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Venezuela: Maduro and the Market

Historian and veteran analyst Steve Ellner argues that President Nicolas Maduro's economic strategy represents an effort to take the middle road between those demanding radical expropriations irrespective of market reality and those calling for currency devaluation,  all as part of a bid to win further breathing room for renewed revolutionary advances  


It’s a point of honour for the Venezuelan government that despite the sharp plunge in oil prices and acute shortages of goods, President Nicolás Maduro has ruled out austerity measures. In a recent TV interview conducted by former vice president José Vicente Rangel, Central Bank President Nelson Merentes explained why, when he asked: ‘Do you remember what happened on 27 February 1989?’ On that date massive nationwide disturbances broke out after the government of Carlos Andrés Pérez announced sharp price hikes and negotiations with the IMF, setting the stage for the 1992 military uprising led by Hugo Chávez. The memory of 27 February and the decision of the formerly left-leaning Pérez to come to terms with powerful economic groups as a way out of pressing economic difficulties undoubtedly weigh on Maduro’s response to the current situation. 

Since assuming the presidency following Hugo Chávez’s death in March 2013, Maduro has faced intense economic and political problems. In the first place, he inherited a highly depreciated bolivar, the local currency, which began to lose value in late 2012, when Chávez was undoubtedly suffering intense pain from the cancer that killed him but when immediate government action was required. Any attempt by Maduro to devaluate the official exchange rate once he assumed the presidency would have run the risk of setting off an inflationary spiral. 

Additionally, throughout Maduro’s two years as president, opposition forces have engaged in numerous disruptive and sometimes violent protests with dozens of fatalities, including ten security force officers. The perpetrators have been abetted both by an international media that minimises the gravity of their actions, and the US government, which has imposed sanctions on Venezuelan government officials for alleged violation of human rights. In March, President Obama issued an executive order that condemned Venezuelan human rights abuse and declared the nation ‘an extraordinary threat’ to US ‘national security,’ a move that legally paves the way for economic sanctions, as was the case with countries such as Iran and Syria.

Taking the middle ground

In an economic policy announcement by the government on 10 February, Maduro took a middle ground between regulated prices that are completely out of sync with the market, or even production costs, and prices pegged to market conditions. On the one hand, in recognition of economic reality, the government legalised and regulated the open market for the purchase of foreign currency, transactions that had previously constituted a black market. On the other hand, in a deviation from market economics, Maduro retained the exchange rate at 6.3 bolivars to the dollar for the import of basic commodities. This rate was 27 times less than that of the open market. 

The ever-widening disparity between the official and unofficial exchange rates over the past two and a half years has generated acute problems of contraband, hoarding and price speculation. The black market also undoubtedly provides fertile ground for money laundering. The government sets artificially low prices not only on foreign currencies, but also basic commodities, a practice that contributes to the problem of contraband and a black market for scarce goods. The most blatant example of artificial prices is petrol, which is the cheapest in the world. The policy of subsidised prices undermines the viability of state companies that are forced to sell below cost. In contrast, private firms are sometimes able to get around price regulation by altering the content of products in order to market them as non-regulated. 

The recent legalisation of the foreign currency open market is designed to check speculation. The main service that quoted the price of the dollar on the black market was the vocally anti-Chavista online ‘Dollar Today’ operating out of Miami, thus indicating that the bolívar’s rapid depreciation may have been at least partly politically motivated. A second motive behind the new measure is the promotion of exports by allowing enterprises to repatriate profits legally at the open market rate. 

Contraband and hoarding

The government has also sought to avoid extremes in its enforcement of legislation prohibiting hoarding, contraband and price speculation. On the one hand, through the Just Price Superintendence (SUNDDE), it has imposed fines, confiscated merchandise and occupied hundreds of commercial establishments, including large ones. In recent months it took over eight warehouses of Herrera C.A., exclusive distributors of the products of Kellogg’s, Nestle, General Mills, Procter and Gamble and Pfizer, and detained leading executives of the oligopolistic pharmacy Farmatodo. 

Large companies such as Herrera C.A. that engage in hoarding have more to lose than smaller ones, and thus political motives most likely enter into play. Their hoarding practices and probable complicity in the black market and contraband lend credibility to the claim that powerful groups are engaged in an ‘economic war’ against the government. 

On the other hand, the government has accepted the insistence of the nation’s chamber of commerce, Fedecamaras, that it should proceed according to established legal channels. Consequently it has ruled out a fast-track procedure and refrained from publicising the judicial proceedings against accused businesspeople. 

Maduro has insisted that political conditions are not suitable for the implementation of drastic economic measures, which an intransigent and aggressive opposition could exploit. In addition, he told José Vicente Rangel that the issue of petrol prices ‘is always a delicate one with regard to the sensibilities of Venezuelans’. He added that given the existence of ‘mafia speculators in Venezuela, a decision like this may exacerbate the problem’ and thus the government needs to wait for the right moment to act. 

Leftist hardliners and dogmatists ignore the importance of the market and thus write off the black market as the creation of speculators that could be eliminated by efficient government policing. At the opposite extreme, some pro-Chavista economists call for pegging the official exchange rate close to the open market rate. The plan, while logical in the abstract, ignores the ensuing detrimental social effects. The elimination of artificially low prices (which are made possible by an overvalued currency for the import of basic products) in order to stimulate production and commerce would disproportionately hit the poorest sectors of the population. 

Political imperative

Although the Chavistas have managed to win elections held during the past two and a half years, solving the problem of scarcities, or at least getting it under control, is an urgent political imperative. According to the respected polling firm Hinterlaces, the nation’s pressing economic problems and specifically shortages are now the principle source of concern for eight out of ten Venezuelans. The pro-opposition polling company Datanálisis report that 51 per cent of government supporters consider the situation in the country to be ‘negative’. Hinterlaces president Oscar Schemel maintains that the main challenge to the Chavistas does not come from the opposition, which lacks a viable programme for the nation, but rather undecided voters and the likelihood of a ‘punishment vote’ in future elections.

Elections for the National Assembly are slated for the end of the year. Just as opposition standard-bearer Henrique Capriles called the previous 2013 municipal elections a ‘plebiscite,’ opposition leaders now announce that a triumph in the upcoming elections will pave the way for regime change and that the appalling scarcity of goods will guarantee such an outcome. This strategy is ironic: political scientists who questioned Chávez’s democratic credentials – such as the Mexican anti-leftist, Jorge Castañeda – accused him of establishing what they pejoratively call a ‘plebiscitary democracy’, in which all attention is focused on the nation’s head of state, rather than those running for office.

The government has denounced the radical opposition’s plans to parlay agitation on the long and slow-moving lines outside stores into violent disruptions leading to regime change. Early this year, federal district head Ernesto Villegas warned Chavistas of provocations, saying: ‘When you are in a line and see an infiltrator calling on people to loot, respond with the symbol of peace.’ The danger of disruptions of this type comes from an opposition that for more than a decade has kept open the possibility of the non-democratic road to power. In February Maduro presented alleged evidence of a coup plot for which the mayor of the greater Caracas area, Antonio Ledezma, is currently in jail awaiting trial.

Uncharted waters

Venezuela finds itself in uncharted waters with a sharp political polarisation without parallel among governments committed to democratic socialism that have lasted as long as 16 years – the length of time the Chavistas have been in power. The challenges generated by shortages and the knotty issue of the role of the market hold implications for all governments committed to socialism. The Soviet Union, for instance, was plagued by corruption stemming from an extensive black market, a problem that had much to do with its demise, while Cuba is currently grappling with similar predicaments.

Maduro’s recent measures were a step in the right direction in that he recognised that market conditions must enter into the equation, even while the government cannot renounce its strong interventionist role, which includes the regulation of exchange rates and prices of basic commodities. At the same time he announced social initiatives and made clear that the decline in oil prices cannot be a prelude for austerity measures that affect the least privileged most.

Nevertheless, until the government reduces the colossal disparity between official prices for goods and foreign currency and their value on the open market, contraband and corruption will be virtually inevitable, a problem exacerbated by unscrupulous and politically motivated powerful members of the private sector. Subsidised prices for both currency and merchandise are perfectly legitimate correctives to neoliberalism, but the Chavista government needs to avoid extremes by staking out a middle ground between production costs and market prices. 

Radical left-wing measures, such as expropriations of large companies, may have to wait until the government has dealt heavy blows to an enemy that refuses to recognise its legitimacy. Maduro’s strategy is to gain breathing space in the context of extensive discontent and well-organised insurgent tactics. He has thus pushed for a ‘peace dialogue’ to achieve stability, which the political opposition has rejected. 

Maduro also prioritises political objectives out of fear of further destabilisation if the opposition were to gain control of the National Assembly in the elections later this year. In light of these political and social considerations a middle ground between radical devaluation, on the one hand, and highly subsidised prices for basic commodities and currency, on the other, represents the most viable formula for the Chavistas at this critical juncture.