Where is Venezuela’s Economy Headed?

Looking back at 2013

2013 was a difficult economic year for Venezuela. The currency control system was put under great pressure as the black market dollar spiraled to ten times the official value of 6.3 BsF = 1 USD, creating a series of distortions for the economy. Meanwhile shortages in several basic foodstuffs and others goods were created, and annual inflation hit 56.2%, a Bolivarian-era record. While the government compensated for this by increasing the minimum wage by 59% from May 2013 to January 2014, even pro-government figures concede that price increases managed to reduce consumer spending power over the previous year.

President Nicolas Maduro’s administration blamed the situation on an “economic war” it said was being waged against the country by business groups aligned with the conservative opposition. According to this thesis, such groups were involved in a coordinated attempt to exacerbate economic problems by speculating on Venezuela’s currency and hoarding or diverting production to create shortages and inflation.

Politicians and economists critical of the government instead claimed that government policies were responsible for the economic situation, alleging that a lack of foreign currency had been granted to private importers while price controls stifled production at home.

To overcome these problems the government took a series of measures, including a currency devaluation, introducing a new complementary exchange rate system, increasing food imports from neighbouring countries, stimulating national food production and cracking down on product hoarding and contraband. Then, in the final weeks of the year state officials embarked on a crackdown on price speculation, forcibly lowering the prices of imported electronics and other goods. In response to the situation the people backed the government, giving the United Socialist Party of Venezuela (PSUV) and its allies a strong victory in December’s municipal elections. It’s also worth noting that despite these economic problems both poverty and unemployment continued to decrease last year, in part due to the government’s sustained high level of social spending.

New measures, same vision

In his annual state of the nation address to the National Assembly on Wednesday, Nicolas Maduro made several economic announcements that outlined his government’s approach to the economy this year. In short, the government hopes to “stabilise” ongoing currency and pricing distortions to then move towards an industrialised “socialist productive model”.

“We understand perfectly well what that means and it’s going to be hard work for us to make the Venezuelan economy a sustainable force in the promotion of sources of work, in the diversification of our productive undertakings, in the contribution of added value to our goods, and in the socialisation of our means of production,” Maduro said in his speech.

He continued, “It’s about the construction of the economic power of Venezuela as an energy, agricultural and industrial power, from now into the future”.

This long term economic vision enunciated by Maduro does not differ significantly from the goal the Bolivarian government has pursued since Hugo Chavez was elected to power in 1998. The central idea is to stimulate domestic production to diversify and industrialise Venezuela’s economy. In the process this would reduce dependency on oil as the country’s primary source of export earnings and capital spending (95% of foreign currency earnings are from oil sales). While the government has significantly raised local food production over the previous decade and set up new industrial ventures with foreign governmental partners, the limited progress toward this goal was highlighted in a statistical review of Venezuela’s economy and society for Venezuelanaysis.com by Chris Carlson.

On Wednesday Maduro spelled out that for the government this new productive model must be mixed: guided by state regulation and investment, while also attracting national and international private investment. A collective citizen role in production is also envisaged through community organisations such as communes and cooperatives.

Maduro further made the desire for more foreign investment clear when he spoke of creating a “special plan of incentives” for investment in eleven core economic areas, although details of this plan have not yet been elaborated.

“We’re going to create an industrial plan. National public and private investment will come, foreign investment will come too but they must respect the law and constitution. If foreign investors want to invest in Venezuela, welcome, but respecting the law,” explained Vice President Jorge Arreaza on public television yesterday.

Underpinning this project is the government’s continued commitment to a strong public spending policy in the coming years, both in the social and infrastructural sectors.

Extending regulation

However Wednesday’s state of the nation speech also made clear that for such economic development to occur the government considers it necessary to “stabilise” the currency and pricing distortions currently being experienced. As the argument goes, it is hard to encourage production when it is more lucrative for companies to make a profit through currency speculation. To encourage the shift to a productive model, Maduro signalled his intention for the state to play a greater regulatory role in the economy.

One of the key announcements was that the new National Centre of Foreign Trade is to take over from the old currency exchange body CADIVI in administering foreign exchange transactions.

In order to prevent capital flight, protect currency reserves and protect spending from currency fluctuations, since 2003 the Venezuelan government has fixed the value of the bolivar to the dollar and implemented controls on the exchange of bolivars with foreign currencies.

Under the controls, the state allocates quotas of how many official-rate dollars businesses, importers and citizens can buy. If businesses and citizens want to access more foreign currency beyond these quotas then they resort to the informal “parallel” or black market where dollars are more expensive.

However the difference between the official and parallel rate can cause economic distortions because accessing official rate dollars and then selling them on the black market becomes a speculative and lucrative activity. In 2013 a perceived lack of dollars granted for imports and speculative black market currency activity caused the value of the black market dollar to increase to ten times the value of the official dollar, which in turn encouraged retailers to increase prices, even those who did not import their goods or those who imported them using the official rate dollar. It was this situation that led to the government’s price crackdowns on imported electronics goods at the end of last year.

Under the National Centre of Foreign Trade it’s hoped that the administration of currency exchange can be improved to reduce the numbers of businesses and citizens fraudulently requesting official rate dollars to then sell them on the black market. Further, the government argues that with the “rational” distribution of foreign currency in the economy and the use of complementary mechanisms like the SICAD currency auctions the value of the black market dollar can be reduced, which would also reduce pricing and other distortions in the economy. However this may be a tall order, as similar actions taken last year have failed to arrest the continued increase in the value of the dollar on the black market.

What the government has refused to do is devalue the bolivar as it did in February last year. Such a move would carry a significant political cost and it could be argued that the devaluation last year did not achieve all of its aims, nor did it prevent the black market dollar from increasing in value. However the government has ordered that some economic sectors apply for their dollars at the SICAD rate of around 11.36 bolivars to the dollar, and tourists can also now legally sell dollars at the higher-value rate too. Meanwhile essential imports like food and medicine remain on the 6.3 rate. As such, critics say the increasing use of the SICAD rate in currency transactions amounts to an “informal devaluation”.

Along with the improved administration of currency exchange, the second pillar of the state’s extended regulatory framework will be regulations on costs, prices and profits. While the maximum prices of some basic food and household goods are already regulated, President Maduro plans to pass a law soon regulating the maximum profit margin across the economy at 30%. With this measure the government hopes to protect consumers from price gouging originating from shortages and speculative currency activity.

Monitoring these regulations will be the new Superintendency of Fair Costs, Prices and Profits. It is a welcome reduction of bureaucracy to see that the two previous price control bodies with overlapping functions have now been collapsed into one agency. However the body’s important work will be overseen by Andreina Tarazon, who will have her time divided as she is also the Minister for Women and Gender Equality. Meanwhile the former president of price control agency Indepabis, Eduardo Saman, who was considered as taking a “no nonsense” approach to price speculators, has been apparently dismissed without explanation.

The other announcements made by Maduro in his speech were of a more administrative nature: merging the public banking and finance ministries, and re-appointing Nelson Merentes as head of the Central Bank, who is considered a “moderate” on fiscal and currency policy.

Reactions

Unsurprisingly, there were a range of reactions to Maduro’s announcements from across the political spectrum. Neftali Reyes, a regular contributor to alternative leftist website Aporrea.org, argued that regulation of prices and profits was necessary to avoid unjustified price speculation in the economy.

However the writer warned that the success of this regulation would depend on the effectiveness of the work of the new Superintendency, arguing, “The political base of the Bolivarian revolution in the coming months will depend on the efficiency of this organisation”.

The author also aired the worry among some activists on the left of the Bolivarian process that the government’s economic measures represent a possible move to “reformism”, or a pact with sectors of the opposition and national capital.

“After fourteen years of revolution it is imperative  not just that the [economic] measures benefit the people, but also that the course the Bolivarian revolution is going to take in the comings months is defined with force,” the article concluded.

Meanwhile Venezuelan conservative daily El Universal claimed that the government’s actions to stabilise the economy “are insufficient in the fiscal and inflationary context”. The article used the opinion of JP Morgan, Barclay’s Capital and Bank of America to argue that monetary devaluation and greater fiscal discipline (printing less money and lowering public spending) would be needed to resolve the country’s economic imbalances.

The right-wing opposition Democratic Unity Table coalition (MUD) also released a statement accusing Maduro of having omitted to explain how his government will reduce inflation, shortages and solve other problems the country faces.

While the MUD has not released a comprehensive economic plan for Venezuela in the possibility it would to get into power, some of the economic groups that support the coalition would like to see currency controls removed and “market forces” restored as the central dynamo of the economy. One of the motivations behind this would be to regain control over the income gained from oil sales, which currency controls maintain in the hands of the government to then be distributed to the rest of the population through social spending and official dollar allocations to citizens and businesses.

Conclusion

In many ways Maduro’s state of the nation address reaffirmed the government’s long term economic vision, one toward which only very limited progress has been made so far despite the great political and social changes achieved over the previous decade. That vision is to transform Venezuela’s capitalist economy, in which sectors of private capital only engage in speculative activity based on capturing money from oil sales, into a “socialist” model where state, private and collectively-owned enterprises play a productive role in an industrialised and diversified economy.

Whether Venezuela moves in that direction this year and beyond will depend on many factors, including the success of government policies to encourage investment in productive agricultural and industrial activities. Meanwhile, immediate challenges will be whether new regulatory policies can combat currency distortions and price speculation, and whether the sporadic shortages which still affect consumers and the economy can be eliminated. Certainly, following the strong electoral victory last 8 December and the opposition’s greater acceptance of the Maduro administration’s legitimacy, the government will hope it now has the space to solve persisting economic difficulties and to implement its wider economic agenda.