United States Seems Concerned About

¶ … United States seems concerned about Chavez's plan to move Venezuela towards socialism, especially if he plans to end the practice of privatization in the oil sector; it seems unlikely that a socialist Venezuela could benefit the world economy. However, in his campaign speeches, Chavez seemed certain that moving towards socialism would benefit Venezuela's domestic economy, place Venezuela in a more competitive position in the world economy, and benefit the international economy. Do you agree with Chavez's position that a socialist Venezuela could benefit the international economy? If so, how do you think this could happen?

It is difficult to conceive of a thriving international economy that does not feature the exploitation of less developed countries by more developed countries. History and imperialism have shown that financial exploitation can be extremely profitable for the imperialist country. However, history has also demonstrated that financial exploitation has lasting and extremely damaging financial and social repercussions for the exploited country. Therefore, it should come as no surprise that Chavez's plan to move Venezuela, which faced years of financial exploitation from European countries and is still considered a third-world economy, towards socialism has received tremendous public support. The problem is that movements towards socialism have not met with tremendous success in the past. For example, communism in Cuba resulted in great social oppression, and also stripped Cuba of a meaningful role in international economics. Even a large country like the U.S.S.R. did not reap the expected internal benefits of socialism and found that such a system hampered its role as a major economic power. However, Venezuela has a huge percentage of the world's oil supply, which may make it possible for Venezuela to benefit from socialism in a way these other countries could not. Venezuela's oil supply gives it the income possibility necessary to fund social programs and pay for the transition to socialism. In addition, because Venezuela has a valuable and necessary commodity, it will not be as vulnerable to the same type of pressure as other socialist countries, like Cuba. It is likely that if Venezuela nationalizes the oil industry, the result will be a slightly elevated international oil price. However, an elevated oil price is not necessarily damaging to the international economy, and may help spur innovation in more developed countries.

Q2: Despite their informal status, G8 and its predecessors G7 and G6 have had a tremendous impact on the world economy, largely due to the fact that they control about 65% of the world's financial resources, which gives them the ability to decide where to lend money and under what conditions. Do you believe that these organizations are legitimate uses of financial power, or that decisions about international economics should be made by a more representative international organization, which has an interest in protecting less affluent countries?

A2: It is impossible to look at the actions of G8, especially the 2005 G7 summit, without seeing the vestiges of imperialism. For example, the result of the 2005 G7 summit was that the major financial powers decided to cancel the debts owed by 18 of the poorest African countries. At first glance, such a decision seems as if it could only benefit those poor countries. However, the problem is that these countries were so economically disadvantaged that they were unable to make payments on those loans anyway. The result of canceling the loans did nothing to increase the economic viability of those countries. In addition, in exchange for canceling the debts, the economic powers demanded certain concessions from those poor countries. Those concessions have placed these poorer countries in the position of submitting to continued financial exploitation or of operating under the burden of tremendous debt. It is important to note that all of the members of G8 are already members of an international organization, the United Nations. While the UN does not protect all member nations equally, it at least provides financially disadvantaged, developing, and third-world countries with some type of voice in the international arena. In fact, the UN's official policy attempts to limit the types of conditions that can be placed on debt forgiveness for third-world and developing nations. Despite this fact, it would be simplistic to state that G8 should not have the ability to make financial decisions independent of the UN and other international influence. As the countries that have provided the majority of financing for the world's poorest countries, it may be that the continued financial health of those countries depends upon them getting a financial benefit from such financial assistance. Therefore, the current world economy may actually depend on the ability of G8 to operate independently from the broader international community.

Q3: How does the Fisher effect impact the ability to forecast currency exchange rates? If the real interest rate is constant across borders, one would expect a constant currency exchange rate, but this does not occur. On the contrary, currency exchange rates are subject to a tremendous amount of fluctuation. Why does this occur?

A3: The Fisher hypothesis posits that in integrated capital markets, the real interest rate is not dependent upon monetary measures like the nominal interest rate, but instead reflects a relationship between the nominal interest rate and the expected rate of inflation. The Fisher hypothesis is largely based on the principle of monetary neutrality. Therefore, changes in a country's currency's exchange rate can be expected to catch up quickly with internal changes in that country's economy. However, the Fisher effect cannot always be used in calculating exchange rates, especially when one of the countries has a prohibitive economy. For example, many developing countries place great internal restrictions on nominal interest rates and rates of inflation, which make capital market integration more difficult. These restrictions can mask a country's actual financial condition, making it impossible to determine the appropriate currency exchange rate.

Q4: What could one expect if the international community made the decision to convert to one form of international currency, rather than using different forms of currency in each country? Would this have an equalizing effect on the world economy, or would it actually further the current economic disparity?