In August 2018 the government of Nicolas Maduro unveiled a sweeping series of economic reforms under the title of the ‘Economic Recovery, Growth and Prosperity Plan’.
The reforms included the launch of the Sovereign Bolivar currency to replace the Strong Bolivar; a revaluation with five zeros knocked off the local money; the pegging of wages and the exchange rate to the Petro cryptocurrency; a series of fixed prices announced for goods of primary necessity, allegedly agreed upon with private sector leaders; a 3,464 percent wage hike; a 97 percent currency devaluation; and a series of tax reforms. The President also promised to close the fiscal deficit, end inorganic money emission and restructure government subsidies.
Since, a US-led economic blockade has intensified, including a January oil embargo, a series of financial sanctions in April, sanctions against the CLAP subsidised food program in July, and a near-general trade embargo, including the threat of secondary sanctions, in August this year.
In this editorial piece, economic collective 15 y Ultimo evaluate the performance of the recovery plan one year on and in the context of sanctions.
Evaluating the performance of the recovery plan one year after its launch is not an easy task, and several non-minor details should be considered when doing so.
The plan’s promoters and advocates quickly blamed the [US-led economic] blockade as the reason why things didn't go as planned, or at least as we expected. This makes sense, but it's also an easy tangent.
While this variable – which has become a constant – cannot be overlooked, the problem is that it is precisely the designers and executors of the August plan who seem to have forgotten about the blockade. In this sense, to say that the recovery plan did not work because of the blockade is equivalent to saying that a war strategy X did not work for a country Y because... there is a war.
Whatever the reasons why, the fact is that the recovery plan should have foreseen not only the permanence of the blockade, but also its deepening. If it didn't do so, or if it couldn't counteract its effects, then it's a plan that wasn't successful.
Moreover, it should be remembered that on more than one occasion government spokesmen assured that [the blockade] could no longer be used as an excuse, stating that "economic warfare will always exist as long as the Venezuelan people have the will to be sovereign and independent,” "we must focus on building our destiny” and "creating conditions for economic stability," and that "we cannot choose to win and die, we must overcome,” etc.
For example, in the communication minister’s press conference on August 18, 2018, the minister stated that the use of the Petro [cryptocurrency], to which the Sovereign Bolivar (BsS) was anchored, "meant the death of the parallel dollar and would face up to sanctions and blockade".
In fact, the president himself at a meeting of the fourth congress of the United Socialist Party (PSUV) on July 30 last year talked about the plan (which was yet to be revealed) and said this:
That imperialism assaults us? No more whining, you don't see me whining, and I don't name [imperialist heads] anymore, you don't see me whining in the face of imperialism. It's up to us to produce with [imperialist] aggression or without it."
What all this shows is that not only were [the advocates of the plan] well aware of the context of the blockade and economic warfare, but clearly the plan arose with the purpose of addressing it: it was a formal part of the proposal.
But in our view, and this is the second point, the blockade is not the only issue to consider when assessing the performance of the recovery plan. There are also a couple of other things to assess, which may be obvious, but that are not really so evident:
1) Are we still in a position to evaluate the plan?
2) What plan are we talking about exactly?
Let us explain:
With regard to the former, the point is that one year has gone by since the announcements, and given everything that has happened, and how things look for the future, reviewing and evaluating [the plan] becomes a necessity.
However, this may be a necessity for us, the ordinary people, but not for the government and those responsible for the plan. Actually, the few times that concrete goals were discussed (including specific deadlines and not just statements of intent or wishes), the results were expected to be seen in the short term of two years or maybe five, which is why technically we should not be expecting anything good from the plan yet.
In his address at the PSUV congress quoted above, the president said:
I estimate about two years to achieve a high level of stability, in which we can see the first symptoms of a new, economic prosperity without abandoning social protection and security, in housing, in education, in health, in bonds, in pensions, in the Homes of the Nation.
We now have the most advanced, comprehensive program we have ever had, at least for 5 years, for the country's economic recovery, for the growth of reproductive forces and for the path of recovery and growth to achieve a situation of economic prosperity.
While it is also true that in that same speech the president spoke of achieving "early victories (…) for the good or the bad" as of August 20, especially in terms of prices. There is no doubt that this is an important aspect to take into account when evaluating.
In a strict sense, given this, it is still very early [to evaluate the plan]. We could perhaps complain about the lack of early victories, or say that they were ephemeral:Purchasing power only recovered for a couple of weeks and rather as a result of the reconversion. When the corresponding price adjustments came into effect, we paid the new higher prices.
But the problems surrounding this conclusion are more than obvious: do we Venezuelans have two or five years to wait? What happens in the meantime? On the other hand, waiting two or five years may entail:
a) Our condition progressively improve until we are in good shape?
b) Taking one step forward and two back?
c) Going through a scorched desert of deprivation and hardship to then – and almost as in a biblical way – reach growth and prosperity within the timeframe proposed?
None of these considerations, though, take into account the more momentous question: what type of society and economy may we see at the end of the recovery plan?
Which brings us to the second point: which plan are we talking about exactly?
More than all of the above – the blockade, the timeframes – we believe that the main difficulty in assessing the recovery plan is that everything indicates that we are not exactly talking about one plan but at least two. And depending on which one is chosen, we can talk about good or bad results, failure or success, etc.
This is something that we have been commenting on since the very beginning of the August reforms, regarding which we made several observations. The most constant observation was that the majority of the reforms – if not all – were trapped in a contradictory logic where not only the means and mechanisms put in place tend to aggravate the problems posed as objectives to be solved, but between the objectives themselves there were profound contradictions. At best they could be achieved separately but not together, and indeed, in more than one case, the failure of one was necessary for another to be achieved.
Thus, in our view, in August two plans were launched as we said: a first that we could call "heterodox-progressive," which dominated the scene and included the anchoring of the Sovereign Bolivar to the Petro, and from it to the barrel of oil, the recovery of purchasing power, agreed prices, etc. Secondly, a monetarist orthodox version, which involved combating hyperinflation by reducing the fiscal deficit and cutting currency emission.
The reality is that the first lasted exactly three months and eight days, since on the occasion of the famous "correction" of November 28, 2018 this plan was abandoned, or relegated to the background, to give an open playing field to the orthodox monetarist version.
By then, the law of illicit exchange had been eliminated. Regarding this, we said that, among other things, the legal status was ambiguous enough not to clarify whether the decriminalization of foreign exchange covered only the formal foreign exchange market or also involved ordinary business transactions. What was visible at the time was the unpegging of the Sovereign Bolivar to the Petro, as well as the formalization of this cryptocurrency in two versions: one as a unit of account on which certain values, fundamentally wages, were anchored. The other was as a speculative crypto-asset that would vary as DICOM increased (in fact, the exchange rate was obtained from dividing the value of the crypto-asset Petro between 60 and vice versa, without any reason given). Once again the chasing of the parallel exchange rate by the official exchange rate began, which continues even today and despite the definitive exchange controls liberalisation that occurred between April and May 2019.
In this regard, it should be added that it takes a huge effort of analytical condescension to say, as some do, that it was a mistake to leave wages anchored to the Petro as a unit of account, while everything else anchored itself to firstly the DICOM rate and later the free-floating rate determined by private banks. No such unforced errors should occur at this level of economic policy: it was obviously a deliberate decision with the purpose of compressing wages to contract consumption, to slow prices. Likewise, it seems that it was intended to reduce the fiscal deficit by both decreasing currency emission and the public budget in real terms and reducing State payrolls. The destruction of wages brought a similar devastation of formal employment and associated labour rights, and also impacted on the beaten down private sector, which further struggled to pay for labour.
The immediate achievement of this ultra-liberal and ultra-monetarist orthodox policy was certainly the slowdown of hyperinflation, which went from monthly variations above 100 percent in late 2018 and early 2019 to variations below 50 percent since then, even taking into account the reports from the National Assembly in contempt of court for the months of May, June and July (Central Bank figures were updated until April).
The problem is that this is a pyrrhic victory, not because it is minor but because it is a fragile achievement secured at the cost of contracting purchasing power and economic activity in general (technically we are no longer in hyperinflation, but the conditions for its return are waiting for a trigger, and in any case, at current pay levels, monthly price increases of around 30 percent are no small thing). This has brought with it levels of pauperization, as well as destroying wages, formal employment and the Sovereign Bolivar itself, which in a year of existence has not lost all of its value for the sole reason that it is technically impossible to be devalued below zero.
As of August 20, 2019, the official opening exchange rate was 14,483.54 BsS per US$. If we take into account the exchange rate at which the recovery plan started one year ago (60 BsS per USD), we are talking about a variation of 24,039.23 percent, which equates to a depreciation of the Venezuelan currency against the American one of 99.58 percent.
As far as wages are concerned, the minimum wage decreed at the start of the plan (1,800 BsS) amounted to US$30 per month (11 times below the regional average) and allowed for the purchase of 20 kilos of chicken at the fixed price of the time. Today the minimum wage of 40,000 BsS is equivalent to US $2.70 per month (122 times below the regional average) and with it, depending on the place, you can buy one or two kilos of chicken at best.
With regard to the reconversion, in less than ten months an extension of the monetary cone was needed, in which the highest denomination banknote was changed from 500 BsS to 50,000 BsS, an extension that through practice eliminated the initial cone of August 20. The 500 and 100 notes are still circulating because the 10,000 and 20,000 notes cannot be commonly found and the 1,000 and 2,000 notes were not put into circulation.
If this were not enough, the contractive policy that pulverized the value of the Bolivar in record time is also stopping it from being circulated. The highest denomination banknote in August 2018 (500 BsS) currently equals 0.03 cents of a dollar, while the highest denomination today (50,000 BsS) is worth US $3.40. But in fact, if you divide the entire number of Bolivars that currently circulate in our economy according to the latest Central Bank figures, it turns out that all that gigantic mass of currency equals to US $761,672,100. This is less than half the fortune declared by [food and beverage mogul and head of the Polar Corporation] Lorenzo Mendoza, and roughly 45 percent of it would be enough to buy all the Bolivars from the Central Bank and complete the dollarisation.
About 50 percent of commercial transactions in general (and between 70 and 90 percent in specific areas, such as vehicle parts, purchase and sale of vehicles, real estate, white line goods, etc.) are preferably carried out in dollars, but also in currencies or means of payment other than the Bolivar. Bartering for informal trade with the retailer and the provision of certain services that can be paid for with food is also common. All the while the trading influence of the Petro cryptocurrency, designed to bypass the blockade, is only to pay for clothes in [department store chain] Traki.
Regarding monetary and exchange rate issues, the numbers are so absurd that if the currency had not undergone the reconversion [in August 2018], the current exchange rate would be 1.4 billion BsF per US$.
The figures which reflect the economic contraction are as scary as they are absurd. Already having contracted around 60 percent in five and a half years of GDP free fall, by the end of this year we can expect to have an economy equivalent to 30 percent of that of 2012-2013.
Last but not least, it should be borne in mind that policies to reduce the fiscal deficit and the contraction of consumption, even under normal conditions, are always terribly unpopular and their effects harmful to the population. We have the recent case of Argentina with [Mauricio] Macri, whose economic policy has been exactly that from the beginning, and we see in what it is ending up. Similarly, there’s [former Venezuelan President Rafael] Caldera's policy in 1996, the Venezuela Agenda, against which Hugo Chávez raised the Bolivarian Alternative in a completely different direction. However, bringing in such a policy in a context of already inertial economic contraction of five years of free-fall is just shy of suicide.
Due to official silence in this area, the current fiscal deficit is not known, but by the middle of last year it was around 20 percent of the GDP. The fact is that to close such a deficit not only do you have to reduce public spending nominally and/or in real terms, but also accompany this by a substantial increase in the state's revenue, usually through taxes, or in our case through an increase in oil revenues. If not, the conditions for a fiscal hecatomb are created, which appears as the corollary of economic contraction.
At least since Keynes, it is known that in the context of contraction, measures to reduce fiscal deficit, contracting spending causes just the opposite effect, for the simple reason that – especially in economies like ours with such a significant weight of the public sector – lower public spending leads to lower consumption, lower consumption to lower sales, and lower sales to lower tax revenue.
If to this we add the well-known and not properly arrested problems of tax avoidance and evasion, and also the long lists of tax exemptions approved as "stimulus" to entrepreneurs, all in a hyperinflationary context of monetary contraction and with a shocking drop in revenue due to the fall in oil production, the result is what we have before our eyes in state and public services: the already critical situation degenerating into a virtual standstill in many areas and a failure to function ends up imposing the "need" to privatise on the population and common sense. It is a shock formula which has been used time and again in other contexts and moments. It could be said that it is being done on purpose, if the case were not that it is from a government which proclaims to be pushing in a direction which is totally contrary to these ideas...
And we have only had one year of the plan, well short of the two or five years which the government projects...
What do you say: are we on track or are we waiting to see?
Introduction and translation by Paul Dobson for Venezuelanalysis.
The views expressed in this article are the author's own and do not necessarily reflect those of the Venezuelanalysis editorial staff.