Economic Opportunities During the Coronavirus Crisis
Venezuelan economist Luis Salas concludes that “the conjuncture is exposing the conservative policies of the Venezuelan left-wing government in economic affairs.”
At this point, the whole planet seems to be clear of the need to act forcefully and quickly against the coronavirus pandemic. At the same time, it is clear that responsibility to act sits with the states and governments, which must place themselves at the vanguard of any response.
As it has become fashionable to say, it is urgent to flatten the COVID-19’s transmission curve to stop the infection and reverse the critical situation in incubation. It is the governments and the public health systems which are called upon to do this, as the examples given by countries such as China, Cuba and South Korea demonstrate. Unfortunately, countries like Italy and Spain, where things seem out of control, are examples of what should not be done.
At the same time, there is a consensus that the same attitude must be assumed with regard to the economic effects of the epidemic.
These very important effects are already serious, and possibly more powerfully and devastating than the epidemiologic effects, even in cases where authorities act correctly and following the required protocols. A lack of lockdown can lead entire countries, beyond just their health systems, to collapse. But lockdowns also have regressive and negative effects that need to be managed. The urgency of flattening the virus’s transmission curve is accompanied by the urgency of flattening or softening its economic impact.
The extraordinary measures taken by governments such as in Argentina, France, Germany and the US itself reflect this. These measures amount to no small thing if you consider that at least the last three have felt it necessary to quarantine free-market neoliberal dogmas to deal with the crisis, including state non-intervention in the economy, self-regulation and the primacy of the private sector over the public. Many of these governments were enthusiastic exponents and propagandists of these issues until only two weeks ago.
With regard to the former, Venezuela has been no exception. As the complexity of the global situation was beginning to be understood, the Venezuelan government acted to put itself ahead of the crisis and not behind it, seeking to avoid mere damage-control. However, the same speed and clarity cannot be seen with regard to the economic measures, where it seems that things are getting muddled once again.
The point of this article is not to raise alarms in this regard – the epidemiological crisis alone does that – but rather to help raise awareness of how urgent it is to act, of the costs that may arise from not acting in time or from pursuing the wrong measures. Equally, this article aims to make some proposals that we think should be carried out not only to mitigate the most perverse effects of the crisis unleashed, but also to turn this crisis into an opportunity.
The cost of not acting or not acting in time
Most experts point out that the COVID-19 is harshest for those with pre-existing adverse conditions, such as the elderly or those with respiratory diseases. The same can be said for the economies: the economic impact of the pandemic will be especially felt by those economies that present pre-existing critical situations. And that’s exactly our case.
Indeed, before the COVID-19, we already had many Venezuelans worrying about how to flatten some extremely negative economic behaviour curves.
The issue of prices, which haven’t stopped increasing, and that of the exchange rate, which doesn’t stop going up either, are surely the best known. Oil production, in a frank decline for several years, also needs the curve to flatten. But in order not to get tangled up with many indicators, let’s sum up all this with just one: that of Gross Domestic Product (GDP).
GDP has been in free fall since 2014, even since 2013, which was the last year of positive behaviour of this indicator but already with significant decline when compared to 2012.
As is clear to most of us that live it every day, even before the COVID-19 virus emergence and its transformation into a pandemic, the situation of the Venezuelan economy was critical.
Between 2012 and 2018, which is the last year with official GDP performance figures, the Venezuelan economy contracted by 48.6 percent, which equates to a six-year reduction to almost half the size of the economy of 2012. This is without precedence in our history. Globally, these figures would be equivalent to the collapse of countries in war conditions, such as Syria. However, we are not only talking about a more or less simple stagnation or periodic economic repression, but rather a contraction of the production of wealth as well as of the sources of this production.
Official figures for 2019 are not yet available. For the purposes of the graph we used our projection of a 25 percent GDP fall. This we calculated based on the fact that last year was very complex both politically and economically: we experienced first semester blackouts, the blockade, fall in oil production and an orthodox restrictive monetary policy implemented by Central Bank and the Ministry of Finance. For 2020, we used the IMF projection, which most analysts agree with.
So, between 2012 and 2019, the Venezuelan economy shrunk by about 65 percent. If we add to that the shrinking of 10 percent projected for 2020, it would imply that at the end of this year, and despite the dollarised consumption bubble and the adjustment of the economy to its minimum operating state, Venezuela’s GDP would end up being just over one third of what it was in 2012.
But all that was before we knew of the existence of the coronavirus. Now the situation is different, and not necessarily better.
This graph, which we can consider as a conservative estimate of the coronavirus crisis, projects the period to extend to the entire first half of the year (with the quarantine in our country being lifted or eased earlier).
In this following graph we project that the health crisis lasts all year.
A fairly extreme economic scenario is painted. This is due to a combination of the fall in oil prices (in the most optimistic scenarios, oil is not expected to exceed $50 per barrel for the rest of the year, with the average price expected to hover around $25 – $30), a contraction of international GDP and trade (global GDP is estimated to drop 1.4 percent, well down from the already quite low estimate of 2.9 percent this year, with a trade contraction of 3.75 percent), plus the contracting effects of the local quarantine on an economy that has been in contraction for more than five years. All of this, of course, is assuming that the epidemic doesn’t get out of control.
Due to the untimely nature of the phenomenon that we are going through, it is very difficult to predict which scenario is most likely. In any case, those presented here serve to alert us as to what is coming if we do not do assume the task at hand.
In the short term, the following should be taken into consideration:
The global crisis, in addition to affecting Venezuela’s foreign currency income through the contraction of trade and oil prices, affects income due to a fall in remittances, which will also suffer from a contraction.
Supply to [upper market, dollar charging, imported product-selling] shops known as “bodegones” will be particularly affected. It is quite possible that the industry bubble [of these shops] will end up bursting both due to the rising prices of imported goods and because of the difficulties and even inability to import. As always, the most vulnerable will be the smallest shops.
Imports for the [state-run subsidised food box program of the] Local Food Production and Provision Committees (CLAP) will also be affected by the fall in oil revenues.
Over time the quarantine will have an effect on the supply to the large cities, and perhaps especially Caracas. In some areas of the rest of the country there are restrictions on fuel, which affect the mobility of goods.
As most families and individuals do not currently have sufficient income to stock up for a long time. Situations can arise – as is indeed already happening – where people are forced to break quarantine either to shop or to generate income to survive. This can lead to explosive situations, especially if it is combined with speculative practices that are already observed and possible induced undersupply.
This also applies to some services such as gas and water.
If things go on, many of the companies which are still in Venezuela, as well as businesspeople and the self-employed, will face possible closure or bankruptcy, with everything that that implies.
Despite the border closure, it is likely we will see a massive return of migrant Venezuelans, which brings with it increased demand pressure for goods and services (not to mention the epidemiological threat).
If the restrictive monetary policy in the local currency is not lifted, the demand shock will be much higher and will affect those who do not receive a dollarised, or partially dollarised, income above all. The point is that for the government to lift this policy means confronting the complex dilemma of needing to create the conditions to avoid skyrocketing inflation and exchange rate. When one has to choose between two bad options, one has no choice but to choose the least bad. In our view, the least bad is to lift the restrictive policies and sacrifice inflation levels, which, despite all of these monetary restrictive measures, have not been eradicated.
What needs to be done in this case in a complementary way is to apply price controls. This should be done either explicitly – as is being done in Argentina – or implicitly or partially, as in France, Germany and even in the United States with some essential medical goods. But the problem here is well known: Venezuela’s government does not seem to have the capacity, let alone the will, to do something of this sort, even though there seems to be consensus in society that special conditions merit it. In fact, according to how little has been said by the government so far on this topic, it seems that they are moving towards applying the same policies applied in the past without positive results for the vast majority, including paying private payrolls or giving soft, guarantee-less loans to business partners. Incredible as it may seem, the same conjuncture that is forcing neoliberal governments to be interventionist is exposing the non-interventionism and conservative policies of the Venezuelan left-wing government in economic affairs.
So, what to do?
In the short term, it is positive that the government has announced the extraordinary supply of CLAP food boxes, as well as offering bonuses to many families. We believe that this is an initiative that must be maintained and widened.
We assume that the CLAP will tend to vary its providers from imported products to domestically produced ones due to the aforementioned drop in foreign trade (revenue drops, international trade stopping, etc.) but also as a way to avoid spending the small amount of available foreign currency and stimulating the domestic productive apparatus.
Apply a VAT exemption for items that warrant it.
Promote a productive food stimulus plan, especially with small and medium-sized producers, where there is less concentration, and therefore more possibilities for speculation, smuggling, and hoarding.
Implement a fuelling plan that ensures the transport of goods throughout the country under current conditions.
Dismiss and even prohibit the importation of non-essential goods, which can be done by applying tariffs.
Centralise the production of essential healthcare goods, including facemasks and hygiene or cleaning products.
Apply price controls to essential goods and services, guaranteeing all the conditions to ensure compliance. The Argentine model serves as an example.
Ease the restrictive monetary policy on banks, which is less embarrassing for the country than giving soft public loans to the private sector. The redirection of resources to parallel foreign exchange markets can be done by other monitoring means that do not imply the paralysis of the credit market.
On this point, we think this is the golden opportunity to reverse the process of “spontaneous” dollarisation. We can also start seeing some of the problems which dollarised economies have in situations like the one we are facing, where the dollar is revalued and capital flight soars (during the 2008 financial crisis, the outflow of capital from emerging markets added up to $20 billion in the first 50 days after the outbreak. In the current crisis, this figure is four times higher, with a leak of close to $60 billion in the same period). Other problems include a decline in currency liquidity, imports becoming uncompetitive and, broadly speaking, the impossibility of applying monetary and even economic policies when compared to cyclical factors. Ecuador is perhaps the most complete example of what we mean.
As for external financing, the most cumbersome and costly path is to borrow from bodies like the IMF. The first thing to be clear about is that the economic context opened up by COVID-19 will have a prolonged impact, and the worst may still be to come from a worsening of the global pandemic. So, for an already highly indebted and blocked country, it is not a good time to borrow with a revalued dollar that makes debt service more expensive, with oil prices on the floor and a projection of zero global recovery rates. It seems to us that the best option at the moment is to deepen the policy of self-financing through the sale of gold, which, even with the fluctuating price behaviour it has had recently, remains the safest and therefore a sellable haven in global markets. Venezuela still has significant monetary gold reserves (about $3.5 billion at current prices), which can be sold gradually in these markets in order to provide the country with cash flow.
China should also be asked for a moratorium on using oil to service debt in order to release this production to direct market sales.
The proposal made by some sectors to exchange food for oil, apart from being humiliating, seems unworkable given the current prices of oil.
In any case, as the saying goes, extraordinary times require extraordinary measures. The most extraordinary thing of all in this context is the quarantining of neoliberal ideas and a return to the centrality of the state and its economic directionality.
As trite as it may seem, this is the winning recipe. Proof of it is that the most capitalist countries of the “first world,” including those with Trump and Macron at the helm, are turning to these measures without blushing. This was, in fact, what Chavez did in 2008 when the price of oil fell to current levels and it seemed that the apocalypse was coming, as it now also seems.
Likewise, beyond the imitation effect, not taking protectionist measures when everyone else does makes one more exposed in the global economic system when it comes to spreading the losses of the crisis.
Being caught up in prejudiced policies at this time in order to win the favour of the most recalcitrant and selfish sectors of society is exactly what we don’t need. Likewise, locking oneself in the Maduro vs. Guaidó, Maduro vs. Trump, Bad IMF or Humanitarian IMF diatribe is a path that can be entertaining for Twitter influencers, but not at all useful to the rest of the country, the real people.
Better orientation is required so that the economy so that the country does not get permanently tangled up in the loop of terminal decline and unviability. This was true before the crisis, but is more so now.
From this point of view the coronavirus, that certainly came to complicate things, can also be the unexpected opportunity to turn things around and get out of the orthodox trap that the government once decided to take us into.
Luis Salas Rodriguez is an economist and sociologist, as well as being a lecturer and researcher at the Bolivarian University of Venezuela (UBV). He has also served as the minister of productive economy and economic vice president.
The views expressed in this article are the author’s own and do not necessarily reflect those of the Venezuelanalysis editorial staff.
Translation by Paul Dobson for Venezuelanalysis.