Despite attempts by the Venezuelan opposition and the US business press to paint the Chavez government as the cause of Venezuela’s economic problems, the economic crisis in Venezuela, and indeed throughout the poor countries, is more widespread, deeper, and longer-running than anything that can be attributed to a single regime. A quick look at the economies of Venezuela’s neighbours – Colombia, or Brazil – shows that Venezuela has no monopoly on problems like poverty, inflation, unemployment, and social problems like violent crime.
Gregory Wilpert recently published an assessment of the Chavez government’s fight against poverty (1). He argues that Chavez, on coming to power in 1999, inherited an economy that was undergoing a long-term trend towards increasing poverty, misery, and inequality. He argues, further, that Venezuela under Chavez has managed to achieve some success in fighting poverty through redistributive policies like rural and urban land reform, micro-credit lending, public education, food distribution, and health clinics.
In its anti-poverty fight, Chavez’s economic team has had to grapple with a very difficult problem: what can a poor country manage to do in a neoliberal context? The poor countries are often saddled with large external debts the form of loans and interest payments made possible by lending institutions like the IMF. If they want to develop and reduce unemployment, speed economic improvement and reduce their indebtedness, they need capital and investment. These dynamics force governments into a ‘race to the bottom’, as they lower labor, health, and environmental standards (the very things ‘development’ is supposed to bring) in order to meet the conditions of investors and lenders. Whether these are private, or institutional like the International Monetary Fund, investors and creditors exact a terrible price from people in exchange for their investments, the benefits of which somehow elude the population. But trying to live outside of the global economy and ‘delink’ (2) from it, particularly when a vindictive global power applies sanctions, blockades, and terrorist attacks (as partially ‘delinked’ Cuba has faced), is even harder.
Having learned from Venezuela’s past experience, Chavez’s government has tried various ways to deal with this problem. None of them are long-term solutions, but they are policies thought out to try to help the economy survive the class- based conflict and sabotage the country has faced.
The inherited economy
Venezuela had enjoyed some economic growth and redistribution until the 1980s, when decline set in that still has not been reversed. That trend began with a decline in international oil prices and an increase in international interest rates in a country dependent on oil exports and borrowing for finance. Chavez is not the first Venezuelan president to face capital flight nor the first to apply exchange controls: “capital flight reached historical levels at the end of 1982 with US $8 billion leaving the country. The government forced the state oil company to repatriate foreign reserves in an attempt to shore up the domestic currency. Then in 1983, Luis Herrera Campins (President 1979-1984) imposed a tiered system of exchange controls with the cheapest rate – for the import of essential goods – set at 7 bolivars to the dollar.” (3) This devaluation from 4.3 bolivars to the dollar made debt repayments more difficult, and corruption cost the country $11 billion USD in foreign reserves . (3)
To deal with this “crisis”, President Carlos Andres Perez, elected in 1988, delivered the country over to IMF orthodoxy. Privatization, public spending cuts, liberalization, and deregulation followed. The economy contracted by 8.6% and general poverty went from 43.9% in 1988 to 66.5% of the population in 1989. (3) Not only did these measures fail to solve the problems they purportedly had set out to solve (ie., inflation), but they had devastating side effects on the population.
The president who preceded Chavez, Rafael Caldera, again faced massive capital flight, due to a banking crisis. Devaluing the currency brought inflation to 70.8% in 1994, and price and exchange controls were imposed again. Another $1.4 billion IMF loan, with its structural adjustment, was negotiated in 1995. There were more privatizations: foreign investment increased, oil prices rose – but poverty kept on growing. This was the situation Chavez’s government inherited in 1999.
Their response was to try to improve the living standards of the people while trying to avoid discouragements to private investors. But the Venezuelan opposition’s incessant attacks on the Chavez government have severely sabotaged these efforts.
Fighting the current crisis
The most recent round of Venezuela’s ongoing economic crisis began with the U.S.-backed coup in April 2002, followed by the late 2002 general strike led by oil executives at the state oil monopoly Petroleos de Venezuela (PdVSA) and the business elite. The strike, which affected all sectors of the economy, paralyzed oil exports and cost the country nearly $8 billion.
The National Assembly’s Economic Advisory Office estimates losses to the country’s vital oil sector, which accounts for about one-third of gross domestic product, totaled $3.7 billion. The non-oil sector lost about $1.19 billion and the government said that as a result of the virtual shut down of the economy (meaning little revenue was coming in) it would have trouble meeting $5 billion in debt obligations for 2003.
Soon after the national strike began in December 2002, foreign exchange analysts estimated the bolivar would slip to VEB2000 per dollar by the end of 2003 because of the constant political uncertainty fomented by the business elite. The threat of a steadily devalued currency brought fears of massive capital flight and flight to quality. (4)
As investors began looking to buy dollars and close up deals in Venezuela, the central bank in January 2003 suspended auctions of dollars. Foreign reserves, which act as a buffer against the flight of money and investment, stood at $11.05 billion on Jan. 20, 2003 down from $11.93 billion at the beginning of 2003, according to central bank statistics. Such rapid decreases in capital prompted the Chavez government to revert back to the now-familiar policy of applying currency controls.
This time around, a state-run currency controls board, known as the Cadivi, was set up to sell dollars to companies that pass its strict guidelines at the official rate of 1,598 bolivars to the dollar. Venezuelans privileged enough to travel abroad (a small percentage, given that in 1997 67% lived on less than $2 USD a day) must buy dollars on the black market, where the going rate is about VEB2,500.
The move to fix the bolivar to the dollar was an admission that Venezuela, again, was in an economic crisis and at the mercy of foreign investors and elites. The opposition’s characterization that the currency controls are a retaliatory measure by Chavez to punish the private business sector bears little steam. The bureaucratic burdens and financial losses the business elite are facing in the wake of these controls are an after-effect of their intended purpose: to protect the economy from capital flight. As history has shown, the application of these currency controls is one of the few monetary policy tools the government has to protect the economy from the whims of international investors and their domestic puppets. To banks and brokerages, foreign governments and institutional lenders, poor countries like Venezuela (coldly referred to as “emerging markets”) are just another form of investment to pull in and out of in times of boom and bust. The real implications of such whimsy can be found in the growing numbers of poor, out of work citizens and indebted governments.
Foreign reserves are also being preserved and replenished through controls on credit card spending. The Chavez government is limiting the amount of money Venezuelans can spend while traveling abroad to $2,000 a year, meaning the currency controls cannot be circumvented by elites looking to exchange bolivars for dollars. Under the restrictions, the government will heavily fine anyone spending over the $2,000 limit.
The move, while inconsequential to the majority of Venezuelans too poor to travel abroad, has angered the business elite. Fedcameras – the leading business group – and Consecomercio – the leading retail umbrella group – have pushed hard for an overturn of the currency controls and will go to great lengths to see these policies changed. Fedcameras, incidentally, was a leader of the strike and one of its former leaders, Pedro Carmona Estanga, was Venezuela’s 48-hour dictator during the coup in April 2002.
But the Chavez government has been careful not to choke off much-needed foreign investment totally. Since August, the finance ministry has issued billions of dollars in bonds to be sold within Venezuela, providing institutional investors as well as private citizens with an opportunity to get around the currency controls. This is an innovative approach to stimulate investment in Venezuela’s economy while protecting it from these investors.
The bond sales, of course, are not without some controls of their own. The Finance Ministry said financial institutions as a group – meaning banks and brokerages – will only be able to purchase 20% of the latest $1 billion in bonds being issued. This leaves $800 million of the bonds for residents and private investors. Each individual financial institution will only be able to purchase a total of $50 million of the bonds.
The 10-month long currency controls have proven their efficacy. The Venezuelan finance ministry estimates foreign reserves will end 2003 at $20.7 billion – an increase of $9 billion, or roughly 30%, since mid-January.
Venezuela’s economy is expected to contract 10%-11% in 2003, Finance Minister Tobias Nobrega has said. Nobrega said fourth-quarter GDP growth could be around 0%, as the economy begins to recover, and he said 2003 inflation will be around 25%. These estimates don’t say much about a Venezuelan economic recovery, but should be taken in the context of constant assaults on the Chavez regime and therefore, the country’s economic stability. How can a country work towards growth when it must first work to cancel out the sabotage consistently being imposed upon it? To try to enact economic policies other than harsh neoliberal ones is to become a besieged economy and society. Surviving, even making modest progress under these conditions, has required clever thinking.
C.P. Pandya ([email protected]) is a freelance journalist based in the US. Justin Podur is a frequent writer and translator on Latin America issues.
(1) Wilpert, ‘Venezuela’s Mission to Fight Poverty’
(2) This phrase is Samir Amin’s. He believes ‘delinking’ from the global economy offers poor countries a better chance at development than trying to survive its ravages.
(3) Julia Buxton, “Economic Policy and the Rise of Hugo Chavez”, in Steve Ellner and Daniel Hellinger, eds., “Venezuelan Politics in the Chavez Era”, Lynne Rienner Publishers, 2003.
(4) Dow Jones Newswires, 12-06-02 “Venezuela Congress Approves VEB41.6 Tln Budget For 2003”