When Leaders Are True to Their Lies

Ricardo Hausmann

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Director of the Center for International Development at Harvard University and a professor of economics at the Harvard Kennedy School.

HANOI – What does the Venezuelan domestic payments crisis have in common with the death of the North American Free Trade Agreement, announced by Wilbur Ross, US President-elect Donald Trump’s pick to be the next US Secretary of Commerce? These two seemingly disparate events are linked by the odd relationship with the truth that both Trump and the Chavista regime seem to share.

All governments lie. A few believe their own lies. But things get dangerous when they act in order to be true to their lies. That is the trap into which Venezuelan President Nicolás Maduro’s government has fallen, and it seems to be the logic behind the decision articulated by Ross to withdraw from NAFTA.

Many observers have noted similarities between Trump and Maduro’s predecessor, the late Hugo Chávez, even though they represent opposite ends of the political spectrum. But our brains are designed to identify patterns. Toddlers learn the concept of a cat by being shown just a handful of exemplars. Even adults classify things based on concepts that we cannot really define. In 1964, US Supreme Court Justice Potter Stewart stated his now famous criterion of obscenity: “I know it when I see it.”

That certainly seems true of the connection between Chávez (who died in 2013) and Trump. Chávez, and then Maduro, adopted policies that put Venezuela in a very weak position: lavish spending, expropriation, price and foreign-exchange controls, and reckless borrowing abroad. Global capital markets lost confidence in Venezuela in 2013, and the price of oil plummeted in 2014, making these policies unsustainable and sending the economy into a tailspin.

Confronting a declining economy, Maduro decided to blame it all on an economic war waged by the United States and its local cronies. The crucial point is that this imaginary war ended up being the rationale for government decisions. Every symptom of the crisis was transformed into the consequence of an action taken by the enemy. Shortages were the result of hoarding by speculators. Inflation was caused by price gouging by unscrupulous businessmen. Currency depreciation was driven by a website that reported on the exchange rate. People have been prosecuted and imprisoned on the basis of these allegations.

In managing the crisis, Maduro failed to authorize the issuance of higher-denomination banknotes, which would constitute an acknowledgement of the high inflation that the country has suffered. The highest-denomination banknote, the 100-bolivar bill, which was worth $46.5 when it was introduced in 2008, fell to just $0.03, requiring mountains of bills to make small payments.

The value of the stock of bills and coins held outside banks has fallen from about $150 per capita in 2012 to less than $6 at the beginning of this month. And the shortage of bills – caused in part by the difficulty of supplying so much low-value currency – upset Venezuelans to the point that the government finally took action.

According to Maduro, the problem was straightforward: bills were being siphoned out of the country by mafias financed by the CIA. To destroy the mafias, Maduro canceled these bills as legal tender and gave their holders only 72 hours to exchange them at banks. To prevent the mafias from returning the money from abroad in this period, the borders with Colombia and Brazil were closed.

The chaos that ensued is hard to describe. Just as Venezuelans were getting ready for Christmas, they found out that they had no money to pay for anything. Nobody would accept their 100-bolivar notes, and banks had no bills to exchange for those being returned by the public. People without bank accounts, mainly the poor, lost what little they had. The payment system went into a tailspin, and the country fell into chaos.

Now consider NAFTA. Trump convinced many voters that NAFTA was the worst trade deal the US ever signed. It was a deal negotiated by “really stupid people,” he declared. Millions of jobs left the US for Mexico, causing Americans to suffer. The lack of good manufacturing jobs was clearly a major complaint during the election; but let’s check the facts before blaming Mexico and NAFTA.

In 1993, the last year before NAFTA came into effect, Mexican manufacturing value added was equivalent to just 7.7% of US manufacturing. By 2014, it had grown to about 10% of the US level, a gain representing about $50 billion. With average US productivity per worker at about $150,000, if Mexico’s manufacturing gain is attributed entirely to NAFTA, this represents about 333,000 US jobs, or less than one out of every 400 jobs in the US.

In the same period, value added in US manufacturing increased by $972 billion, more than 19 times as much as Mexico’s gain. Compared to US manufacturing value added of $2.1 trillion, Mexico’s $50 billion is a paltry sum. And the US may have derived other benefits from the deal, such as more jobs, thanks to more exports to Mexico and more competitive Mexican inputs.

In the same 1993-2014 period, industrial employment as a share of total employment fell by 8% in the US, 8.5% in Japan, and 9.8% in Germany, but it barely moved in Mexico. Clearly, the industrial jobs that are missing in the US have also gone missing in Japan and Germany, and those jobs are not in Mexico.

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Trump may have convinced Rust Belt voters that “their” jobs are in Mexico. But if he actually believes it, a lot of damage will be done before people discover the truth. As a consequence of all the talk about withdrawing from NAFTA, the Mexican peso has lost about 14% of its value since the election results were announced. That depreciation is larger than the likely tariffs the US would impose on Mexican goods if it left NAFTA.

Lying to get ahead is a human foible. But it becomes something much worse if, like Chávez, Maduro, and Trump, you remain true to your word.