End of the Dollar Dictatorship? Hugo Chavez and Latin Leaders Hope to Bury the Greenback
By Nikolas Kozloff
Last week, representatives of the Bolivarian Alternative of the Americas (known by its Spanish acronym ALBA) met in the Bolivian city of Cochabamba to discuss the future evolution of the trade bloc, designed to promote complementarity and reciprocity amongst left-leaning regimes in the region such as Cuba, Venezuela, Bolivia, Nicaragua and Ecuador. Since its inception in 2004, ALBA has carried out important exchanges of goods and services; for example Venezuela has exported subsidized oil to Cuba and receives Cuban medical assistance in return. However, some wonder whether ALBA is practical or can help to foster real economic development for the region's poor.
ALBA leaders however say it's time to place such doubts aside. Last week in Cochabamba they declared their historic adoption of a common currency called the Unified System of Compensation of Reciprocal Payments or SUCRE in Spanish. Named after Antonio Jose de Sucre, a military general and hero of the wars of independence against Spain, the Sucre is to be gradually substituted for the U.S. dollar in terms of commercial exchange between ALBA member nations.
According to the new Cochabamba agreement, ALBA countries will make deposits in their respective currencies to an ALBA bank headquartered in Caracas. The Sucre will act as a payment compensation mechanism and allow ALBA nations to reconcile accounts when they carry out commercial transactions in local currency. It's a kind of barter exchange system: if Venezuela for example buys textiles from Bolivia and owes the Andean nation a certain quantity of money, then this will be compensated in kind with other imported goods such as asphalt. The difference in cost will be reconciled by central banks located within respective ALBA countries which handle the Sucre. Payment requests meanwhile will be processed electronically between ALBA members via an ALBA bank.
Creation of the Sucre then will not lead to a new physical currency being issued. The Sucre will not have any intrinsic value but will have parity in relation to the U.S. dollar, the euro or Japanese yen. By early 2010, ALBA countries hope to start using the "virtual" currency, with future plans to convert it into a hard currency. Eventually, at some future yet undefined date, ALBA members hope to establish a unified regional currency which Bolivia has suggested could be named "Pacha" for the Quechua Indian word for Earth.
EK: I think that's correct --- I don't think the adoption of the Sucre or Pacha for that matter will have much of an economic impact on the United States. It probably will have a greater economic impact on ALBA nations by fostering import substitution and industry as opposed to pursuing a course of commodity exports. Here's another benefit of a common currency: right now a lot of countries spend a lot of money buying dollar assets because they're afraid of a speculative attack on their currency. One solution to this is to institute capital controls which the International Monetary Fund doesn't particularly like. A successful currency union could make ALBA nations less subject to speculation and as a result these countries would be less concerned about their exchange rate relative to the U.S. dollar. As a result, ALBA nations would benefit as they wouldn't have to invest so much in low-yield dollar assets. Still if speculators can force the bank of England to lose almost 100 billion pounds in one day back in 1992, my guess is that the Pacha will not be immune to speculative attack.
NK: ALBA was originally set up to counter the FTAA or Free Trade Area of the Americas, the corporately -friendly free trade scheme sponsored by Bill Clinton and George Bush. Venezuela's Hugo Chavez on the other hand says that the adoption of the Sucre constitutes a system of "fair trade" which will distance Latin American countries from "hegemonic capitalism," "the neo-liberal dictatorship" and the "dictatorship of transnational companies." The Sucre, Chavez adds, "will be much more than a currency." According to him, the Sucre system will have four component parts: the Regional Monetary Council, the Sucre currency itself, the Central Clearing House, and a regional reserve and emergency fund. How significant a break does this represent with the go-go free trading past?
EK: If the Sucre agreement winds up fostering closer economic integration along the lines of the EU and not NAFTA, then the new ALBA currency could wind up resulting in more fair trade as opposed to exploitative trade. Here's another way the Sucre could represent a plus: normally multinationals go to Venezuela or Ecuador and set up their own companies which get all kinds of tax breaks and make profits off exports. Those profits are then repatriated to the United States. If there's a common currency however, those profits would probably stay in the local region. So, a new currency might promote fair trade as well as fair investment.
NK: On the face of it the idea of the Sucre is reminiscent of the euro, another regional currency which recently came into effect. Yet, the Sucre would seem to be more unique in that it has been promoted as a common ideological project amongst left-leaning nations. Is there any historic precedent for such an idea?
EK: I'm not aware of any currency that's been promoted on the basis of shared ideology, certainly not any left wing ideology...
NK: What about the ruble?
EK: That's a good point. The Soviets exported the ruble to all of their satellite areas. But for the Soviets, the ruble on its own wasn't such a decisive factor as there was already a centrally planned government which decided what the satellite countries would produce as well as what price they would trade at. In other words, given that the Soviet Union could already decide the relative prices of all goods, an exchange rate was relatively redundant. So, in terms of ALBA countries I think the benefits of a shared currency are higher because you have different governments as opposed to Moscow calling the shots.
NK: Ecuadoran President Rafael Correa, himself an economist, hopes that the Sucre and the implementation of the new "virtual monetary system" could accelerate commerce between nations. Eventually, he hopes, such a system could be extended to all countries in Latin America and use of dollars would be reduced greatly. How likely is this to occur?
EK: I think if the Sucre, or the Pacha as the case may be, were extended to all of Latin America this would reduce the use of the dollar and this would have an impact on the United States, particularly if Mexico joined the Sucre. Let's face it though: Mexico is going to be reluctant to do that. To be honest, we don't even know if the countries that have currently signed up for the Sucre will continue to stay on it. What would happen if a right wing government came to power in one of the ALBA nations? If one ALBA country on the Sucre has an economic downturn and wants to pursue a monetary policy that will help to reduce unemployment, this could lead to inflation in another ALBA nation, which in turn could spark political conflict. For the time being the ALBA nations have relatively similar political ideologies and they could set up some kind of political institution to govern the currency board. But, if one of the ALBA nations became right wing I don't know what would happen.
In addition to disagreements over monetary policy, there might also be conflicts over fiscal policy. One way for the government to get out of debt is by printing money to pay off the debt. This causes inflation. This is a very typical pattern in Latin America. So, if one ALBA country decides it wants to inflate its debt away and another country in the currency union doesn't like that idea, then this could give rise to political conflict. A country finding itself in dire economic straits may need to create inflation because otherwise it would go bankrupt. Other countries within ALBA meanwhile won't want one of their members to go bankrupt which could result in a potential currency attack on the entire region. Here's the key point though: ALBA countries that are not experiencing economic pain may want to dictate how much debt their fellow member can hold as a percentage of GDP. If you want to join the EU, you must have a certain debt to GDP ratio. How will the ALBA nations bargain this out? These are vexing questions. Plus, if you really want to have an economic impact on the United States and the dollar you'd have to involve Brazil, Argentina and Mexico and it's difficult to see that happening.
NK: Speaking of which, Chavez has invited Argentina to join in the Sucre, and over the past few years Venezuela and Argentina have cultivated an unprecedented geopolitical alliance which is based on shared ideological affinities. Do you think that if Argentina joined that there could be a ripple effect and other countries might be encouraged to join? Some might say that if Brazil, the true economic juggernaut in the region, fails to join that such a currency might lack credibility.
EK: Cristina Fernandez de Kirchner, the current President of Argentina, is not super popular. She and her husband [former president Nestor Kirchner] had this idea of alternating power so they wouldn't hit the wall on term limit restrictions. In light of recent parliamentary elections which resulted in electoral defeat for the Peronist party, it's not clear whether the Kirchners can stay in power. If they don't stay in power you can forget the idea of Argentina ever joining the Sucre. My guess is that even if they do, it's an unlikely scenario for Argentina.
NK: Some might say that from the very outset the Sucre won't have much clout. Bolivia exports most of its goods to other Andean nations such as Peru and Colombia which do not participate in ALBA. Nicaragua meanwhile exports most of its products not to fellow ALBA nations but to other Central American nations, the United States and Europe where the dollar and euro are paramount in commercial transactions. What are your thoughts?
EK: That's true. But similarly a lot of countries in the EU don't just trade amongst themselves but also with the UK, Switzerland and the United States. So, I don't see that as being a huge barrier. In the case of Nicaragua it could be a little weird since the Central American nation doesn't do that much business with other ALBA nations. So, there may not be a lot of benefits but conversely getting on the Sucre might imply little financial and political risk.
However, once the currency goes from being "virtual" to real and ALBA nations ditch their own currencies for the Pacha these costs may go up as I explained earlier. The bottom line is that as long as ALBA countries are not trading amongst themselves that's Ok: if it's a virtual currency like the Sucre they still maintain their exchange rates with the other countries. Once they swap their currencies entirely however they're forced to have the same exchange rate as other ALBA countries. Normally, if Nicaragua had a lot of inflation it would want to devalue relative to its other trading partners in Central America. But in the new milieu, Nicaragua wouldn't be able to do that. This could really wind up hurting its exports.
NK: What types of protections would you advise for the ALBA nations moving forward?
EK: My concern would be defending the incipient currency from speculative attacks. There's a very easy way to prevent this: you need to implement currency controls. In other words, don't let people take money out of the currency except for trade-related actions and do not allow any speculation. There's no way for ALBA to move ahead with a currency union without acting on currency controls. The International Monetary Fund won't be too happy about that but I don't think these left wing countries care about the IMF anyway.
NK: The situation in Ecuador is positively ironic. Up until recently the Andean nation's currency was called the Sucre, which it then ditched for the U.S. dollar. Now Ecuador is going back to another Sucre. How do you think life will change for Ecuador and Ecuadorans as the country moves to the Sucre as opposed to the dollar which had been embraced by the country's economic elite?
EK: First of all, let's look at some of the costs of using the U.S. dollar. When the U.S. inflates currency and prints dollars to pay off debt, that's a tax because prices go up and the value of money goes down. Who pays that inflation tax? In part it's the Ecuadoran people who hold dollars. Who benefits? The U.S. government as it gets to pay off its debt. So, these financial crises devalue Ecuadoran money.
But now the new Sucre monetary board, or eventually the Pacha board, could redistribute money between countries as opposed to having it filter back to the United States. Also, once Ecuador goes on the Pacha it'll be easier for the Andean nation to adjust its exchange rate than it would under the dollar. As long as Ecuador sticks to the dollar, it'll be beholden to whatever U.S. monetary policy happens to be. Once Ecuador's in the ALBA currency union it has a voice and can have a much greater impact to shape its own finances.
There are other political benefits to not being on the U.S. dollar. Take for example the case of Panama. When George H.W. Bush wanted to get rid of military strongman Manuel Noriega, he banned the export of U.S. dollars to Panama which caused a recession. That leverage is still there potentially with Ecuador. George W. Bush never entertained the possibility of putting the squeeze on Ecuador as he was distracted in other parts of the world. But, under other circumstances the United States might have exerted pressure.
Despite all these problems, there are some benefits to having ties to the U.S. dollar. If you're on the dollar this leads to stability in price levels which could be lost once Ecuador joins a new currency.
NK: One key question will be whether private sector exporters in ALBA nations will have confidence in the new Sucre for it is they who dominate international trade. What are your thoughts?
EK: If the private sector is forced to trade in the Sucre or not trade, then they'll use it...
NK: In all of these countries like Ecuador and Venezuela, it's precisely the right opposed to leftist governments which is controlling the exports...
EK: You could wind up with a strange situation in which the exporters are skittish about the new currency and either reduce exports or send their goods to non-ALBA countries like Colombia. In that case, the new currency union would not foster more intra-ALBA trade but the total opposite. If there's greater state control over exports, as in the Venezuelan oil industry, this all becomes a moot question.
NK: Professor Kaplan, thank you very much.