Currency Adjustment: Necessary, but is it Socialist?

There is little doubt, even among some opposition leaders (who normally oppose just about anything the government does), that the recent currency adjustment of the bolivar was economically necessary. It is a matter of basic math to realize that if inflation averaged 22% between 2005 and 2009 and each bolivar thereby lost about 72% of its purchasing power since the last currency adjustment, then maintaining the exchange rate at the same level during this entire period means imports become ever cheaper and Venezuelan-produced exports become ever more expensive in the rest of the world. As a result, unsubsidized domestic production was slowly being killed off and exports could not compete on international markets. The low exchange rate was also unnecessarily subsidizing innumerable imports for the middle and upper classes.

In other words, if Venezuela wants to diversify its economy and export other products besides oil, an adjustment of the currency’s exchange rate was absolutely necessary. The accompanying economic measures that create funds for subsidizing production will greatly help the import substitution effort.

The understandable fear now is that this adjustment will mean more inflation and thus less purchasing power, which in theory would go against the socialist principle of improving the population’s standard of living.

However, President Chavez is correct to point out that most prices in Venezuela have been adjusted to the bolivar’s declining value, even products that were imported at the official exchange rate. The price of imported goods, such as cars, electronics, liquor, etc., increased in step with inflation and the parallel exchange rate, and not with the official exchange rate. For most imported goods, adjusting the exchange rate only represents a lowering of profit margins—if importers do not adjust their prices accordingly—and not an unreasonable inflationary push, as the opposition argues.

To rein in inflation, the government perhaps should have temporarily frozen prices instead of issuing vague warnings to businesses that increased prices could face worker takeovers. Temporary price controls could have broken the inflationary spiral in Venezuela, while giving the new exchange rate a better chance to help drive domestic production.

Unfortunately, if the government spends all of the new bolivars that the new exchange rate implies (now that each oil dollar earns the government 4.3 bolivars instead of 2.15), the money supply would increase, which could bring about more inflation due to the increase in currency in circulation that doesn’t correspond to an increase in goods within the economy.

If the government wants to keep inflation down, it would have to resist the election-year temptation to spend all of its new income within the country. Instead, it probably ought not increase its bolivar expenditures significantly and should use the new dollar resources mainly for imports of goods that cannot be produced within Venezuela.

Keeping inflation down while trying to get the economy out of a recession is a notoriously difficult task. The government is stuck between a rock and a hard place, out of which it can only maneuver with the help of unorthodox measures. One such measure could be the previously mentioned temporary price controls, which bring their own danger of shortages.

Another—more economically democratic, and hence more socialist—measure would be to move away from the dilemma between state pricing and market pricing, towards prices that are negotiated cooperatively between consumers and producers, between communities and factories. Such a long-term project would represent a real move towards participatory or 21st century socialism.

Gregory Wilpert represents the Rosa Luxemburg Foundation to Venezuela and is a member of the VenezuelAnalysis.com collective.