straight forward. I buy bread from Wegmans because I value the bread more than I value the dollar I use to pay for the bread (or more precisely, I value the bread more than I value the next best alternative I could have purchased with that same dollar). This is because Wegmans has a lower OPPORTUNITY COST of producing bread than I do. The same is true of auto manufacturers and housing contractors. They all have lower opportunity costs than I do. This is why I trade with them rather than trying to produce these goods myself. The bottom line is that when somebody else has something we value more than we value our own stuff (and vice versa) trading makes us better off.

But what if my trading partner lives in Rochester? Will I still gain by trading? Of course! What if my trading partner lives in Pennsylvania? The gains from trade are still there. It doesn't matter where our trading partners live as long as we value what they have more than we value what we have. But, what if my trading partner lives in Quebec? Are there still gains to be made from trade? Again, the gains from trade are the same regardless of where your trading partner lives (though transportation costs may begin to eat into those gains). The economics of trade is the same for intercity trade, interstate trade, and international trade. However, the POLITICS changes when trade becomes international. We get very touchy about goods and jobs crossing international borders (and here in New York, we are a little touchy about state borders, as we watch more and more jobs move south because of our ultra-high taxes)

We are sometimes tempted to place barriers on trade by imposing tariffs and quotas – but we need to be careful. This only serves to reduce the gains from trade and can stifle economic growth. This is why economists are virtually unified in support of trade. Yes, we can make some short-term gains by restricting trade (mostly political, and this is why you often hear politicians railing against trade, especially in an election year) but at the expense of long-term economic benefits.

Economists really don’t debate the merits of trade (at least not with each other) any more than physicists debate gravity or mathematicians debate linear algebra. But observers from all over the political spectrum continue to object in the face of overwhelming evidence. The arguments that trade will destroy jobs, and lead to unemployment and falling incomes are fallacies that history and experience have refuted time and again. For example:

"With America’s high standard of living, we cannot successfully compete against foreign producers because of lower foreign wages and a lower cost of production."

That was Herbert Hoover in 1929! Also, does anybody remember Ross Perot’s giant sucking sound from the 1992 presidential campaign? As one economist stated:

"Free traders are trapped in a public policy version of the movie Ground Hog Day, forced to refute the same fallacious arguments over and over again, decade after decade."

Paul Krugman (Princeton University economist, New York Times columnist, and Nobel Prize winner) sums it up this way:

"The logic that says that tariffs and import quotas almost always reduce real income is deep and has survived a century and a half of often vitriolic criticism nearly intact. And experience teaches that governments that imagine or pretend that their interventionist strategies are a sophisticated improvement on free trade nearly always turn out, on closer examination, to be engaged in largely irrational policies – or worse, in policies that are rational only in the sense that benefit key interest groups at the expense of everyone else."

The bottom line is that unless you make your own clothes, bake your own bread, grow your own wheat, and build your own house, you have bought into the benefits of trade –and in a big way! Jeffrey Sachs (Director of Columbia University's Earth Institute and one of the world's foremost economists) points out in his book The End of Poverty:

“Embracing globalization is a key to ending world poverty”.

Evidence to support the benefits of trade are summarized and documented in the book, Free Trade under Fire by Douglas Irwin if you are interested in exploring this topic further.

We have a powerful incentive to trade. People tend to prefer more to less and trade helps make that happen. By specializing in what we do best and trading with others who are also specializing in what they do best, we raise our standard of living. Specialization and exchange actually allows us to consume beyond our production possibilities (Adam Smith, the father of modern economics, pointed this out way back in 1776 in his revolutionary book An Inquiry into the Nature and Causes of the Wealth of Nations)

The data are very clear on this: In wealthy nations, people are highly specialized with lots of interaction and trade. This results in greater productivity and a higher standard of living. In poor countries, people are much more independent. They make their own clothes and grow their own food and trade much less with each other. This results in lower productivity and a lower standard of living.

Please see the following Paul Solman video:  

Specialization

MM