A few weeks ago asked the (somewhat) rhetorical question “Who’s sicker, Chavez or the Chavez economy”. Not to toot my own horn, but my prediction that Chavez would succumb to cancer before a collapse of the Venezuelan economy was proven correct on Tuesday, when Nicolas Maduro made the announcement heard around the world.
Since one patient is now dead and others are buying ink by the barrel to write about it, I will try to focus on the other patient: the Venezuelan economy that Chavez left behind. So here it goes, three (not so simple) steps for fixing the Venezuelan economy:
1. Devalue the currency…further
The Venezuelan Bolivar (VEF) was devalued by 32 percent in February. This moved the currency from 4.3 VEF per U.S. dollar to 6.3. As I wrote then, this was a step in the right direction, but far from sufficient. On the black market – the only place where most Venezuelans can access hard currency – the greenback trades for well over 20 bolivars. While this price might be unreasonably high, reflecting a shortage of dollars in the market, it is clear that the Venezuelan currency remains vastly overvalued at the official rate.
The consequence is that very few transactions take place at this rate. If the government allowed citizens to exchange freely at 6.3 VEF/USD in order to buy foreign goods (not to mention to ship their savings abroad), the Venezuelan central bank would run out of lechuga verde (greenbacks) tomorrow. Hence, the government severely restricts access to foreign currency, limiting availability to only what it sees as essential imports (although being well connected might help a business man access dollars as well).
The result: empty shelves as scarcity of basic goods has reached record heights.
At the same time the overvalued currency destroys the competitiveness of Venezuelan exports. Nobody outside of the country is willing to give a dollar for only 6.3 bolivars worth of Venezuelan goods, which makes exporting virtually impossible for the private sector and consequently the only thing Venezuela exports is crude (through the government’s oil monopolist PDVSA).
Brining the currency broadly in line with its market value would allow Venezuelan non-oil exports to once again compete and it would reduce imports in a more efficient manner. A correctly valued Bolivar Fuerte would also help to reduce corruption, as it would eliminate the need for the government to grant access to foreign currency arbitrarily.
There is of course a downside: Inflation, already pushing towards 30 percent on an annual basis can be expected to rise further at least in the short term as imports become more expensive in terms of bolivars. Moving to a more market based or even floating currency would require monetary and fiscal discipline, which brings me to my second point.
2. Reduce wasteful government spending
Reducing wasteful government spending is like promoting motherhood and apple pie. However, in Venezuela (where apple pie is scarce) waste abounds. Government spending increased by 46 percent in the last year (an election year) and the fiscal deficit is among the highest in the world. The spending spree is clearly part of the inflation problem and cutting back would help get it under control.
Of course not all spending is wasteful and many commentators have rightly pointed out that the Chavez government has redirected expenditure to benefit the poor. Nevertheless, there seems to be ample room for efficiency gains as other countries (Peru, Brazil) have achieved similar rates of poverty reduction while increasing government spending at a much slower pace. Arguably, spending in the Bolivarian Republic has been prioritized not by its welfare effect but by how much it advances Chávez’s notion of 21st century socialism. The public payroll, a powerful way to attach people’s livelihoods to the future of Chavismo has doubled under Chávez to 2.4 million citizens.
The country also spends US$15 billion on arms, mostly from Russia. Cutting back on guns and being more efficient in spreading the butter might go a long way to fix public finances.
I do not proscribe austerity for Venezuela. Given Venezuela’s hydrocarbon treasure, it has the ability to keep government spending on a high level for quite some time. But the Venezuelan economy is on path that is not sustainable as it does no generate increases in productive capacity or efficiency. Which bring me to my third point.
3. Increase investment in the oil industry
Everyone knows that oil is the lifeblood of the Venezuelan economy and the lifeline of Chavismo. Yet the policies currently in place are slowly strangling the goose that is laying the golden eggs. Venezuela’s oil production has been stagnant at best in recent years even though the abundance of reserves and the high oil price make a strong case for expansion. When it comes to petroleum products, the country has become increasingly reliant on imports, as poorly maintained refineries are crumbing and accident-prone. The major problem is that PDVSA has been abused as a cash cow by the government. Not only are its profits siphoned off to the Venezuelan public budged, funding Chávez’s missions, the hard currency has also been used as piggy bank for off-budget projects. PDVSA has not been able to retain enough profits to invest in maintenance, let alone expansion.
A fiscally friendly way for the government to get more funds into PDVSA would be to allow the company to charge consumers something closer to a market price for petroleum products. Gasoline in Venezuela is the cheapest in the world at about nine cents a gallon. Raising prices would create a cash flow to be used for investment and would also help reduce excess domestic consumption of gasoline, which in turn would reduce imports and strengthen the current account.
Why not much of this will happen
While all these steps would seem to be common sense from an economic point of view, they will be a tough sell politically. The Chavista movement is in large part sustained by populist measures such as wasteful spending, bloated government employment and subsidized fuel. Reversing this course, especially with another election on the horizon, and with potential fissures emerging in the Chavista camp, could well be political suicide. Similarly, the private sector – for obvious reasons – has not been a friend to the “Bolivarian Revolution” so we shouldn’t expect a new Chavista president to do any favors for the bourgeois enemies of 21st century socialism.
So my final diagnosis goes as follows: This patient, not unlike Mr. Chavez, will remain sick to the bitter end. How this will play out however is not so clear. In Mr. Chavez’ case the outcome was more predictable. But economies don’t die. Observing the fate of the Chavista economy will be, at least in this blogger’s view, much more interesting than watching the demise of el Presidente. Unlike Chávez’s illness, there is a cure for the Venezuelan economy. Will the nation accept the painful medicine?
Unless you are overly anxious to join Mr. Chávez, I wouldn’t hold my breath.
Cornelius Fleischhaker is currently a Research Analyst at the International Monetary Fund. The opinions expressed in the post are those of the author only and should not be attributed to the International Monetary Fund