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This economic plan - pegging to the US dollar - led to large current account deficits. The only reason why this "worked" was because following the plan imposed

This economic plan - pegging to the US dollar - led to large current account deficits. The only reason why this "worked" was because following the plan imposed by foreign investors (i.e. the IMF) meant that they could secure foreign currency. This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead, and they were essentially more dependent upon foreign investors. The fact that this 'worked' and didn't lead to disaster was probably due to the fact that oil prices kept creeping up. Currency pegging was used in Venezuela too and that story ended in disaster. In terms of poverty reduction, Lula's Bolsa Familia program was more effective than this at actually helping people, but foreign investors love the story about how "Brazil was made safe again for foreign investors".

whack 10y ago
Any time you have an entity that's low on capital but high in potential, it's bound to attract outside investors, which is in turn bound to produce current account deficits. This isn't necessarily a bad thing. Having outside investors provide the capital needed to ramp up your operations, can be a huge win-win for both sides. In fact, this is exactly how most successful startups got to where they are today. In contrast, I can't think of a single country with hyper-inflation that had a successful economy.
- crdoconnor 10y ago
  >Any time you have an entity that's low on capital but high in potential, it's bound to attract outside investors, which is in turn bound to produce current account deficits. This isn't necessarily a bad thing. Taking on large foreign debts has pretty much led to disaster everywhere from Greece to Thailand to Zimbabwe. Where it's "worked out", it's usually been a way for foreign investors to extract wealth from a country's natural resources. Any time anybody tells you that the best way to grow a business is to rack up lots of credit card debt, run. >Having outside investors provide the capital needed to ramp up your operations, can be a huge win-win for both sides. You have to make sure that the outside investors are put on a leash (as they are in China). If you don't, you end up bringing in lots of capital causing a spike of growth for a while, destroying local businesses (who can't compete with foreign businesses) and then when it ends the economy craters and inflation spikes once again. >In contrast, I can't think of a single country with hyper-inflation that had a successful economy. I can't think of a single country with a successful economy that hasn't at hasn't taken the IMF's guidelines and done the exact opposite (contrast South Korea's relative success with Thailand's).
hga 10y ago
Currency pegging was used in Venezuela too and that story ended in disaster. Which period are you referring to? Venezuela's biggest problem right now, besides the drought which has hit their electrical supply, is that the government looted the oil industry instead of maintaining it and taking a sustainable vig from it. I haven't looked at the numbers (but see e.g. this production chart: http://www.tradingeconomics.com/venezuela/crude-oil-production http://www.tradingeconomics.com/venezuela/crude-oil-producti...), but as I understand it the lower oil prices are secondary to this, although if they'd maintained, let alone expanded production, I suppose the prices would be even lower....
digi_owl 10y ago
Yeah i found that line about them becoming a big exporter right after the URV was introduced more interesting than trying to get people to think in static URVs than inflating Reals. And the moment i read "Catholic university" i found myself thinking about the Chicago Boys. https://en.wikipedia.org/wiki/Chicago_Boys https://en.wikipedia.org/wiki/Chicago_Boys
jomamaxx 10y ago
"This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead" This is extremely misleading. There is absolutely no need for a country to be borrowing at such large rages. Your statement seems to imply that countries should get money for free from outside entities. Yes - if your finances are a mess - you're going to have crazy books - hyperinflation or massive debt - pick your poison. The 'fix' is not to change the numbers around, it's to solve the underlying fiscal and investment problems.
neves 10y ago
Yes, you are right. URV was a nice hack, but people overestimate its economic brilliance. To confirm that it was something imposed by foreigners, you just have to take a look at the dates when the Latin America hyperinflation ended in each country: Mar. 1990 Brazil Mar. 1990 Argentina Aug. 1990 Peru Mar. 1991 Nicaragua You can see a compiled hyperinflation rates in a table in this paper: http://object.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8.pdf http://object.cato.org/sites/cato.org/files/pubs/pdf/working... Till today Brazil suffers with a overvalued money. The medium class loves it, because they can travel abroad cheaply and buy imported goods. You should take a look at this Wikipedia page: https://en.wikipedia.org/wiki/Washington_Consensus https://en.wikipedia.org/wiki/Washington_Consensus
- icebraining 10y ago
  The medium class loves it, because they can (...) buy imported goods. Doesn't Brasil have an import tax of 60%?
rmsaksida 10y ago
> The only reason why this "worked" was because following the plan imposed by foreign investors (i.e. the IMF) meant that they could secure foreign currency. Well, yes, that was the idea. > This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead, and they were essentially more dependent upon foreign investors. The fact that this 'worked' and didn't lead to disaster was probably due to the fact that oil prices kept creeping up. Currency pegging was used in Venezuela too and that story ended in disaster. An external debt that was payable and negotiable. And that we were able to pay successfully (though now we have a large internal debt). In any case, having an external debt is not the end of the world. How many countries do it? > Currency pegging was used in Venezuela too and that story ended in disaster Right. That was the reason of Venezuela's disaster... > In terms of poverty reduction, Lula's Bolsa Familia program was more effective than this at actually helping people, but foreign investors love the story about how "Brazil was made safe again for foreign investors". Do you have any idea how destructive inflation is to a poor household? I'm sorry, this is ridiculous. And what does Bolsa Família - a program that was actually a merge of several programs from FHC's previous administration, modeled by Ricardo Paes de Barros around Friedman's negative income tax - have to do with this?

whack 10y ago

Any time you have an entity that's low on capital but high in potential, it's bound to attract outside investors, which is in turn bound to produce current account deficits. This isn't necessarily a bad thing. Having outside investors provide the capital needed to ramp up your operations, can be a huge win-win for both sides. In fact, this is exactly how most successful startups got to where they are today. In contrast, I can't think of a single country with hyper-inflation that had a successful economy.

crdoconnor 10y ago
>Any time you have an entity that's low on capital but high in potential, it's bound to attract outside investors, which is in turn bound to produce current account deficits. This isn't necessarily a bad thing. Taking on large foreign debts has pretty much led to disaster everywhere from Greece to Thailand to Zimbabwe. Where it's "worked out", it's usually been a way for foreign investors to extract wealth from a country's natural resources. Any time anybody tells you that the best way to grow a business is to rack up lots of credit card debt, run. >Having outside investors provide the capital needed to ramp up your operations, can be a huge win-win for both sides. You have to make sure that the outside investors are put on a leash (as they are in China). If you don't, you end up bringing in lots of capital causing a spike of growth for a while, destroying local businesses (who can't compete with foreign businesses) and then when it ends the economy craters and inflation spikes once again. >In contrast, I can't think of a single country with hyper-inflation that had a successful economy. I can't think of a single country with a successful economy that hasn't at hasn't taken the IMF's guidelines and done the exact opposite (contrast South Korea's relative success with Thailand's).

hga 10y ago

Currency pegging was used in Venezuela too and that story ended in disaster. Which period are you referring to? Venezuela's biggest problem right now, besides the drought which has hit their electrical supply, is that the government looted the oil industry instead of maintaining it and taking a sustainable vig from it. I haven't looked at the numbers (but see e.g. this production chart: http://www.tradingeconomics.com/venezuela/crude-oil-production http://www.tradingeconomics.com/venezuela/crude-oil-producti...), but as I understand it the lower oil prices are secondary to this, although if they'd maintained, let alone expanded production, I suppose the prices would be even lower....

digi_owl 10y ago

Yeah i found that line about them becoming a big exporter right after the URV was introduced more interesting than trying to get people to think in static URVs than inflating Reals. And the moment i read "Catholic university" i found myself thinking about the Chicago Boys. https://en.wikipedia.org/wiki/Chicago_Boys https://en.wikipedia.org/wiki/Chicago_Boys

jomamaxx 10y ago

"This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead" This is extremely misleading. There is absolutely no need for a country to be borrowing at such large rages. Your statement seems to imply that countries should get money for free from outside entities. Yes - if your finances are a mess - you're going to have crazy books - hyperinflation or massive debt - pick your poison. The 'fix' is not to change the numbers around, it's to solve the underlying fiscal and investment problems.

neves 10y ago

Yes, you are right. URV was a nice hack, but people overestimate its economic brilliance. To confirm that it was something imposed by foreigners, you just have to take a look at the dates when the Latin America hyperinflation ended in each country: Mar. 1990 Brazil Mar. 1990 Argentina Aug. 1990 Peru Mar. 1991 Nicaragua You can see a compiled hyperinflation rates in a table in this paper: http://object.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8.pdf http://object.cato.org/sites/cato.org/files/pubs/pdf/working... Till today Brazil suffers with a overvalued money. The medium class loves it, because they can travel abroad cheaply and buy imported goods. You should take a look at this Wikipedia page: https://en.wikipedia.org/wiki/Washington_Consensus https://en.wikipedia.org/wiki/Washington_Consensus

icebraining 10y ago
The medium class loves it, because they can (...) buy imported goods. Doesn't Brasil have an import tax of 60%?

rmsaksida 10y ago

> The only reason why this "worked" was because following the plan imposed by foreign investors (i.e. the IMF) meant that they could secure foreign currency. Well, yes, that was the idea. > This still meant that they were basically swapping hyperinflation for racking up a huge external debt instead, and they were essentially more dependent upon foreign investors. The fact that this 'worked' and didn't lead to disaster was probably due to the fact that oil prices kept creeping up. Currency pegging was used in Venezuela too and that story ended in disaster. An external debt that was payable and negotiable. And that we were able to pay successfully (though now we have a large internal debt). In any case, having an external debt is not the end of the world. How many countries do it? > Currency pegging was used in Venezuela too and that story ended in disaster Right. That was the reason of Venezuela's disaster... > In terms of poverty reduction, Lula's Bolsa Familia program was more effective than this at actually helping people, but foreign investors love the story about how "Brazil was made safe again for foreign investors". Do you have any idea how destructive inflation is to a poor household? I'm sorry, this is ridiculous. And what does Bolsa Família - a program that was actually a merge of several programs from FHC's previous administration, modeled by Ricardo Paes de Barros around Friedman's negative income tax - have to do with this?