The (Endless?) Loop of the Venezuelan Economy. No way out?

The first thing to say about the situation we’re going through in Venezuela is that there is a way out. Actually more than one.

What this means is that we don’t necessarily need to remain trapped in this kind of unknown dimension we find ourselves in, in which nothing is what it seems and the only certainty – official propaganda notwithstanding – is that everything is slowly but surely getting worse.

Nevertheless, the fact that there is a way out does not mean we are going to get out, or at least that we’ll do so in the near future.

Given things as they are, and especially taking into account the current economic policy, everything points towards us being trapped for a while longer in this critical state which, as we have said, is not stagnation – which would be bad enough – but regression and decay.

A situation which is not necessarily new

All this being said, it would not be the first time this happens nor would this be an exceptional case. When the terminal crisis of the Fourth Republic went off in 1983 with the devaluation of the Bolívar, we had to wait fifteen years before there was a new direction to halt the economic, social and cultural free fall that the country was enduring.

During those fifteen years, there was a major social explosion (the Caracazo in 1989), two military uprisings (1992), two deals with the IMF (1989 and 1996), a banking crisis (1994), two inflationary spikes (1989 and 1996), a presidential impeachment (1993), a sharp fall in oil prices (1998) and a bunch of other misfortunes. After all of that, we went through a transition period that implied a new constitutional pact (1999). Immediately after that a period of strong political confrontation that included a coup (2002) and an oil blockade/sabotage (2002-2003).

So, in reality, it took twenty years for the Venezuelan economy and the country to embark on a decade of almost virtuous economic growth (2003-2012). Of course, not without setbacks and with plenty of tensions, but sustained nonetheless.

Currently, there are at least two other cases around the world of countries going through similar processes. One of them is Greece, since the outbreak of the financial crisis in 2008 but mostly since the humiliating capitulation of the “socialist” Tsipras government in 2015.

Ever since Greece suffered the intervention of international and regional financial bodies (IMF, European Central Bank), and was declared in default for having a debt worth 109% of GDP, it has endured three financial “bailouts,” 16 operations of salary and pension cuts, as well as of public spending (cuts in healthcare, education, etc), alongside a violent program of privatizations. As a consequence, all social indicators have dramatically worsened. Nevertheless, after ten years of austerity and adjustments, not a single economic indicator has improved, much to the contrary. Case in point: the debt which ten years ago was 109% of GDP is now over 178%. In other words, it did not decrease, it increased. Poverty and unemployment rates are the highest in Europe.

Zimbabwe is another country trapped in a kind of zombie situation where, to paraphrase Gramsci, the old does not die and the new is yet to be born, or where more accurately we could say that the old refusing to die has killed the possibility of anything new being born.

Zimbabwe was a victim, like Venezuela, enduring “sanctions” and a unilateral blockade imposed by the United States and the European Union. It also reached a default situation with the IMF. All of these resulted in brutal hyperinflation, which among other things led to the suppression of the national currency (the Zimbabwean dollar), replaced by the US dollar and the South African rand. Other currencies like the pula from Botswana, the euro, the pound sterling or even the Australian dollar also circulate. These days Zimbabwe is drifting along in a sea of economic and political uncertainty, going from hyperinflation to deflation and then back to inflation, with no prospects for improvement.

It is true that, after legalizing cryptocurrencies, Zimbabwe became one of the countries in Africa and around the world where they are most bought and sold. In particular the bitcoin price hike at the end of 2017 was related to the coup that removed Mugabe from power. The few Zimbabweans who can afford it buy cryptocurrency as a savings mechanism. Nobody is investing in production. Those who don’t stash capital elsewhere invest in speculative or illegal activities, such as smuggling.

It is worth recalling that Zimbabwe was the favorite laboratory for Steve Hanke’s monetary experiments. He is one of the experts behind the dollarization of the Venezuelan economy, economic advisor of Dolar Today and a fan of Air TM (translator’s note: these are reference websites for the black market exchange rate).

When the future arrives: or is it already here?

The official statistical blackout that has coincided with this crisis – almost no economic indicators have been published since 2015 – makes it hard to rigorously assess the current situation and its depth. Nevertheless, with the little available data together with what can be inferred it’s possible to sketch the current scenario and what comes next.

Among the most worrying issues — in the sense that they will worsen the currently existing problems and create new ones — we have to mention these:

1. Fall, in real terms, of tax revenues: although surely in nominal terms tax revenues will be higher than in 2017, in real terms that will hardly be the case. Even being conservative, taking current prices into account, there should be a drop of around 70% compared to last year. Among other consequences this will bring added pressure on the oft-maligned public budget, which will put a bigger strain on public services.
2. Decrease in oil production, now under 1.5 million barrels a day. And at the moment there are no signs that this trend is being arrested, much less reversed. Furthermore, according to multiple sources, most of these 1.5 million barrels are destined towards operational agreements, mixed enterprises and repayment of debts (to China), so in reality the daily production that amounts to a cash inflow in PDVSA, and the country’s coffers, should be around 400 thousand barrels per day.
3. Unstoppable rise in prices (and the exchange rate). At the time of writing, new dialogs between the government and the private sector are underway to fix prices. Now, beyond goodwill and good intentions, everything points towards a new failure. There are many reasons for this that we could bring up in this regard, but let’s focus on two: if this is not done in the midst of a broader program, involving an integral and coherent economic policy, it is naive to imagine that the prices of 50 products can remain fixed, or decrease (even if temporarily), while all other prices keep going up daily or every other day. At the current rate, the average monthly price hikes are around 100% which, through the required adjustment of relative prices, makes an agreement on fixed prices unfeasible. The other reason is the exchange rate: as long as the bolívar keeps losing value at the current rate, both officially and in the black market, prices will inevitably go up.
4. We are now up to 17 consecutive trimesters of GDP contraction, with the forecast of a 15% contraction for 2018. In concrete terms, this means not only that wealth is not being produced, but rather destroyed. This generates additional problems: more companies and shops shutting down, an increase in unemployment and informal work (which is already widespread due to low salaries that force workers to look for other work), as well as a higher prevalence of speculative activities over productive ones and a definitive brain drain. This also affects tax collection and in turn the public budget (see point 1). If this trend continues, the achievements in social terms will inevitably regress to their 1998 levels.
5. Escalation of sanctions: as we pointed out in an article a few weeks ago, out of Venezuela’s 20 largest trading partners (source/destination for imports/exports), at least 17 are part of the Lima Group and/or are hostile towards Venezuela. Mike Pence has begun a new tour of Latin America to tighten the siege against Venezuela including a visit to Ecuador, an important ally that is slowly turning rightward with Lenin Moreno as president. In what remains of 2018 we can only expect new sanctions.
6. Default fears: as we commented in the latest 15yultimo.com editorial, in 2018 Venezuela has, just in terms of foreign debt, 8 billion dollars to pay, plus 4 billion that mature. Beyond the strain that this imposes on national finances and imports, we have to take into account that this entails a risk of intervention and loss of national assets through seizures and embargos.

Well then, what’s the exit?

As we mentioned at the beginning of this article, this far from promising situation has nonetheless various exits. In my view, the problem is that to find a way out the government first needs to respond to the question: which kind of exit are we looking for?

In this regard, we could say the government is facing a similar predicament – with the obvious differences – to the one Alice faced when in front of the Cheshire cat, when she’s trying to get out of the mysterious land she ended up in after falling down the rabbit hole. Faced with the question of how to get out, the cat replies as follows: “that depends a good deal on where you want to get to.”

In fact, to find a way out of this situation the government first has to decide – and inform the country – where it wants to go. And saying “towards national prosperity” is not a valid answer: that merely expresses a wish of “getting out”.

Orthodox economics offers a relatively quick exit of situations such as these: total lifting of price controls (including on services and gasoline) and lifting regulations (including of the exchange rate), alongside freezing salaries and flexibilization of labor. This would imply, in our case, repealing the current labor law and other legislation that offers labor protections, such as those concerning maternity and paternity leave, as well as putting an end to salary raises and bonuses. This would cause the necessary and definitive shock in prices to curb inflation by contracting demand. This was Caldera’s recipe in 1996: beating inflation with hunger.

The problem with this exit is obvious: it sacrifices most of the wage-earning population which has no responsibility for the crisis, whereas those who have caused it to end up being rewarded. In large part that’s why these solutions are so unpopular: recall the cases of Carlos Andrés Pérez in 1989 and Macri in Argentina today.

Unorthodox exits point in a different direction and are usually more successful and just. And in this regard there are also precedents: Chávez in 2003 and then in 2010. Cristina Fernández in 2013-2014.

Both kinds of exits have their risks and associated costs, so one has to decide which one to follow and assume the risks from that point onwards. And it’s also the case that they lead to different kinds of future countries.

What cannot go on is an attempt to exit through both doors at the same time, or pretending to go through one while in reality going through the other, because the results are worse and the endless loop in which the same unsuccessful measures are re-hashed becomes exasperating for the people and irreversibly costly for the country.

Translated for Venezuelanalysis by Ricardo Vaz.