CEPR’s Mark Weisbrot explains that the new measures can help alleviate some of Venezuela’s economic problems, but do not address the heart of the problem, which is an inflation-depreciation spiral that has given the country an extraordinarily high inflation rate. Trump’s recent illegal sanctions will make the situation even more difficult.
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore. On Thursday, Venezuela’s president, Nicolas Maduro, presented a series of eight new economic laws to the National Constituent Assembly, or the ANC. Following those announcements, he also announced that he will renegotiate Venezuela’s state debt. The eight laws he presented to the ANC are intended to rescue the country from its deep economic crisis, which it has been in for the past three years.
The laws are designed to modify the price and exchange control system, and to strengthen the role of local production and distribution committees, and move Venezuela towards an oil pricing system that does not include the dollar, among many other things. The announcement, of course, comes on the heel of new economic sanctions from the Trump administration. Two weeks ago, Trump imposed strong financial sanctions against Venezuela, which will make it practically impossible for Venezuela to restructure its debt, or to take on new debt in the U.S. financial system.
Joining us now to discuss Venezuela’s economic problems is Mark Weisbrot. Mark recently published an article in The Nation Magazine, and it is titled “Trump’s Sanctions Make Economic Recovery in Venezuela Nearly Impossible.” Mark is the co-director of the Center for Economic Policy Research. His most recent book is Failed: What Experts Got Wrong About the Global Economy. Thanks again for joining us, Mark.
MARK WEISBROT: Thank you, Sharmini.
SHARMINI PERIES: Mark, so let’s start with President Maduro’s economic policy announcements, which took place on Thursday night. From what you can tell so far, do you think they will work towards recovering Venezuela’s economy here?
MARK WEISBROT: Well, I think probably not. I think there’s some good things there. The try to increase the food distribution, which they have increased recently, I think is a good thing, but they do have these fundamental imbalances in the economy that have not been resolved, and have worsened pretty much continuously over the last five years.
So if you go back five years, about this time in 2012, the inflation rate was 18%, and the exchange rate was, a dollar went for on the black market, 13 bolivares fuertes, the domestic currency. So, now you have 600% inflation over the last year, and $1 costs about 20,000 bolivares fuertes. That is, been a pretty much continuous process, and that’s because of this inflation-depreciation spiral, which you know, I and others have been writing about for the last five years, which is basically you have this shortage of dollars, and that drives up the black market price of a dollar, and that increases inflation. Then the inflation feeds back into the black market exchange rate, because more people want to hold dollars as a store of value, and that goes back into the price of imports as the black market dollar rises, and you get more inflation.
That just keeps going, and that’s what’s been going on. If you don’t break that spiral, then you still have a worsening situation, and you can’t recover. The economy can’t recover either, because the only way that the government’s kept this from exploding into complete hyper-inflation, where the currency basically loses all of its value, is by cutting government spending in real terms, and that of course prolongs the depression, which has been going on for more than three-and-a-half years.
SHARMINI PERIES: Now, in The Nation article, you argued that President Trump’s financial sanctions on Venezuela will make the country’s economic crisis worse. So in what way do you think that will take place, exactly?
MARK WEISBROT: Yeah, that’s right, and that is the really terrible thing about these sanctions, which are also, incidentally, illegal under both U.S. and international law, and the problem is that even the kind of reforms that I was just mentioning are much more difficult, now, because the sanctions … For example, you would expect, normally, if they did float the exchange rate, it would hit a bottom, and then money would come back because everything’s cheap, and people no longer believe that the currency is going to keep falling against the dollar. That’s what happened, for example, in Argentina in 2001, when they floated their fixed overvalued currency, and it crashed enormously, but it stabilized, and then it went back up a little actually, and billions of dollars came back into the country, because everybody knew that the exchange rate was going to be stable.
Now, something like that could happen in Venezuela, but the Trump sanctions make it much more difficult, because they’re preventing the government from borrowing, internationally, and that creates enormous uncertainty, and a threat of default, which would make everything much worse. If they defaulted on their debt, then there would be international seizures of their oil and assets overseas, and-
SHARMINI PERIES: Which is probably what the Trump administration ultimately wants. How much debt is Venezuela dealing with here?
MARK WEISBROT: Well, in terms of payment, they have $4 billion to pay this year, interest and principal, and I think about half of it’s principal, but this is an example of when they’re already cut off from this new borrowing, but otherwise they could roll over the principal. That’s what countries normally do, but the Trump administration has cut them off from anything, so that means they have to pay off debt that comes due, which governments don’t do, normally. They roll it over. They just borrow to pay off the principal when it comes due.
So that puts an enormous squeeze on them, and what the Trump sanctions have done is prevent them from getting out of that situation. So it locks in the situation that they’re in now, even if they make the reforms that they would need to make to stabilize both the currency inflation, that is not necessarily even reducing, but just stabilize inflation, and stabilize the economy.
And they could return to economic growth, normally, with the economic reforms that they need, because they’ve already cut their imports. They’ve cut imports by 75% since 2012, which is a staggering portion, so they’ve done the hard part. That’s the hardest part of the adjustment that they had to go through to adjust to the oil prices, but the Trump financial embargo really prevents them from recovering, and I think, of course, that’s what it’s designed to do. The Trump administration has made no secret of their desire to get rid of this government. Rex Tillerson, the Secretary of State, said that. Trump has said similar things, even threatened-
SHARMINI PERIES: But at that same time, I mean depending on who’s speaking, I understand that Rick Waddell, the White House’s deputy national security advisor, said that the administration does not want a regime change, at least that’s the official line, only a change in the behavior of the Venezuela government. How credible do you think this is in light of everything else they’re doing to undermine the Venezuela economy?
MARK WEISBROT: And threaten with military action. I mean, how much more drastic can you get? Look, you had 16 years of George W. Bush and Obama, and they both were … I mean, their administrations were almost continuously trying to get rid of the government as well, so this is nothing different in that sense, just the military threat, and of course, this sanctions and financial embargo, which Obama didn’t do, but he did implement the sanctions in March of 2015, and those sanctions hurt much more than the media acknowledged too, because they were a sign of what was coming, and they also, the Obama administration did try to, and successfully prevented financial institutions like JPMorgan Chase and Bank of America from just doing, for example, a gold swap, which would have allowed Venezuela to borrow more recently against their $7 or $8 billion of gold reserve.
So yeah, they’ve always been trying to get rid of this government. It’s just this, they feel they’re closer right now, because the government’s much more vulnerable, as you know. I mean, this is again, it’s a four year, three-and-a-half year depression. So yeah, that’s what they’re trying to do.
I think that the government will have to get some outside financing, some outside help. You know, China has loaned them in the past years, about $60 billion. Most of that has been paid back. The rest is being paid off with oil shipments, so that would be one place where they could go, but I think they would probably have to, or it would certainly help them, to present a credible economic plan that shows that they are going to stabilize the economy. That would be one possible solution.
SHARMINI PERIES: Mark, these eight laws that was announced by Maduro in the ANC, do you think any of these are going to assist the economy out of its crisis?
MARK WEISBROT: I don’t see anything that stabilizes it, because again, there’s nothing that really addresses the inflation-depreciation spiral, or even some of the other severe problems with the price controls. I mean, they do set up new mechanisms to try and control prices, but I don’t necessarily think those will work better than the old ones.
You know, this is not Cuba. It’s not the old Soviet Union. It’s really, they don’t have the police power of anybody that has these kinds of controls. Even in South Korea in the 1980s, if you were caught with a $20 bill in your pocket, you could go to jail. You can trade currency anywhere in Venezuela. There’s no penalties. They don’t have a planned economy. They don’t have any of the administrative capacity that you would need to maintain a system.
That’s why I’m recommending that they let the currency float. It’s not that I think that that’s always the best thing, although you don’t see really … very few economies in this hemisphere have anything like that kind of system, and no economist in the world, that I can think of, would recommend the exchange rate system that they have.
Now, that’s not to say that the vast majority of economists can’t be wrong. You know, they are, but this is really almost anyone across the political spectrum, and you can see it again, they’ve had it for five years, and you can see exactly how it’s destroyed the economy, so I think that those are the kind of reforms they’re going to need, and they’re probably going to need some outside help too.
SHARMINI PERIES: All right, Mark, I thank you so much for joining us today, and stay tuned. Mark is on a field trip to Barcelona next week, and we’re looking forward to having you from Barcelona, Mark.
MARK WEISBROT: Okay. Thank you, Sharmini. Thanks for inviting me.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research in Washington, D.C. He received his Ph.D. in economics from the University of Michigan. He is author of the book Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015), co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He writes a column on economic and policy issues that is distributed to over 550 newspapers by the Tribune Content Agency. His opinion pieces have appeared in The Guardian, New York Times, the Washington Post, the Los Angeles Times and most major U.S. newspapers, as well as in Brazil’s largest newspaper, Folha de Sao Paulo. He appears regularly on national and local television and radio programs. He is also president of Just Foreign Policy.