FacebookTwitterGoogle+RedditEmail

Fixing the Venezuelan Economy

by

shutterstock_377367403

Venezuela this week announced it would significantly raise fuel prices and devalue its currency as part of a series of measures to help shore up its flailing economy. Venezuelan president Nicolás Maduro also named a new economy czar: Miguel Pérez, the former head of an industry association. Reuters reports: “Perez has sought dialogue with Venezuela’s private sector and has also spoken of the need to eventually unify Venezuela’s multiple exchange rates.”

While these measures are a step forward, there is much more that needs to be done in order to stabilize the economy.

Let’s look at the numbers. The best estimates and forecasts for the Venezuelan economy have come from Bank of America Merrill Lynch (BOA). Unlike the IMF, which was not even in the ballpark in their forecast for 2015 GDP, BOA was on target. (Using a statistical model, BOA even correctly forecast the December National Assembly election results.)

BOA estimates that Venezuela has a public sector financing gap — which includes principal payments on the debt — of about $24 billion for 2016, and that about $5 billion will be covered by Chinese loans. Looking at the economy as a whole, the current account (mostly trade) deficit was about $18 billion last year. BOA also estimates that the government has about $60 billion in assets that it can sell for U.S. dollars, including its international reserves. So, the country is not broke yet — there is still at least another year to turn the economy around, or possibly more, depending on oil prices.

So where should Venezuela go from here? Here are four measures the country could take to create a path toward economic recovery:

Make living affordable



The economy has large imbalances that will have to be adjusted. Therefore, the first thing to ensure is that poor and working Venezuelans do not suffer from the adjustment. This means setting up a system to make sure that food, medicine, and other essentials are available at affordable prices. There are many governments that have such systems, including the U.S., where more than 45 million people receive food stamps.

The Venezuelan government has shown that it has administrative capacity when it really wants to use it, for example in administering national elections. Last year, the country even reduced significantly the amount of dollars lost to capital flight, which is amazing given the incentives to cheat under the current exchange rate system. Venezuela also has funds to ensure that most citizens have access to necessities at affordable prices. So, it is definitely possible to set up a food-stamp-type system under which people are protected from price increases, and shortages are eliminated.

Stabilize the currency

Once this system is in place, the government can unify the exchange rate. This is the most damaging imbalance in the economy. It has been causing an inflation-depreciation spiral since the fall of 2012. The rising black market rate increases inflation, which then feeds back into the price of the black market dollar, in a continuing vicious circle.

The fastest and best way to break this cycle is to allow the currency to float. It’s hard to say where it would settle, but it would likely be somewhere between 150 and 200 Bolivares Fuertes to the U.S. dollar — nowhere near the current black market rate. Although this devaluation would cause some inflation, in four out of the last five devaluations in Venezuela, the resulting increase in inflation disappeared within a year. Only the last devaluation, which took place in the middle of an inflation-depreciation spiral, contributed to a persistent increase in inflation. But unifying the exchange rate would break that spiral and put an end to the black market.

Once the currency begins to stabilize, a lot of U.S. dollars would come back into the country, since everything would be cheap for those who hold dollars. This is what happened in Argentina in 2002, after a huge devaluation. The government then managed the exchange rate for the next six years at a realistic level, and the economy grew very fast. (The business press predicted hyperinflation and continued deep depression.) Any devaluation in Venezuela that does not break the inflation-depreciation spiral is likely to lead to continued balance of payments crises and more inflation.

By unifying the exchange rate at a realistic level and breaking the inflation-depreciation spiral, the government will also avoid having to lose precious reserves defending an overvalued currency. It will put an end to the chronic balance of payments crises, as well as most of the corruption that stems from the overvalued official exchange rates.

Eliminate dysfunctional price controls

Once these measures are taken, and consumers are protected from rising prices for essential goods, the government can begin to lift some of the dysfunctional price controls. This week’s announcement of a gasoline price increase is a step in the right direction, but there are other price controls on food and household items that will need to be relaxed in order to eliminate shortages. This will save billions of dollars of foreign exchange lost to smuggling, although as noted above, consumers would have to be protected from price increases.

Adjust to lower international oil prices

Adjusting to lower oil prices over the intermediate and longer run will mean diversifying the economy away from oil. In 2011, Venezuela imported about 24 percent of its food; the country could become nearly self-sufficient in food production and pursue other import-substitution and diversification strategies, which would become more feasible with a lower-valued currency.

The government will have to take additional measures to bring down inflation, and there are many other policies that can contribute to economic growth and development. But first the economy has to be stabilized, to put an end to balance of payments crises and chronic shortages, as well as the recession of the past two years.

This column originally appeared in Fortune.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
April 21, 2017
Friday - Sunday
Diana Johnstone
The Main Issue in the French Presidential Election: National Sovereignty
Paul Street
Donald Trump: Ruling Class President
Jeffrey St. Clair
Roaming Charges: Dude, Where’s My War?
Andrew Levine
If You Can’t Beat ‘Em, Join ‘Em
Paul Atwood
Why Does North Korea Want Nukes?
Robert Hunziker
Trump and Global Warming Destroy Rivers
Vijay Prashad
Turkey, After the Referendum
Binoy Kampmark
Trump, the DOJ and Julian Assange
CJ Hopkins
The President Formerly Known as Hitler
Steve Reyna
Replacing Lady Liberty: Trump and the American Way
Lucy Steigerwald
Stop Suggesting Mandatory National Service as a Fix for America’s Problems
Robert Fisk
It is Not Just Assad Who is “Responsible” for the Rise of ISIS
John Laforge
“Strike Two” Against Canadian Radioactive Waste Dumpsite Proposal
Norman Solomon
The Democratic Party’s Anti-Bernie Elites Have a Huge Stake in Blaming Russia
Andrew Stewart
Can We Finally Get Over Bernie Sanders?
Susan Babbitt
Don’t Raise Liberalism From the Dead (If It is Dead, Which It’s Not)
Uri Avnery
Palestine’s Nelson Mandela
Fred Nagel
It’s “Deep State” Time Again
John Feffer
The Hunger President
Stephen Cooper
Nothing is Fair About Alabama’s “Fair Justice Act”
Jack Swallow
Why Science Should Be Political
Chuck Collins
Congrats, Graduates! Here’s Your Diploma and Debt
Aidan O'Brien
While God Blesses America, Prometheus Protects Syria, Russia and North Korea 
Patrick Hiller
Get Real About Preventing War
David Rosen
Fiction, Fake News and Trump’s Sexual Politics
Evan Jones
Macron of France: Chauncey Gardiner for President!
David Macaray
Adventures in Labor Contract Language
Ron Jacobs
The Music Never Stopped
Kim Scipes
Black Subjugation in America
Sean Stinson
MOAB: More Obama and Bush
Miguel A. Cruz-Díaz
Minute Musings: On Why the United States Should Launch a Tomahawk Strike on Puerto Rico
Tom Clifford
The Return of “Mein Kampf” … in Japan
Todd Larsen
Concerned About Climate Change? Change Where You Bank!
Thomas Hon Wing Polin
Brexit: Britain’s Opening to China?
John Hutchison
Everything Old is New Again: a Brief Retrospectus on Korea and the Cold War
Michael Brenner
The Ghost in the Dream Machine
Yves Engler
The Military Occupation of Haiti
Christopher Brauchli
Guardians of Lies
James Preece
How Labour Can Win the Snap Elections
Cesar Chelala
Preventing Disabilities in the Elderly
Sam Gordon
From We Shall Overcome to Where Have all the Flowers Gone?
Charles Thomson
It’s Still Not Too Late to Deserve Your CBE, Chris Ofili
Louis Proyect
Documentaries That Punch
Charles R. Larson
Review: Vivek Shanbhag’s “Ghachar Ghochar”
David Yearsley
Raiding the Tomb of Lubitsch
FacebookTwitterGoogle+RedditEmail