The economic situation in Venezuela

Kindly translated by Anne-Marie de Grazia.

The economic situation in Venezuela has been since several weeks characterized by a series of provocations emanating from the opposition forces attempting to challenge in the streets the results of the various 2013 elections. However, these are also abetted by a deterioration of the economic situation, noticeable since the beginning of autumn 2012. Having been invited by the government of Venezuela, I did a survey mission of the economic situation by the beginning of November 2013. At the end ofwhich, I wrote the following note for the government. The authorities of Venezuela have given me authorization to declassify it today. I remind my readers that these lines are mine and by no means engage the government of Venezuela, which I want to thank for its trust and for the vast scope of the documentation which I received.

Jacques SAPIR

 

The situation of the economy of Venezuela in the autumn of 2013

 

Venezuela is presently confronting a major economic crisis, in a situation in which the bourgeoisie has not given up its goal of overthrowing the Bolivarian power. A stabilization of the economic situation is required, but it will not suffice to resolve the problems which have arisen. We must therefore take into consideration here a sequence of measures.

To immediate stabilization, which can be attained through administrative measures, adds itself the necessity of a stabilization more durably rooted in economic logic. But such an economic stabilization makes no sense by itself alone. Stabilization make sense alone if it allows the implementing of a development model corresponding to the long term goals of the Bolivarian Revolution. The following must therefore be read within the logic of a sequence of measures, going from the short to the long term.

  1. The government of Venezuela is presently facing an economic destabilization which is politically exploited by the opposition, which is using non-democratic methods in order to worsen the economic situation. In this difficult situation, President Nicolas Maduro has taken the necessary measures in order to face up to these attempts at destabilization. The measures taken or announced will be efficient for a period of 1 to 3 months. Yet they will later lose their efficiency and will bring about perverse effects which will go on amplifying. The macroeconomic destabilization actually dates back to autumn 2012. It is this destabilization which has provided the context for the non-democratic manoeuvrings of the opposition. It is this context which much be addressed if one wants to durably deprive the opposition from its means of action.
  1. The heart of the problem stems from the increasing gap now existing between the  official exchange rate (or “administrative”) level, and the so-called « on the street » exchange rate. This gap, which remained relatively small over a long period, started to get wider since 2010. This widening has become truly explosive since autumn 2012. In such a situation, with a gap between both exchange rates now attaining 9/1, economic activities find themselves deeply and durably warped. The speculation by private agents on the exchange rates affects all sectors of activity and is becoming a major source of enrichment for a small minority. The fact that economic activities are reorienting themselves around the difference between these two exchange rates is an additional factor in the broadening of this gap, for it translates into an increase in the amount of bolivars feeding the street exchange rate. All this results in a profound weakening of the Venezuelan people’s trust in their currency, with economic, but also political and psychological consequences, which are potentially dramatic.
  1. The causes of the opening of such a gap between the two exchange rates can be identified. They are of two orders. Structurally, the credit policy, imposed by the crisis and necessary to the development of the country, has been the cause of a first sideslip, which was perceptible as early as 2010. The inefficiency of some investments then came to aggravate the problem. Yet, in the short term, it is indeed the financing of PDVSA by the Central Bank which is the cause of the massive destabilization which we have been witnessing since autumn 2012. It must be added that this financing was necessary in consideration of a situation in which PDVSA had to sell the foreign currencies which it derived from its receipts at the official exchange rate, while it saw itself compelled to pay its suppliers, which billed their services and supplies at the rate of the « street ». To this must be added the psychologically induced behavior  of the population, left anxious and helpless by the illness and death of President Chavez and seeking to accumulate consumer goods as a means of preserving its savings. The very existence of these two exchange rates is both cause and symptom of the destabilization of the economy. 

Chart 1

Evolution of internal credit and the monetary base

 

Base Monetaria

Crédito interno

2009

16,7%

51,4%

2010

26,1%

82,4%

2011

40,4%

14,1%

2012

55,3%

55,7%

2014

54,2%

63,9%

Source : Central Bank of Venezuela

 

  1. The problem therefore concentrates itself on the policy adopted by the government in order to control the exchange rate. We must presently acknowledge  the increasing inefficiency of administrative methods and move on to a policy in which the exchange rate will be regulated by indirect means. It is necessary therefore  to organize, as early as the beginning of 2014, an exchange « market » that must be a single and on which ALL the agents, enterprises as well as private persons (through the intermediary of the banks) will be able to buy and sell bolivars and foreign currencies. The exchange rate will, of course, be regulated by the government and not abandoned to the free forces of the market (and potentially, of speculation), and this by the actions of the Central Bank. The latter will be able to weigh down on the foreign currency offer by buying or selling foreign currencies (thus making the amount of its foreign currency reserves fluctuate), but also to weigh down upon demand, by forcing operators to intervene by means of an account at the Central Bank, and establishing for this account a variable interest rate and compulsory reserves, which will render the purchase of foreign currencies more or less expensive. Let’s point out here that it is possible to advantage one sector (for instance, imports of food stuffs, or of spare parts for industry and agriculture) by fixing different levels of rates and of compulsory reserves according to the activity sector of the enterprises. Yet it is not desirable to multiply preferential treatments if one is intent on keeping this policy of exchange rates in control. The single rate will necessarily be much lower than the present so-called « street » rate, but it will be higher than the « official » rate. It will put an end to the frauds and to the various speculations on the double exchange rate which we are witnessing at present, which undermine the political stability of the society, while skewing the nature of economic activities; and it will put an end both to the penuries and to the smuggling now going on because of the double exchange rate.
  1. In such a context, it is important to give compensation to the most fragile households and those whose needs cannot be covered by their income. The single exchange rate will entail a rise in prices in relation to the theoretical level at which the latter are fixed according to the « official » exchange rate. It will be necessary to put into place a supplement to income, the size of which will be progressively decreasing depending on the real income, for the benefit of the more modest households.  The principle of a subsidies to persons, instead of to products, is a system allowing for greater social justice and which is akin to a negative tax for the benefit of those who most need it.
  1. In order to be efficient, this system implies the reorganization of existing organizations, the reinforcement of the powers of the customs office, and an important control over the banking system. that existing institutions be reorganized and that the powers of customs officers be reinforced, and considerable control established over the banking system.  It is important that import and export transactions be controlled in order to make sure that there is no fraud as to the reality of these transactions, or to their date. So that, for instance, an importer should be able to buy the foreign currencies which he needs only during the 24 or 48 hours preceding the operation for which he needs them. Similarly, an exporter should be compelled to repatriate his foreign currencies within 24 hours of his payment. It is for this reason that the role of the customs office is particularly
  2. important for the stability of the system. But it is also necessary that the banks which will hold the accounts of the enterprises (current accounts) and which will grant credits (together with the Central Bank) in view of the purchase of foreign currencies be put under public control in order to insure the most efficient transparency of banking mechanisms. More generally, the transparency of the operations of the customs office as well as those of banks must be ameliorated in order for public control to be really efficient.
  1. This  unifying of the exchange rate is in accordance with the goals clearly and justly affirmed  by President Nicolas Maduro to reinforce the value of the bolivar. This is an important point, for which one can only salute the clear-sightedness of the President. Indeed, a weakening of the currency, such as it is occurring through the double exchange rate, is bad economically, politically and socially. Economically, such a weakening provokes a rejection of accumulation and investment, to the advantage of short-term operations and of consumption. Politically, increased uncertainty linked to the uncertainty brought by the weakening of the currency begets unstable collective preferences and makes the country swing over into the realm of emotions, to the detriment of more reasoned choices. Socially, it is clear that the weakening of the currency has different consequences according to the levels of society. The working classes are the most affected by it. Which is why unifying the exchange rates must be conceived of as a measure of social justice, of political stabilization and of economic efficiency, materializing in the necessary reinforcement of the bolivar.
  1. The economic destabilization is also the result of a situation in which agents have but few incentives to saving. Which has obvious consequences on the situation of an excess of liquidity such as the one we know at present. It is urgent to conceive of systems inciting the population to save, in particular the mechanisms of home-loan savings plans which could allow to sterilize in the short term part of the liquidities which are in the hands of the population. Still, this means putting into question the principle of free (or quasi-free) lodging which seems presently to be dominating government policy in matters of construction. Should one not move in this direction, the only solution would consist in paying very high interests on savings, resulting in very high costs for the State. A system of rents pro-rated to the salary (10% to 15% of the salary, according to the amount of the latter) is a must, with part of the rent payable in advance through savings accumulated over a period of three to five years and opening up for a household the right to benefit of a lodging. We see here coming up the problem of things being “for free.”
  1. Beyond the unifying of exchange rates, the problem arises of the reform of the Venezuelan tax system and of the system of subsidies. Both problems are tightly linked. The present system of subsidies being in reality a system of negative tax. But this system is based on the fact of certain goods being available for free, or quasi-for- free, in which injustices are numerous. In the case when the consumption of a good or a service has no, or only very little, effect on others, it is better to subsidize the consumer than the product. On the contrary, in the case when consumption has important effects onto others (as in the case of health or education), the free character of the good or of the service is fully justified. One will be reminded in this regard of the Marxist definition of socialism as « to each according to his work,» as it implies no bias in favor of things being for free. It is important therefore to make a distinction between what must be for free (or quasi-for-free) and what must be paid at its price (at minimum, its cost of production), even if it means that some consumers must then be subsidized. It is important also to take on squarely the tax system. Fiscal pressure is much reduced. This means that there is a lot of distribution and little redistribution. However redistribution is necessary if one wants the development of an economy turned towards the future. We must stress here that the share of the tax levy in Russia (whose economy presents some similitudes with the economy of Venezuela) amounts to  around  22% to 25% of GDP, whereas it is less than 13% in Venezuela. We can see that there exists a margin to play on, and that fiscal pressure can be progressively increased, in order to finance redistribution fluxes.
  1. The combination of unifying the exchange rates, and therewith reinforcing the bolivar, of putting in place systems inciting to savings, and an important reform of the system of taxes and of subsidies will enable one to create a context allowing the development of the economy. The latter will have to be the result from a combination of private and public initiatives. It is necessary to reconsider the policies of agricultural development, while improving its efficiency. Besides, taking account of the relatively high level of salaries in relation to its neighbours (a level which is due to quasi full employment but also to the exchange rate) it is necessary to develope activities with (relatively) high added value. Such a policy is implying in particular to strongly support innovation. In turn, this would make mandatory a reform of higher and secondary learning, advancing scientific and technical teaching, and the development of specialized training of technicians and engineers.

Back to the fundamentals, the government must tackle these reforms as early as the beginning of 2014. It must announce the following contnuation of the goals and targets of the Bolivarian Revolution but woulds indicating a change in methods. The « habilitating law » which has been voted gives the President an ideal isntrument to carry through to impose these reforms.

 


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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