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 exclusive interview with Venezuelanalysis, Salas analyzed the government’s economic policy since August 2018, describing how they morphed into an orthodox structural adjustment package. In part two of the interview, which follows, he turns to the current tendency towards dollarization, and the way out of the present crisis.
For our previous September 2018 interview with Professor Salas, click here.
For many years, the government’s economic policies seemed to be merely reactive, but now there appears to have been a shift toward more a active stance with the government actually having a strategy, although it is not public. Let’s talk about this shift in relation to the current process of dollarization.
Indeed, as you say, the government's policies went from reactive – an ambulance chaser – to being more proactive with the “monetary lobotomy” and other adjustments put in place over the past few months.
For many years, the government’s policy came ex post facto. Basically, they established new frameworks legalizing [extra-legal] activity. For example, the government’s response to widespread violations of price controls was to liberate prices, and to solve the parallel, illegal dollar market problem, the exchange rate was liberalized [to be equal to the parallel, black market rate]. They chose to turn legal infractions into the law.
More recently, we have seen that the government flexibilized the exchange market and, in doing so, it also loosened-up on monetary sovereignty. Why? When you flexibilize the exchange market, which comes with the free convertibility of currencies, you open the door so that other currencies, which aren’t the Bolivar, will begin to circulate more freely in the national economy. (By the way, in constitutional terms, the Bolivar is declared to be the “one and only currency” that can circulate in Venezuela).
Other currencies first began to circulate in the tourist sector, where the government legalized payment with foreign currencies, and later with the cryptocurrencies, with the Petro taking the lead.
At first, the Petro was presented as a cryptocurrency for international transactions, but later President Maduro began to talk about budgets in Petros, payments in Petros, savings in Petros, etc. So really what happened is that the Petro opened the door for other cryptocurrencies. The cryptocurrencies, in turn, opened the door to normalizing the circulation of other currencies.
At around the same time, in mid-2018, the National Constituent Assembly eliminated the Illicit Exchange Law. Later in the year, the Supreme Court emitted [two different] sentences legalizing payments for services and labor contracts in US dollars. Additionally, on December 28, the SENIAT [Venezuelan tax agency] emitted a resolution that allows to pay taxes in dollars and other foreign currencies.
Here we can see a coordinated institutional change in policy, affecting the National Constituent Assembly, Venezuela’s Supreme Court, and the state’s tax office.
It’s very important to point out that – in addition to allowing other currencies to circulate in the economy – the government has been simultaneously restricting the circulation of Bolivars through its new monetary policy. All this in an economy where the Bolivar is more and more depreciated every day!
If you take, as a starting point, the value of the Bolivar Soberano on August 20, 2018 [the day that the Economic Recovery Plan was announced] and you compare it to the Bolivar Soberano on April 12 of this year, you can see that the devaluation has been about 99.5%! This is a variation in terms of real value. (In nominal terms, the devaluation is about 5000%.)
We are facing a strange situation in which, due to the monetarist policy that the government has recently adopted in the effort to reduce inflation, there are far fewer Bolivars than needed circulating in the economy, but on top of that, those Bolivars are now worth far less.
To put this in numbers, when you take the total economic liquidity in Bolivars, from bills and coins to all the money in banks, etc., and you divide that by the official DICOM [state-run foreign currency marker] exchange rate, then the monetary mass comes to 1.3 billion dollars. In other words, if the government wanted to exchange all the circulating Bolivars to USD, all it would have to have would be 1.3 billion dollars. (I make this calculation based on reports issued by the BCV on April 5, which was the last report issued.) On the other hand, if we consider only the Bolivar bills and coins that circulate in our economy, that yields somewhere between 60 and 70 million dollars.
All this means that if the government were to come out today and announce that it was going to formally dollarize the economy (which I don’t think will happen), all it would need would be 1.3 billion USD to do the currency shift. That represents just 11% of the country’s reserves, which are already seriously depleted.
If you add to this that Venezuela, given the massive migration triggered by the current crisis, is one of the main countries receiving family remittances in the region, that will give you a general panorama that shows how polarized things are getting.
Conservative estimates say that last year some two billion dollars entered the country as remittances in 2018. Now, it must be taken into account that, even though that may be a good estimate of what was sent, not all of it arrived in the country as greenbacks; often there is banking triangulation, and in the exchange process some dollars stay in accounts abroad. So a super-conservative estimate would be that half of that initial two billion arrived to Venezuela. If you add to that the fact that in many businesses you can now pay with international credit cards, we can then safely assume that in our economy there are more US dollars than Bolivars circulating. (And that is if we are only talking about US dollars. To that one should add Euro, cryptocurrencies, etc.)
So I would say that we are not in a process of dollarization in the strict sense of the word. We are in a process of de‐Bolivarization. The Bolivar, due to policies and spontaneous phenomena, is being expelled out of the economy. Obviously this could rapidly open the path to full dollarization, or it could open to a period similar to the one in Zimbabwe where there was a sort of monetary chaos, with a multiplicity of hard currencies and cryptocurrencies circulating in the economy. A consequence [of that chaos] is that it is impossible for the Zimbabwean government to apply economic policies.
In a word, we are in a process of de‐Bolivarization that can take us to dollarization after the current economic chaos, or we could sink more deeply into chaos.
Now, what is paradoxical about this situation? The fact is that the government’s economic policy is contributing to dollarization, even if that’s not the aim. In other words, if dollarization hasn’t advanced more, that is because the sanctions, especially the financial ones, prevent more dollars from coming into the economy.
We have a situation in which, on the one hand, the government's economic policy (most likely unintentionally) pushes our economy towards dollarization while US sanctions put a break on it. Interestingly, however, Larry Kudlow, a White House economy assessor, said recently that in a context where Maduro wasn’t president, there is a plan to inject dollars into the Venezuelan economy through smartphones, in a general plan to dollarize the economy.
The issue here, however, is that the conditions for dollarization are being created, and they are in part generated by the government’s own economic policy!
What economic policy should the government implement given the current situation?
One of the most troubling things about the current situation is that the government seems to have no unified criteria regarding the objectives of its economic policy. On top of that, whatever objectives there are, are very vague. A concept such as “prosperity” is not a clear objective, it’s more like a desire. In an economic plan, prosperity cannot be the aim. A plan must define aims clearly, through strategies and policies.
The first thing that the government should do now is to clarify objectives. Once the objectives are there, then comes a process of prioritizing, organizing and, planning.
I’m telling you this for the following reason: Venezuela has a lot of potential, but anybody who knows something about planning knows that when you have limited economic resources immediately available, you must direct them towards the areas where they can yield a better performance.
To give you an example, I think that developing tourism has potential in Venezuela, but for that to happen, large investments in infrastructure are required.
From my point of view, a prejudice about the rentier character of Venezuela’s economy took root here, and it’s highly problematic. Being a rentier country is bad, some will say, or it is sinful, so Venezuela has to overcome this stain by becoming a productive country.
Of course, I don't believe that Venezuela should continue to depend exclusively on oil. However, the problem is not that we receive resources that come from oil sales, but rather that we depend exclusively on those sales. If we have oil revenues, that is obviously not a problem in itself; it is not a sin.
In the current situation, if this is a country that has enormous oil reserves, a country that has been exploiting oil for more than one hundred years, a country with the “know-how,” a country that has secured markets… Then, it’s quite obvious that, in productive terms, all efforts should focus on recovering oil production. Further, we should keep in mind that oil generates hard currency immediately, which is what is needed to boost other sectors of the economy.
In November 2018, we at VA translated a 15 y Ultimo report that stated that there was a crisis situation in Venezuela’s electrical system, and that any economic recovery plan had to prioritize fixing that problem.
That’s true. Last year we released a report stating that economic recovery in Venezuela will depend on rapidly addressing the problems in the National Electrical System. We did so well before the sabotage of the Guri [hydroelectric dam where over 70% of Venezuela’s electricity is generated]. We said that electricity production had to be stabilized [many regions of the country have been undergoing widespread blackouts for years now] and increased, if the country is to recover from the current crisis. This is a proven fact: to increase the GDP of a country by one percentage point, that requires an increase in electrical consumption.
We have been calling attention to the dire situation of the electrical system for more than half a year now. However, we began investigating the issue even earlier: ever since the government started to focus on the cryptocurrency solution [December 2017], which came with much talk about currency mining farms, etc. It seemed pretty absurd to us that the government would be encouraging cryptocurrency mining – which comes with an enormous use of electricity – in a context where the electric system was showing clear signs of wear and tear. In fact, outside of Caracas, blackouts have been a problem for years now.
In a presidential address last year, in which Maduro was talking about regional development, there was a blackout right in the middle of the broadcast. We then published a report that we had been working on, bringing attention to the problem with the National Electrical System. In essence what we pointed out was that with current electrical capacity, development is not possible, because it would tax the system so much that it would end up collapsing (or else widespread electrical rationing would have to be applied).
With the attack in March of this year, this problem has become even bigger!
After examining the National Electrical System, we came to the conclusion that the problem isn't an issue of investment. Enormous investments were done around 2010. The problem isn't that there isn't a plan. In 2014 there was a plan developed. The root of the problem is management of the system and its resources.
[Because of the attacks] there is now infrastructure damage that must be repaired, and that will require investment. So given the circumstances, instead of renovating sidewalks in Caracas, what should really be done is recover the electrical system. To repeat: the renovation is necessary not only to keep life going, but also because it is an economic project that has the potential to increase other economic activities.
Resuming your ideas, then, you propose that the recovery plan should focus on fixing the oil industry and electric system.
Yes. That could open the way for development in other areas. We are talking about taking seriously the activity that will allow us to move forward in other sectors of our economy.
You have to provide a clear orientation to the economic policy, and you have to make a plan with the resources you have. That’s the problem of the Fifteen Motors Plan [a 2016 plan to recover the Venezuelan economy that had fifteen areas, from agro to banking to oil to tourism]. The government’s economic policy was so disperse then that it had no coherence and direction.
So we must anchor our economy to something, and it stands to reason that oil and electricity are that thing. It doesn’t matter if we like it or not, it’s frankly our only option. Also, it makes no sense that we go around saying that we have the biggest oil reserves in the world, if we are incapable of exploiting them. Oil must be the spinal column that is used to get us out of the current crisis.