How to ruin a country's economy in five easy steps: Analyzing the case of Venezuela's Economic War

There have been several news articles in the web about the current events in Venezuela's economy. President Nicolas Maduro has started an economic war against the burgeoisie and dollars and price speculators. He has recently adquired special powers in order to attack and destroy corruption and clean the path for Socialism.
However, from the eyes of the experts, the only thing that will be possibly achieved is the ruin of the country's economy. Here are the 5 steps that the Government has taken and that probably shouldn't have.

1.- Attack the Big Business

Recent news have shown what are the tactics of the government to tackle the "unfair" capitalists and burgeois. The last known event was the government takeover of the electronic retailer Daka. The military took the owner and arrested him, while cutting prices of all goods inside the store. The main claim was the unjustified price level that was "absurdly high".

2.- Foster Hyperinflation

If there is something very clear in Macro Economics is the fact that the more money is in circulation, the higher the inflation rate will get. Inflation means the rate the goods increase their monetary value in time. It means that, the higher the inflation rate is, the higher the costs of basic goods will be.

An unjustified increase in the salaries will create a higher cost of producing goods. The higher the cost of producing, the higher the final price of the finished good. Simple math.

Venezuela has an alarming inflation rate of 54% this year. That means, that basic goods now cost 54% more than the beginning of the year.

3.- Induce a Currency Crisis

Since Inflation reduces the value of the currency, a simple and logic solution would be to push the value of the currency higher. One way to accomplish that is to print less money. The less money there is in circulation, the more value it will have. The problem is, Venezuela is actually running out of cash. It can't pay for basic goods that are needed to be imported, like for example, toilet paper.

4.- Subsidize

The Socialist government use to subsidize may of the basic services to the people: education, health care, housing, food, even gasoline is almost free. But not just that, another reason Venezuela is running out of money is because it is subsidizing one of its super socialist partners, Cuba. It has been doing it for years. Venezuela sends around 100,000 daily barrels of oil to the island.
On the other side of the world, with China has a compromise for 400,000 daily barrels for the following 20 years.

5.- Become a Dictatorship

Not a surprise in Latin America the fact that President Maduro gained the power to pass laws without consulting the congress. Paradoxically, the man who claims himself in favor of democracy, decides to take measures in an authoritarian way. He argues that the reason for this is to attack corruption in the public sector. Nowadays, Venezuela is the 9th most corrupt country in the world, and the most corrupt country in the continent. And surprisingly, everything worsened when Maduro's predecessor, Hugo Chávez, started the socialist movement last decade.

Economic experts agree on the fact that Venezuela is on a fast track to ruin (Zakaria; Pardo; Guerra, 2013). According to analysi Fareed Zakaria, while Venezuela has the potential to become as wealthy as Saudi Arabia or Qatar (because of its oil reserves), it is becoming more similar to North Korea.

CNN's article:

http://globalpublicsquare.blogs.cnn.com/2013/11/16/five-ways-to-ruin-an-economy/

Transparency International:

http://www.transparency.org/annualreport/2012

Maduro impondrá límites a las ganancias de empresas: (in Spanish)
http://cnnespanol.cnn.com/2013/11/11/maduro-anuncia-que-pondra-limites-al-porcentaje-de-ganancia-a-las-empresas-en-venezuela/?iref=allsearch

Troops take control of business:
http://worldnews.nbcnews.com/_news/2013/11/11/21399541-venezuela-sends-in-troops-to-force-electronics-chain-to-charge-fair-prices

Cheers!
Jonathan

Modeling the Unknown (Analyzing the Igloo of Uncertainty by Tannert, et al., 2007)

In this occasion I would like to talk about Business Uncertainty and a model of knowledge and uncertainty called the Igloo of Uncertainty obtained from the articles: Humankind and the Environment: an anatomy of surprise and ignorance, from Faber M., et al; and The Ethics of Uncertainty from EMBO reports.

Referring to the authors Christof Tannert, Horst-Dietrich Elvers and Burkjard Jandrig (2007); Uncertainty touches most aspects of life, especially when we make decisions that have consequences we cannot predict. 

"Let’s say we get out from home without an umbrella. That action carries a risk because it could start to rain. The same happens in business environments like investing in stock markets, which main risk is the loss of money."

A strategy to deal with these challenges is to diminish uncertainty by acquiring knowledge of the issue.

I would like to quote a popular phrase said by the United States Secretary of Defense Donald Rumsfeld in 2002:

“There are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don't know. But there are also unknown unknowns – there are things we do not know we don't know.”

(Rumsfeld, 2002)

That is, the escence of what it is called "uncertainty".

To explain how some important issues like ethics are relevant to uncertainty, it is possible to draw a map of different forms of uncertainty, beginning with a distinction between knowledge and ignorance of the probabilities of adverse impacts (Tannert, et al, 2007).

It is important to distinguish between dangers and risks. A danger has a prescribed quality and a defined probability, and can therefore be avoided or counter-acted. 

"Let’s say for example, car accidents that caused severe or deadly injuries prompted regulation for the mandatory installation and use of safety belts."

(Tannert, et al, 2007) 

On the other hand, according to the authors, a risk can either be accepted by, or imposed on, a person. 

"Driving without a safety belt is a self-accepted risk, while selling cars with faulty safety belts imposes a risk on unsuspecting buyers."

(Tannert, et al., 2007) 

That’s the main difference between risk and danger. While the first one is accepted or imposed, the other one is always present regardless of choice or decision.

When we know that a certain situation or decision will involve dangers and risks, it is a proactive and morally justifiable activity to reduce gaps in our knowledge. 

(Tannert, et al., 2007) 

According to the authors (2007), if the cause of ignorance is a lack of knowledge, which cannot be reduced owing to stochastic and the randomness of the matter under study, and/or the structure of our cognitive apparatus, it is called closed ignorance or “nescience”, an absence of knowledge.

Closed ignorance also results from rejecting or ignoring available knowledge, which can be referred as the “Galileo Effect”, which was inspired by the cardinal in Bertolt Brecht’s play Galileo Galilei, who refused to look through a telescope in order not to accept the knowledge that the planets revolve around the sun (Tannert, et al., 2007). Closed Ignorance can be converted into open ignorance with a change of attitude. It can be addressed by learning or by research (Tannert, et al., 2007).

The term Closed Knowledge is defined by comprehensive knowledge or the certainty that any event will happen in any case.

"For example, driving at 200 Km/h without a safety belt generally means death in an accident. Under these circumstances, the most responsible and rational behavior would be either to use a safety belt or to avoid the situation."

On the other hand, Open Knowledge is defined by the fact that there is enough information available to perform an assessment on the situation, and because of that, it is possible to give a rational and responsible advice (Tannert, et al., 2007).

In their study (2007), two types of uncertainty are defined: The first form of uncertainty is objective uncertainty, which can be further divided into epistemological uncertainty and ontological uncertainty. The second main form of uncertainty is subjective uncertainty, which is characterized by an inability to apply appropriate moral rules. There are two sub-forms of subjective uncertainty. The first one with respect to rule-guided decisions and the second is with respect to intuition-guided decisions, that is, uncertainty in moral rules. (Tannert et al., 2007)

The authors give the statement that Uncertainties challenge the central claim of science: that all problems are presumed to be solvable by research. However, many social and ethical issues have been shown to be so complex that it might never be possible to make reliable predictions about the effects of manipulating these systems.

This perspective is intended to highlight some important considerations about the limitations of knowledge in the assessment of risks (Tannert, et al., 2007). Clearly, acting in a state of uncertainty can create ethical problems: ignorance caused by rejection of knowledge can lead to danger. However, knowledge can also lead to ethical problems: it can create risks if the exposed person decides to accept the threat, imposes it on another person or accepts that such a threat is imposed.

I would like to conclude my main points by stating that as I just had explained, uncertainties about adverse effects can be categorized in taxonomy of uncertainty. While in the extreme of cases, the solutions can be made through knowledge or an intuition guided decision.

Sources: 

• Faber M; Manstetten R; Proops JLR (1992) Humankind and the Environment: an anatomy of surprise and ignorance. Environ Values. 1: 217-242.
• Tannert, Christof; Elvers, Horst-Dietrich; Jandrig, Burkhard. (2007) The ethics of Uncertainty. European Molecular Biology Organization. 8 (10): 892-896.

Cheers!

Jonathan

What does it take to be an entrepreneur in Mexico?

The main issue with Entrepreneurship is not to create a new venture, but to maintain it and make it grow. According to popular thought, in Mexico the main characteristic that an entrepreneur must have is "Perseverance", then it comes at second place "Tolerance towards frustration" and behind it there is" Capacity to work independently" (El Universal, 2013).

One of my professors in Finland asked me if it's difficult to study Entrepreneurship in Mexico. She wonders why is there so many people practicing entrepreneurship in the informal way.

In Mexico, 7 out of 10 people believe entrepreneurship is a matter of personality and 60% of entrepreneurs find independence and the seek of freedom as the main motivations to start a new business (Hernández, et al., 2006). 

According to the Mexican National Institute of Statistics and Geography (INEGI by its name in Spanish) unemployment rate in Mexico is about 4.92%. Around 44% of Mexican population is part of the labor force. From that, 26% is underemployed (INEGI, 2013). Those might be two important reasons for Mexicans to start a new business. But what really bothers is why do most of Mexican entrepreneurs decide to operate into informality?

The truth is that quality education in Mexico is expensive. Public universities (and some high schools) are focused more in technical degrees than plain professional (BSc, MSc) degrees. The traditional education system teaches how to become an employee instead of an employer. It trains people to think about money in a very limited perspective as well as to receive orders (El Universal, 2013). 

And the worst thing is that only 40% of students who start the university manage to graduate from their studies. That inefficiency rate might imply that the problem with education in Mexico resides in the contents of the educational programs. 

An Entrepreneur decides what he or she wants to study and learn. He ask questions and challenge the system without the fear of being repressed.

There are institutions fostering entrepreneurship but they are poorly promoted. Just a few groups of people know about their existence, their programs and how they work. It is much easier to start an informal (usually micro) business and develop it at a minimum scale. That's the way several families generate family income.

Gender inequality is also shown in Mexican labor. 60% of labor force in Mexico is male. In education, social stratification also affects the quality of results in students. In each state, education quality varies a lot as well as students' accomplishments regarding years of studies (Backhoff, 2011).

Some interesting sources (in Spanish):

http://www.eluniversal.com.mx/pymes-tu-empresa-tu-negocio/2013/empresario-emprendedor--81030.html#

El emprendedor en México: Ingenio vs Innovación (in Spanish)

http://www.oei.es/memoriasctsi/mesa12/m12p25.pdf

Instituto Nacional de Estadística y Geografía (in Spanish)

http://www3.inegi.org.mx/sistemas/temas/default.aspx?s=est&c=25433&t=1

Inequidad Educativa en México (in Spanish)

http://ibero909.fm/inequidad-educativa-en-mexico/

La inequidad educativa en México (in Spanish, abstract in English)

http://www.ugr.es/~recfpro/rev153ART6.pdf

Cheers!

Jonathan