Heterodox and Orthodox Economics in Venezuela: A Conversation with Luis Salas (Part I)

In this interview, VA talks with a young researcher and writer about the Bolivarian Government’s economic program, critiquing what he calls a policy of “monetary lobotomy” rolled out in early 2019.

By Cira Pascual Marquina – Venezuelanalysis.com
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Luis Salas is the founder of 15 y Ultimo and a professor of political economy at the Universidad Bolivariana de Venezuela in Caracas. (Venezuelanalysis)
Luis Salas is the founder of 15 y Ultimo and a professor of political economy at the Universidad Bolivariana de Venezuela in Caracas. (Venezuelanalysis)

Former Venezuelan Vice President for Productive Economy Luis Salas is part of the 15 y Ultimo collective. A committed researcher and prolific writer, Salas teaches political economy at the Bolivarian University in Caracas.

In part one of this two‐part interview with Venezuelanalysis, Salas analyzes the economic measures that the government has implemented since August 2018, describing how they morphed into an orthodox adjustment package.

Part two of the interview, to come out on May 3, will address the current tendency towards dollarization of the Venezuelan economy and the way out of the economic crisis.

For our previous September 2018 interview with Professor Salas, click here.

You are part of 15 y Ultimo, a website and research collective that investigates the Venezuelan situation from a left-wing Chavista perspective. To a great degree, the focus of the site is on economic issues, although you also address other issues related to quotidian life.

The Venezuelan economy is a rather complex subject due to the multiplicity of contradictory agents and actors, the government’s restricted control of information, and the mainstream media’s persistent misrepresentation of Venezuela’s problems. In light of this complexity, how do you go about analyzing the country’s economic life? What is your methodology?

In 15 y Ultimo, we decided a while ago that to analyze the situation in Venezuela, especially with regards to economic policy, several particularities had to be taken into account.

Traditionally, an economic policy is examined with one eye on its objectives and another on its results. In Venezuela’s case, the relationship between objectives and results is often very tenuous – it is true that this happens elsewhere, but it is more exaggerated here. And the failure to meet the objectives can have its roots in both internal and external phenomena.

So I believe that the traditional method for analysis is not viable for us, at least not in our circumstances.

The question is, then, what is the most objective method to analyze our economy and the policies implemented by the Bolivarian Government? We go about our analysis not so much by looking at the stated objectives, but by examining the instruments that are put in place, how they work as a whole, how they interact with each other (or counteract each other), etc.

In other words, economic policies have goals and instruments. Here we propose to examine the relationship between the instrument and the goal, because it may be stated that the objective is to finish off hyperinflation, or fight speculation in the foreign exchange market, but objectives and results are mediated by the instruments. So we have opted for analyzing the instruments.

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President Nicolas Maduro announces the Economic Recovery Plan. (Correo del Orinoco)
President Nicolas Maduro announces the Economic Recovery Plan. (Correo del Orinoco)

On August 2018, the government launched, with great fanfare, the Economic Recovery Plan, which involved anchoring of the Bolivar to the Petro and incentives to foreign investment. That plan didn't produce the expected results. What was the relationship between instruments and objectives there?

The Economic Recovery Plan announced by President Maduro had some clear objectives: prevent dollarization of the economy, put an end to hyperinflation, and all that came with the larger objective of initiating an economic recovery after a period of some five years during which there was a severe contraction of the Venezuelan economy.

But the truth is that, when you analyze the August proposal – and I said this in an interview last year with Tatuy TV – one can see that there are at least two different plans within it, and the plans are frankly contradictory. They undo each other.

One part of the plan had to do with monetary reconversion [eliminating five zeros from the nominal value of the currency], anchoring the Bolivar to the Petro [with the Petro’s value tied to the value of one barrel of petroleum]. Although the plan was poorly defined, it reminded us of the Real Plan [in 1994 Brazil emitted a second currency, the Real, to stabilize its economy and curtail inflation]. Thus, it seemed as if the Petro would operate as the Real operated in Brazil, although not in exactly the same way, since in Brazil the Real ended up replacing the Cruzeiro. But, in any case, there were elements that made us think that there was an attempt at constructing a heterodox economic policy

Another important component of the Economic Recovery Plan, which wasn't orthodox either, was the concerted prices policy [prices of basic products would be set by negotiation between the capitalist class and the government].

At the same time, however, policies were announced that were more conventional and orthodox from an economic standpoint. This is the other aspect of the plan. First, they announced a strict fiscal deficit reduction policy, which is a highly problematic orthodox (or liberal) measure. So as the Petro project was being put in place, a new and unorthodox policy, we saw the application of instruments to reduce fiscal deficit being applied and also, as you mentioned in your question, an orthodox foreign investment stimulus plan.

How do you evaluate the announcements made by President Nicolas Maduro last November?

Some one hundred days after the Economic Recovery Plan was made public, Nicolas Maduro gave a televised address informing that, to meet the [original] objectives, some “correcting factors” would have to be set in place. At that point, inflation was even higher than in August, which meant that there had been a progressive devaluation of the Bolivar and the policy of agreed prices had had no impact in what things really cost in the supermarkets.

As I mentioned before, the Economic Recovery Plan’s key feature, in its first phase, was the Bolivar‐Petro anchoring; it was an attempt to stabilize the Bolivar and curb hyperinflation. What began to happen in late November is that the Petro – which was initially conceived as a cryptocurrency – was operating on two levels: on the one hand, it was a cryptocurrency in the discourse, and, on the other hand, it became a unit of account (meaning that part of the nation’s budget would be calculated in Petros, as would tax units, etc).

The Petro had by now two different public roles, and it would soon have two different values! Furthermore, the November announcement broke the Bolivar‐Petro anchoring, since the value of the minimum wage, which was to be [as per the August announcements] half the value of the Petro, dropped in relation to the Petro.

The Petro didn’t operate as a cryptocurrency, but rather became a savings mechanism. It was similar to a bond. It resembled the bonds emitted by countries when the goal is to reduce monetary liquidity.

What happened is that the Petro, which had already become some sort of “crypto-asset,” was now attached to the DICOM [state-run foreign currency auction]. This meant that with any variation in the DICOM (at that time the auctions were held Monday, Wednesday, and Friday) the value of the Petro changed: as the dollar went up in relation to the Bolivar, the Petro also went up.

Whatever the DICOM dollar exchange rate was, it was multiplied by sixty [the approximate value of the oil barrel in USD]. That is how the value of the Petro was calculated, and thus the Bolivar‐Petro anchoring – the key element in the initial Economic Recovery Plan (and the policy that was to stabilize the value of the Bolivar) – was overridden.

All this meant that there was a continuous and orchestrated devaluation of the Bolívar, which happened until the end of the year. In the last auction of 2018, on December 28, the gap between the official DICOM marker and the parallel market [the black market for trading foreign currencies] practically disappeared. In those days, everything seemed to be pointing to a unification of the exchange rates [via liberalization of the official exchange rates], but that didn’t happen. By the beginning of January, the parallel market began to climb once again. [On April 22, four days after this interview with Luis Salas, there was a new Bolivar devaluation to 5200 Bolivars per USD, meaning that the official exchange rate again approximated very closely the parallel market; a few days earlier the Bolivar was officially devalued from 3300 to 4000.]

At that point, Venezuela’s Central Bank [BCV] and, most likely, the Finance Ministry, accelerated the policies aimed at forcing a unification. What did they do? They restricted monetary liquidity dramatically, reduced the legal banking reserve, and froze salaries... but prices continued to rise... Then came January 28, which is when the exchange-rate shock therapy was implemented fullforce.

On the night of the 28th, some tweets from the BCV and a brief press release announced that there was going to be a shift to a new monetary anchor, and that the official exchange rate would be around 3300 Bolivars to a dollar [in early September, the official exchange rate was about 60 to a dollar]. Additionally, we were told that the BCV would implement the economic policies needed to maintain the exchange rate at about that level.

They implemented a monetary anchor, which should not be confused with an exchange anchor – an exchange anchor is what would have happened if the BCV had injected dollars into the economy to stabilize the exchange rate, but that didn’t happen. Instead of injecting dollars into the exchange system, what they did was a radical restriction of monetary liquidity in Bolivars. I call this a “monetary lobotomy.”

They did a kind of shock therapy in the foreign exchange market. In other words, the official exchange rate was brought very close to the parallel market, while there was a restriction on the emission of Bolivars.

The BCV stated that its aim was to stabilize the exchange rate, put a cap on hyperinflation, and recover purchasing power. This is a typical case of an economic trilemma. You can do the first two things but not the third at the same time, since you need to reduce purchasing power to reach the first two objectives. In this regard, there are almost no differences between what [former Venezuelan President Rafael] Caldera did in 1996 or what [Mauricio] Macri is doing in Argentina now with the “Doble Cero” plan, and the policies that the Bolivarian Government is implementing.

Immediately after the late January announcement, I said that these policies might stabilize the exchange rate for a while and could slow down inflation. However, this would no doubt come with enormous social costs.

And it happened... People’s purchasing power dropped even more. In a way that resembles Ricardo’s Iron Law [salaries tending to the minimum wage necessary to sustain life], people began to live at the level of bare subsistence. That, of course, went hand-in-hand with underconsumption. In other words, a drastic fall in consumption came about, which meant that the country’s economy contracted even further.

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GDP contraction of the Venezuelan economy. Data BCV, FMI, Cepal. (15 y Ultimo)
GDP contraction of the Venezuelan economy. Data BCV, FMI, Cepal. (15 y Ultimo)

You call this a process of “monetary lobotomy.” Can you explain what you mean by the term?

Sure. To curb hyperinflation, they decided to paralyze economic activity, bringing material existence to a bare minimum. That is why I call it a monetary lobotomy.

It’s like a psychiatric lobotomy, where a patient with schizophrenia is exposed to electrical shock: the most severe symptoms of the pathology won’t express themselves after the treatment, but the consequence is that the patient is left in a catatonic state. Here the “inflationary schizophrenia” was controlled briefly, but the tradeoff was that the economy was left in a catatonic state.

Now, this orthodox anti‐inflationary policy – applying monetarist policies – is problematic and questionable under any circumstances, since it necessarily raises poverty and produces economic contraction. However, in our case, it is much worse! First, the Venezuelan economy has been in an economic freefall for five years now. We are talking about a situation in which, prior to the application of these monetary measures, the economy had contracted 50% since 2012. Implementing these policies generated further contraction, which in turn led to much larger problems!

Furthermore, when we consider that these [monetarist] policies were applied to an economy faced with sanctions for more than a year now, then we can see how the policies would end up unintentionally reinforcing the purposeful smothering of our economy from outside. In other words, we are facing an internal smothering in addition to the external one!

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