Chavismo Must Stop the Economic Bleeding

A special economic team convened by UNASUR, part of its effort to promote dialog between the Venezuelan opposition and Maduro’s government, has put together a detailed plan to lead Venezuela out of its worsening economic crisis. The key features of the plan are listed below:

– A unification and clean float of the currency that should be implemented immediately

– Gradual lifting of price controls over an 18 month period

– Gradual lifting of all energy subsidies (not just gasoline) over an 18 month period

– Implement direct government subsidies to consumers, preferably universal subsidies, through an electronic discount card.

– The indexing of all salaries to the monthly inflation rate for 18 months or until single digit inflation is achieved if that happens first.

– A thorough and transparent audit of government assets so that non-strategic assets can be sold to finance the plan but also so that options for external financing become available.

– The introduction of financial transaction and wealth taxes

Implementation of an employment program to help people whose informal work (for example standing in lines to buy then resell price-controlled products) is eliminated through this plan. It would cost about 1 percent of GDP and would be financed with the taxes proposed above.

The first three proposals eliminate indirect subsidies which make certain products (and U.S. dollars) cheap for those lucky enough to get them. UNASUR’s team advises that the government support people’s incomes directly instead. The first three proposals would be the most controversial to the Chavista base and to the Venezuelan left. The plan would be denounced by many as an IMF-style “paquetazo” as the IMF’s destructive policy recommendations have come to be known in Latin America. The left gained power throughout the region in the twenty first century primarily because of the devastation caused by governments that followed IMF orders during the 1980-2000 period. It is not hard to see the huge political risk of doing things that look like backsliding or betrayal, but this plan is not in any way a return to IMF imposed neoliberalism.

Over the past three years, the costs of Venezuela’s indirect subsidies have not only skyrocketed, they have also largely failed to protect the poor, especially after oil prices collapsed near the end of 2014, but even for about a year before oil prices plummeted. UNASUR’s economic team estimates that Venezuela’s indirect subsidies cost the government anywhere from 11 to 17 percent of GDP. To get a sense of how huge that is, consider that the United States presently spends about 3 percent of GDP on the Pentagon budget. The Venezuelan economy is being bled dry by massive indirect subsidies that do not work. UNASUR’s plan would stop the bleeding. It would replace outrageously costly and inefficient indirect subsidies with vastly more effective direct subsidies.

The UNASUR team does not address long term problems with Venezuela’s economy that have tended to confuse people about the immediate crisis it faces. Venezuela, like all developing countries, needs to diversify away from oil, and increase productivity generally in order to achieve the living standards of developed countries – at least key features of those living standards that should be strived for, like very low child mortality.

In the Chavista era, the government has only had control over its state oil company, its main source of export revenue and hard currency, since about 2003, four years after the late Hugo Chavez was first took office. It took South Korea, a country not regarded as an ideological threat to the imperial powers, about 40 years to achieve the living standards of a rich country. It took Cuba about forty years to achieve a lower child mortality rate than the United States – a rich country that is a notorious laggard by that measure.

No “solidarity economy” that seeks to develop local production is going to begin to offset the hemorrhaging of 11 to 17 percent of GDP. There are many factors that go into successful long term planning and development, but no country striving to develop in the long term can afford incredibly wasteful and destabilizing polices in the present – especially in the context of a balance of payments crisis and low oil prices. Admonishing the Venezuelan government about long term planning and diversification is like talking to person with a serious stab wound about diet and exercise. The priority must be to stop the bleeding.

Venezuela’s Vice President has recently made remarks indicating that he understands and supports the nature of the UNASUR plan. It has never been totally clear if the government has allowed things to get so far out of hand as a result of political fears or from lack of understanding. People who have years of experience among grassroots Chavistas do not report that pressure from the government’s base will make them implement UNASUR’s plan. The base, it appears, do not know about the plan and would be probably misled about it by many grassroots leaders who would see it as a betrayal of Chavismo. The government relies heavily on grassroots leaders during elections but that is no excuse for inaction. Moreover, as the UNASUR team points out, Venezuela has already made painful adjustments over the past few years through a huge reductions in imports. It could therefore very quickly deliver the benefits of implementing this plan which is the best way to convince people that is necessary.

All around the world, people must really struggle to get any semblance of economic literacy. This is not a problem unique to Venezuela or to the left in Venezuela. The global economy was tanked in 2009 by massive housing bubbles in rich countries that “experts” failed to warn people about. Governments and big financial interests then took advantage of public ignorance again to make working people pay for the disaster.

People who care about the success of progressive change in Venezuela – and in Latin America – must do all they can to ensure that huge self-inflicted problems are avoided. Progressive governments will face extreme hostility abroad and at home during the best of times. They can least afford to make such serious mistakes.