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June 06, 2013


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Heh, and I was thinking about inflation!

I was reading about Venezuelan issues, including the latest OMG! Hyperinflation! (I paid no mind, hyperinflation is hard to happen, and a war is usually the underlying reason) stuff, and I got to wondering how it could not affect Colombia seriously--like all those Venezuelans hopping on a plane to Bogotá with the intent to bring in the items of low supply.

How does inflation and scarcity in one country impact those of neighboring areas, assuming reasonable mobility? My usual lens is with China-Hong Kong, but what about Panamanian borders? Is this a factor in why Panama and Ecuador have such long-lasting dollar policies? What resources online could I read about this?

Good question. It's not the inflation, it's the inflation plus price and capital controls. Inflation feeds pretty rapidly into the exchange rate; nothing in particular happens to the border.

But what you've got in Venezuela is weird. You've got massive smuggling of subsidized gasoline out of the country. You don't have too many planeloads of Venezuelans trying to bring stuff in, for three reasons.

First, the border regions are underpopulated and rather dangerous. Even around Maracaibo, it is neither safe nor easy. http://www.insightcrime.org/news-briefs/kidnapping-gangs-shift-from-venezuela-colombia-border

Second, once you've got to jump on a plane, you might as well go to Miami. The connections to Colombia are rather expensive. (That is political, of course.)

Third, capital controls! It isn't that simple for a Venezuelan to obtain lots of dollars to spend overseas, at least at the official exchange rate. Those that can are also able to obtain most of the missing goods at home, albeit at a price.

It's not related to dollarization in Panama or Ecuador. (Or El Salvador, for that matter.) Those decisions have been domestically-driven.

This is annoying, my response disappeared.

Briefly, then, with apologies: the issue with Venezuela are the price and exchange controls, not inflation. In a world of floating exchange rates, relative inflation usually feeds through pretty quickly into the value of the currency. When there's hyperinflation you might see people on the border using the neighboring country's currency --- when I drove from Santiago to Mendoza in 1990, there was no need to change Chilean pesos to australes --- but no smuggling.

There is large-scale smuggling of gasoline and other refined products from Venezuela to Colombia, but that is due to Venezuela's insistence on selling the stuff cheap at home. (See http://www.ipsnews.net/2012/09/smuggling-freely-across-the-colombia-venezuela-border.)

There isn't (so far) large-scale movements of people taking goods from Colombia to Venezuela for three reasons:

(1) The border is faraway and crime-ridden. (See http://www.insightcrime.org/news-briefs/kidnapping-gangs-shift-from-venezuela-colombia-border. For a more pleasant --- and accurate! --- picture see http://www.happinessplunge.com/2012/01/crossing-the-colombia-venezuela-border-another-nightmare-but-i-rode-a-motorcycle.)

(2) Once you're going to hop on a plane to Bogotá, you might as well head to Miami. It's less expensive.

(3) It isn't that easy for Venezuelans to get the dollars needed to buy stuff and bring it home in bulk. It's those exchange controls again. Get pesos illegally and Colombia is expensive; get them legally and you are strictly limited as to how many you can buy.

Dollarization in Panama and Ecuador (and El Salvador) has been driven by (rather different) domestic factors in all three places.

Given how prevalent and the diversity of exchange controls there are in Latin America, let alone the rest of the Global South, we could do with more talks about mechanisms. I'm pretty sure Venezuelan exchange controls don't work the same way as Argentina's, and they definitely don't work like Brazil or Chile. At least I've a glimmering on how exchange controls in Venezuela works, but I don't understand it well.

What I definitely don't have a handle on is what the price controls are, how they are applied, and what goods have controls. I feel as if I need to have a good idea because there are pretty strong inflationary pressures in certain consumer goods in all of South America, even in places where the money is definitely a bit tight.

I think I'm interested in Venezuela mostly because having a good grip on how Venezuela is reported vis á vis the situation on the ground there allows me to understand what the US general stance is in Latin America. I compare and contrast with other third world countries, and it really helps me understand the difficulties of resource management. India has many of the same problems of Venezuela, and many of the same industrial/retail attitudes, and it's illuminating to compare the antipoverty programs, the indian coal vs Venez heavy oil, etc

Of course, there's also the rooting for the underdog against the hegemon thing as well.

p.s. the links above don't work.

"Few currencies (I am tempted to say none) are denominated in hundreths or thousandths of a euro for long-standing historical reasons."

Did you mean to use "euro" above? Considering oddball denomination schemes, the Yen pops to mind.

Yup, I did mean to say "euro," because it's a new currency: Europe introduced it at close to a dollar. Nobody creates a currency worth only a penny.

The rule that small-denomination currencies are products of unintended inflation holds for Japan. Between 1939 and 1956 the Japanese price level rose 173 times -- before WW2, the yen traded at 4.3 per dollar; when it again became convertible in 1956, it went for 360.

Japan, unlike France, never bothered to redenominate. My guess is that the reason is political. Mosley's data shows countries often redenominate for to increase their perceived international economic stature. Postwar Japan had a lot of reasons not to increase their perceived international economic stature.

What's weirder is the South Korean won. It crashed from 15 per dollar to 1800 before the Korean War, and then plunged again to 6,000. I can't imagine that many coins were in circulation, so I don't understand why South Korea didn't lop off three zeroes right after the war ended.

June 13, 2013 the Colombian minster of Finance stated that they would be dropping the 3 zeros BEFORE the June 2014 elections. They even had the redenomination plan on the Central Banks website until shortly after the June 13, 2013 article was printed. Any thoughts as to where we are actually at regarding a redenomination any time soon and does a revalue of 50 cents to the USD seem possible?

The latest news was in January: http://www.elpais.com.co/elpais/economia/noticias/cuarta-podria-ser-vencida-para-proyecto-busca-quitar-ceros-peso-colombiano

So far, though, President Santos has not yet introduced a bill. The Colombian senate webpage says it's on the agenda, but the link is broken.

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