How Economic Policy Could Determine the Political Results of the Venezuelan Elections

The opposition in Venezuela has stepped up its campaign to remove President Maduro from office, having announced — in accordance with its numerous divisions — that it would pursue a three-pronged strategy: a constitutional amendment to shorten the president’s term of office; a recall referendum, as permitted under the constitution; and “protests.” The first tactic was struck down by Venezuela’s Supreme Court, as it would be in any country — you can’t change the legal term of a president who was already elected for a certain number of years. For the recall referendum, the process of gathering signatures is under way.

The government, meanwhile, clearly needs to fix the economy if it is to regain popularity. The opposition, which has a large majority in the national legislature, has made it clear that it will not co-operate in any such efforts. On the contrary, it has acted to block the government from spending money.

But there is quite a bit that the executive branch can do to fix the economy even without the cooperation of the legislature. For some years now, I have emphasized that the exchange rate system is the most important problem, and this is something that can be fixed rather quickly. The country currently has two official exchange rates: one at 10 bolivaresfuertes (bs) per dollar (called DIPRO), and another which is currently at about 370bs per dollar (DICOM). The latter rate is supposed to be a floating exchange rate, but this is not practical since the vast majority of the government’s dollars are given away at the official rate of 10, and so there is very little to supply the DICOM market. Then there is the black market rate, which is currently over 1,100bs per dollar.

This system of a fixed, overvalued exchange rate with a huge black market premium has trapped the economy in an “inflation-depreciation” spiral. As the price of the black market dollar rises, importers who do not have access to dollars at the subsidized rate have to pay more, thus driving up inflation. As inflation rises, more people want to put their money in dollars, which pushes the black market price of the dollar up further, and the spiral continues.

To exit from this trap, the government needs to switch to a floating exchange rate. President Chávez actually did this in February 2002, allowing the currency to float without currency controls. Despite enormous political unrest — this was just two months before the U.S.-supported military coup — the Central Bank’s international reserves actually rose from that point, until the opposition oil strike cut off oil revenue later that year. Reserves had been falling considerably before the float, which indicates that perhaps this capital flight was at least partly due to fears of devaluation.

Chávez’s decision to float the currency was in some ways part of a switch from indirectly subsidizing imports, through the exchange rate, to a system of direct subsidies to the target population: using government revenues for the misiones, to provide health care, education, and subsidized food. This is especially important in a country where much of the business class is hostile to the government: it does not make sense to give importers a huge subsidy and be confident that it will end up being used for its intended purpose. And with a black market rate now more than 100 times the official rate, the incentives for overinvoicing, cheating, corruption, smuggling, and capital flight are so enormous that they are effectively impossible to curtail.

The economy has already gone through a massive adjustmentto the situation of lower oil prices. Imports for the first two months of this year are down an estimated 40 percent from four years ago. Government spending, adjusted for inflation, is down by nearly half from four years ago.

World oil prices have already begun to rebound significantly, from a low of $28 in January to $48 today. The U.S. Energy Information Administration projects world oil prices at$79 by 2020. And about a quarter of Venezuela’s oil revenues currently go to pay debt service to China; we can expect that the Chinese government will grant some relief for these payments, at least until world oil prices go back up.Also, Bank of America Merrill Lynch estimates that the government has about $52 billion in foreign assets that it can sell or securitize now, which is more than enough to cushion any transition to a functioning exchange rate system.

But perhaps more importantly, a country that has trillions of dollars in assets that the world wants — about 300 billion barrels of oil reserves, plus hundreds of billions of dollars in gold — should never suffer from balance of payments problems no matter what happens to the price of oil. The Venezuelan government could raise cash from selling oil that would not be pumped out until years from now. In the long run, Venezuela is going to have to diversify its economy away from oil production in any case.It does not make sense to suffer through years of recession and balance of payments problems when oil prices slump, if the government can sell assets. And any economic strategy for diversification is also going to need money for infrastructure, as the current electricity crisis — which of course has multiple causes including a record drought — illustrates.

Not to mention the political instability that the current economic problems inevitably invite. As in Brazil, where the opposition is currently taking advantage of a recession to launch an illegitimate impeachment, “regime change” has always beenclose to the hearts of an important sector — sometimes the majority — of Venezuela’s opposition. That is the third prong of the current opposition strategy, euphemistically called “protests,” which in 2002, 2013, and 2014 turned into violent attempts to topple the government. And in each case, Washington was firmly in support of these efforts. In 2013, the opposition refused to accept the results of a presidential election — results that were not in doubt — and took to the streets with violent protests. The U.S. government backed them by refusing — although it stood alone in the hemisphere and in the world — to recognize the results of the election. The Obama administration’s policy of supporting regime change in Venezuela has continued to this day, with renewed economic sanctions and various public relations efforts aimed at undermining the government.

The Venezuelan government faces many challenges, but none so important or urgent as economic recovery.

This article originally ran on The Hill.

More articles by:

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).

Weekend Edition
March 23, 2018
Friday - Sunday
Roberto J. González
The Mind-Benders: How to Harvest Facebook Data, Brainwash Voters, and Swing Elections
Paul Street
Deplorables II: The Dismal Dems in Stormy Times
Nick Pemberton
The Ghost of Hillary
Andrew Levine
Light at the End of the Tunnel?
Paul de Rooij
Amnesty International: Trumpeting for War… Again
Jeffrey St. Clair
Roaming Charges: Coming in Hot
Chuck Gerhart
Sessions Exploits a Flaw to Pursue Execution of Meth Addicts
Robert Fantina
Distractions, Thought Control and Palestine
Hiroyuki Hamada
The Eyes of “Others” for Us All
Robert Hunziker
Is the EPA Hazardous to Your Health?
Stephanie Savell
15 Years After the Iraq Invasion, What Are the Costs?
Aidan O'Brien
Europe is Pregnant 
John Eskow
How Do We Live With All of This Rage?
Matthew Stevenson
Why Vietnam Still Matters: Was Khe Sanh a Win or a Loss?
Dan Corjescu
The Man Who Should Be Dead
Howard Lisnoff
The Bone Spur in Chief
Brian Cloughley
Hitler and the Poisoning of the British Public
Brett Wilkins
Trump Touts $12.5B Saudi Arms Sale as US Support for Yemen War Literally Fuels Atrocities
Barbara Nimri Aziz
Iraqi Landscapes: the Path of Martyrs
Brian Saady
The War On Drugs Is Far Deadlier Than Most People Realize
Stephen Cooper
Battling the Death Penalty With James Baldwin
CJ Hopkins
Then They Came for the Globalists
Philip Doe
In Colorado, See How They Run After the Fracking Dollars
Wilfred Burchett
Vietnam Will Win: Armed Propaganda
Binoy Kampmark
John Brennan’s Trump Problem
Nate Terani
Donald Trump’s America: Already Hell Enough for This Muslim-American
Steve Early
From Jackson to Richmond: Radical Mayors Leave Their Mark
Jill Richardson
To Believe in Science, You Have to Know How It’s Done
Ralph Nader
Ten Million Americans Could Bring H.R. 676 into Reality Land—Relief for Anxiety, Dread and Fear
Sam Pizzigati
Billionaires Won’t Save the World, Just Look at Elon Musk
Sergio Avila
Don’t Make the Border a Wasteland
Daryan Rezazad
Denial of Climate Change is Not the Problem
Ron Jacobs
Flashing for the Refugees on the Unarmed Road of Flight
Missy Comley Beattie
The Age of Absurdities and Atrocities
George Wuerthner
Isle Royale: Manage for Wilderness Not Wolves
George Payne
Pompeo Should Call the Dogs Off of WikiLeaks
Russell Mokhiber
Study Finds Single Payer Viable in 2018 Elections
Franklin Lamb
Despite Claims, Israel-Hezbollah War is Unlikely
Montana Wilderness Association Dishonors Its Past
Elizabeth “Liz” Hawkins, RN
Nurses Are Calling #TimesUp on Domestic Abuse
Paul Buhle
A Caribbean Giant Passes: Wilson Harris, RIP
Mel Gurtov
A Blank Check for Repression? A Saudi Leader Visits Washington
Seth Sandronsky
Hoop schemes: Sacramento’s corporate bid for an NBA All-Star Game
Louis Proyect
The French Malaise, Now and Then
David Yearsley
Bach and the Erotics of Spring