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In World Affairs

Moisés Naím on corruption in South America

Following the publication of his novel Two Spies in Caracas in English, the Venezuelan journalist and writer Moisés Naím was recently interviewed (a) by Roger Lowenstein. He makes interesting observations about failed states.

On the current state of corruption and institutional failure in Venezuela:

Lowenstein: What has happened to the oil wealth in Venezuela? Production in 2020 fell to roughly a half million barrels a day. Before Chávez, it was more than three million. Now, as you have written, gasoline shortages are a fact of life.

Naím: Petróleos de Venezuela [the state oil company] is a cage of thievery. It doesn’t exist [as it did]. They have run it into the ground. It doesn’t have the money, the people, the technical talent, the engineers. The company has lost the capacity to tap its own resources. […]

Venezuela will have a very hard time if it continues to be run by a cartel of criminals.

On the relationship between underdeveloped (commodity-based) economies and populism:

Lowenstein: Venezuela isn’t alone in turning to leftwing populism. Peru, Ecuador, Bolivia, Argentina — even Mexico — are moving or have moved leftward. Why this leftwing surge at the ballot box when established models such as Cuba haven’t succeeded?

Naím: The main defining variable is commodity prices. […] In countries where commodities are 50% or more of exports, give me the price and I’ll tell you what the political mood is. When prices are low the economic situation becomes dire and that opens the way to unemployment, inflation, budget cuts and cuts in social programs. You get a very foul mood in society.

Lowenstein: Why didn’t the previous parties succeed at reinvesting the oil wealth?

Naím: That is a very desirable goal. All governments have economic diversity and export diversity as a goal. Very few succeed. In that sense Venezuela is normal. Look at Chile. A great success — but it’s still [about] copper. In Russia, it’s still oil.

You can point to Norway, or the U.S. but these exceptions are countries that had a state, and state institutions, deeply grounded before the discovery of oil. Petrostates have a difficult relationship with democracy.

On the interplay between Chávez and Cuba:

Lowenstein: The 19th century essayist Thomas Lander called Venezuela “a nation of accomplices.” Was he right — was there a consistent flaw in the political culture that accommodated rule by caudillos?

Naím: You can say that about any country.

Lowenstein: Who were the accomplices to Chávez? Was it the Cubans, or was it previous generation of democratic leaders, whose mismanagement led to Chávez’s election?

Naím: The Cubans were not just accomplices. They were facilitators.

Lowenstein: But don’t the old establishment liberal parties — Democratic Action and the Social Christians, deserve some blame?

Naím: Of course. They mismanaged the power they had. They didn’t realize that the oil wealth had to be better invested and distributed. Yes, the political parties were a disgrace. The intelligentsia, the businesspeople, the professional middle class were also negligent or short-sighted. But the narrative that corruption and poverty was the reason for Chávez? If you look at United Nations statistics, Venezuela was corrupt but far less corrupt than Brazil, Mexico or Peru. We had inequality but Brazil was the world champion in inequality. We had poverty, but income per capita was one of the highest in Latin America.

Lowenstein: Are you saying that Chávez was a puppet? In the book, even the Cuban agent struggles to figure him out.

Naím: Chávez wasn’t a puppet. He surely invited the takeover, the infiltration of Cubans. Cubans have been running the intelligence services; they have had a huge role. [But] you cannot call Chávez completely a puppet. Fidel Castro and Chávez had a very strong personal bond.

You cannot say that of Maduro. He does not have the charisma, the knowledge, the smarts. He was trained in Havana, he there studied there. He was and is a Cuban operative.

Finally, he also makes interesting remarks about how legitimacy can be forged:

Lowenstein: You write in the book of a ceremony to recast Simón Bolívar, known to Venezuelans as “the Liberator.” Bolívar, of course, was a descendant of Spanish aristocracy. In the book, Chávez, with Cuban assistance, reinvents Bolivar as a mestizo — to symbolically bolster Chávez’s claim to power.

Naím: I describe the exhumation of Bolívar. That happened on camera [in 2010] (a). There was a whole spectacle, quite surreal. You have Chávez and military escorts open a casket and take samples. After the cameras left something else happened. This I know from different sources. After the public event there was a private event, with Cubans, where it was decided that Bolivar had been assassinated by oligarchs. It shows a different picture of Bolivar – that he was [like Chávez] more mestizo than white. The genetic evidence is completely fake. The Cubans more or less anointed Chávez. It gave him the power of legitimacy.

In World Affairs
Tagged with Moises Naim · Venezuela · Corruption
via Moises Naim: The economic seeds of South American populism 🌐

Charlie Munger on the rise of China

Charlie Munger did an online interview for the Caltech Distinguished Alumnus Award in December 2020. He talked about China’s remarkable rise — that is, the lifting of hundreds of millions of people from poverty in just a few decades:

Munger: The other thing that’s really remarkable. You take the last 30 years of China. They have had real economic growth at a rate for 30 years that no big country has ever had before in the history of the world. And who did that? A bunch of Chinese communists. Now, that is really remarkable. So if you’re studying finance, you’ve got a lot of strange things to account for.

The Chinese story is the damnedest thing that ever happened to a big country in terms of economics. No other big country ever got ahead that fast for that long.

Who would have guessed that a bunch of communist Chinese run by one party would have the best economic record the world has ever seen? Of course it’s extreme. And I think it proves that it doesn’t… We Americans would like to think that our free expression and allowing all kinds of opinion, and all kinds of criticism of the government is totally an essential part of the economy. And what the Chinese have proved is you can have a screamingly successful economy with a fairly controlling government.

All the government has to do is create a lot of [Adam] Smithian capitalism. If you do that, having a sort of a controlling one-party government doesn’t matter. That’s not a fashionable thing to say, but I think it’s true.

He also mentioned China on his closing remarks:

Moderator: What are you most curious about in the next 30 to 40 years?

Munger: Well, having been an investor for so long, I’m of course interested in these weird present conditions and these weird economic conditions where they’re printing money like crazy and so forth. And of course that’s very interesting.

And I’m interested in the fact that the world has come so far in having these undeveloped countries get ahead so fast like China. Now I compare it with India, which has a way worse economic record, even though they got more of our political institutions. You know, they got more free speech in India, and a way worse economic achievement. I think the economic development of the modern world is very interesting. It’s a very interesting subject.

In the 2021 Daily Journal AGM, Charlie was asked again about China. Here are his remarks:

Question: My question concerns China. In 1860, GDP per capita in China was 600. In 1978, the year Deng Xiaoping took over, it was 300. Today, it hovers around 9500. Never before in the history of mankind have we seen such a rapid eradication of poverty, pulling approximately 800 million people out of destitution. You are on record as a zealous fan of the Chinese work ethic and Confucian value system. As we can see from the deteriorating U.S. relationship with China, the Western world does not understand China. What can we do to increase knowledge, understanding, and appreciation of the Chinese civilization?

Munger: Well, it’s natural for people to think their own civilization and their own nation are better than everybody else. But everybody can’t be better than everybody else.

You’re right. China’s economic record among the big nations is the best that ever existed in the history of the world. And that’s very interesting.

A lot of people assume that since England led the Industrial Revolution and had free speech early that free speech is required to have a booming economy as prescribed by Adam Smith. But the Chinese have proved that you don’t need free speech to have a wonderful economy. They just copied Adam Smith and left out the free speech and it worked fine for them.

As a matter of fact, it’s not clear to me that China would have done better if they’d copied every aspect of English civilization. I think they would have come out worse because their position was so dire and the poverty was so extreme, they needed very extreme methods to get out of the fix they were in. So I think what China has done was probably right for China and that we shouldn’t be so pompous as to be telling the Chinese they ought to behave like us because we like ourselves and our system. It’s entirely possible that our system is right for us and their system is right for them.

Question: Mr. Munger is a champion of Chinese stocks. How concerned is he about Chinese government interference as seen recently with Ant Financial, Alibaba, and Mr. Jack Ma. What, for example, is to stop the Chinese government from simply deciding one day to nationalize BYD?

Munger: Well, I consider that very unlikely. And, I think Jack Ma was very arrogant to be telling the Chinese government how dumb they were, how stupid their policies were, and so forth. Considering their system, that is not what he should have been doing.

I think the Chinese have behaved very shrewdly in managing their economy and they’ve gotten better results than we have in managing our economy. I think that that will probably continue.

Sure, we all love the kind of civilization we have. I’m not saying I wanted to live in China. I prefer the United States. But I do admire what the Chinese have done. How can you not? Nobody else has ever taken a big country out of poverty so fast and so on.

What I see in China now just staggers me. There are factories in China that are just absolutely full of robots and are working beautifully.

They’re no longer using peasant girls to beat the brains out of our little shoe companies in America. They are joining the modern world very rapidly and they’re getting very skillful at operating.

In World Affairs
Tagged with Charlie Munger · China

Charlie Munger comments on US fiscal, monetary, and trade policies

Charlie Munger made two public-speaking appearances in 2020. In both talks he has made interesting remarks about the current state of affairs in the economy — including the U.S. dollar, negative interest rates, and money printing. He first spoke at the Daily Journal Corporation Annual Shareholders Meeting in February 2020. His second speaking event this year was an online interview for the Caltech Distinguished Alumnus Award in December 2020.

On the role of the U.S. dollar as the world’s reserve currency and the big responsibility it bears to Americans:

Munger: One of the interesting things about the current condition is that the Americans — by accident — have created the reserve currency of the world. And the world needs a reserve currency. And I don’t sense any great sense of trusteeship among my fellow Americans for behaving very well in our responsibilities to the rest of the world with our own currency. Our attitude is we’ll do what pleases us. That’s not my view. I think once you get a big responsibility to other people who are depending on you, you ought to think about them too.

Quick, related question about trade balances:

Question: Do you think it’s necessary for America to record a positive trade balance to keep its prosperity in the next century?

Munger: The answer is no.

His thoughts on the absence of inflation after the 2008 financial crisis:

Question: We have record budget deficits, record unemployment, and record expansion of the balance sheet. Why do you think we don’t have inflation?

Munger: Well, regarding inflation. You know, the economists of the world thought they knew a lot more than they did.

What has happened is weird, that in response to the Great Recession, all the nations of the world have printed money like crazy and have bought all kinds of investment assets. And they’ve done things that nobody in the economics profession would have recommended on this scale even five or so years ago — and yet the inflation has been very low.

I think we all have a lot to be modest about when we talk about economics. Lyndon Johnson said that giving a talk on economics was a lot like pissing down your leg. He says, “It feels hot to you, but it doesn’t influence anybody else very much.” And I’m afraid I can’t do much better than Lyndon Johnson could.

His nervousness about negative interest rates:

Question: There are over 10 trillion dollars of securities around the world with a negative yield. And by the president Trump’s Twitter feed, it seems that he wants to bring negative interest rates to the United States. Are you for negative interest rates or against them?

Munger: Negative interest rates make me very nervous. However, I don’t think the authorities had much choice. It’s politically impossible to do big stimulus rapidly and the only weapon they had in a crisis was to print money and change interest rates. And I think it was probably the right thing to be done. Of course it makes me nervous.

I think, having worked once, people will overdo it. And that’s the nature of governments and people. And of course, that makes me nervous. I don’t know what to do about this.

Question: My question is about the effects of low interest rates on insurance. Lower returns on float may be causing a tighter supply of insurance. For example, there used to be three main underwriters insuring all the taxi cabs in Southern California. Now it is heading towards just one underwriter who will have a monopoly on all commercial taxi insurance in Southern California. You have access to CEOs of GEICO and Wesco and a Rolodex that we can only dream of. So do you see 10 years of low interest rates posing a systemic risk to the supply of insurance?

Munger: I am made uncomfortable with the idea of extremely low interest rates, or negative interest rates even more extreme, lasting a long time. I don’t think anybody knows how those will work. If you are a little uneasy, welcome to the club. I think it’s dangerous and peculiar, but I think we had to do what we did. In other words, I don’t have any good solution for you. I think you’re right to be worried about it.

On quantitative easing and fiscal deficits:

Moderator: What do you think of the combinations of quantitative easing and large fiscal deficit? And where are they going to lead us?

Munger: Well, there I got a very simple answer and that is, it’s one of the most interesting questions anybody could ask. And we’re in very uncharted waters. Nobody has gotten by with the kind of money printing we’re doing now for a very extended period without some trouble. And I think we’re very near the edge of playing with fire.

Moderator: It is remarkable how much we’ve expanded the money supply; how low interest rates are and how little initial response there has been on…

Munger: Remarkable is not too strong a word. “Astounding” would be more like it.

Moderator: I’ll let you choose the adjective, Charlie.

Munger: It’s unbelievably extreme. Some European government borrowed money recently for some tiny little fraction of 1% for a hundred years. Now that is weird. What kind of a lunatic would loan money to a European government for a hundred years at less than 1%?

In Daily Journal’s 2021 AGM, Charlie was asked again about monetary policy. Here’s what he said:

Question: Mr. Munger recently raised the alarm about the level of money printing taking place. What are his thoughts on modern monetary theory?

Munger: Modern monetary theory means that people are less worried about an inflationary disaster like Weimar Germany from government printing of money and spending it. So far the evidence would be that maybe the monetary modern monetary theory is right. Put me down as skeptical. I don’t know the answer.

According to Aznaur Midov’s notes of Daily Journal 2015 Annual Meeting (a), Munger was asked if the Fed would reduce its balance sheet. He answered as follows:

Question: Is the Fed going to return to $0.9 trillion of balance sheet the current from $6 trillion?

Munger: I remember coffee for 5 cents and brand new automobiles for $600. The value of money will continue to go down. Over the past 50 years we lived through the best time of human history. It is likely to get worse. I recommend you to prepare for worse, because pleasant surprises are easy to handle.

In World Affairs
Tagged with Charlie Munger · Monetary Policy · U.S. Dollar · Inflation · Bitcoin