Venezuela in the abyss

Why is such a wealthy country experiencing such a catastrophic financial crisis? And why, in the light of this crisis, have certain measures been introduced that lead nowhere? Interview. Español

José Zepeda Rodrigo Cabezas
20 September 2018

Venezuelan refugees sleeping on the streets of Cúcuta, Colombia. Wikimedia Commons.

Rodrigo Cabezas, ex-finance minister of Hugo Chávez, a man of the left who believes in a socialist nation, nowadays distanced from Maduro, analyses the economic announcements that the Venezuelan government has just made and explains why they are destined to fail. 

José Zepeda: In 2018, inflation in Venezuela will reach one million percent. Petrol production and exportation are collapsing. The contraction of the GDP is around 15%. Unemployment will reach 33.3% this year and it is estimated that the following year it will reach 37.4%. How have we got to this stage?

Rodrigo Cabezas: The model of capital accumulation based on petrol capital has been exhausted, not because the petrol has run out, or because it’s produced and sold in its crude form. Simply, it’s because of the international market value of a barrel is no longer sufficient to sustain the economic growth needed to satisfy the needs of the Venezuelan population.

It’s a problem that has yet to be resolved because there’s no debate regarding industrialisation, which is the main solution we Venezuelans have to get out of the rent-seeking system we find ourselves in, and to attempt to build a path towards productive development. 

The current crisis implies some serious difficulties for us. The first is a lack of professional management of the economy. What has been done so far is of an administrative and punitive nature, like the oath of the attorneys to control and detain business owners and sellers. We’re dealing with an absurd approach that doesn’t react to market behaviour.

The economic announcements that are made and the decisions that are taken make no sense from the perspective of economic science. In the economic cabinet of the president there is not one economist with a specialisation in macroeconomics, or in exchange and monetary policies.

The economic announcements that are made and the decisions that are taken make no sense from the perspective of economic science. In the economic cabinet of the president there is not one economist with a specialisation in macroeconomics, or in exchange and monetary policies.

The second is our exchange policy which has been the main trigger. The exchange differential was never corrected and for these reasons we have prices above the dollar which destroyed the structure of the agricultural and industrial economy is a short period of tie. I’m not referring to the dollar on the black market, but the official dollar. 

So obviously, the system lost all its credibility. Later, when Venezuela together with the rest of the world, began to feel the effects of the price reduction on a barrel of petrol towards the end of 2014 and 2015, there was no fiscal policy in place. Considering that 96% of Venezuelan currency is dependent on petrol activity, an adjustment program was put in place.

This opted however for exceeding the deficit of the Central Bank that became the usual practice of the national executive. Any possibility of tax reform or adjustment of tariffs and prices was bypassed. Refinancing of external debt was left in the background. A reduction on military and bureaucratic spending was never declared.

A dramatic fall in petrol prices combined with a program that has failed to provide fiscal consolidation that would avoid an inflationary crisis have come together to create the current situation.

A fourth factor is the operational and financial deterioration of the petrol industry. There is no need to be a specialist in economics to see that as Venezuela produced 3 million barrels daily and currently produces 1,400,000, the deterioration is tremendous. As well as a significant fall in production, the debt levels have reached around 41,000 thousand million dollars, which requires an urgent recuperation program. 

Finally, one of the last factors that can be added to this is that of the financial embargo of Venezuela by the US and the EU. Of course the government uses it as an excuse, and it’s not the case that the embargo extended throughout 2014, 2015 or 2016.

But since 2017 and until today, the blockage of banks corresponding to the US and Europe limits the use of credit cards of the petrol industry and private businesses, and it reinforces the collapse of imports that have dropped 80% in the last four years.

Think of a country that four years ago imported 100 monetary units and that today imports only 20 and 23, and how this affects the population’s medical needs, their food and their clothing supplies. 

JZ: The plan that the government has just announced includes among other things an increase in VAT and the price of petro, the cheapest in the world currently, the devaluation of the currency by 96% and the creation of a cryptocurrency, the Petro, backed by the price of petrol, with the objective of gaining finance in the light of US and EU sanctions. Do these measures do the trick? 

RC: I would like to say that we have hope, that the measures are a step in the right direction and that they’re going to mean a great relief for the short and medium term, but regrettably I don’t think we can leave our worries to one side.

The first consideration that must be addressed is that the government hasn’t presented a systematic economic policy to face the problems of the economic-fiscal crash. In other words, a policy that deals with the development of the recession during the next 5 years.

No object of growth appears anywhere. When we will return to the growth curve has yet to be mentioned, nor what our GDP might look like in the coming years. 

No object of growth appears anywhere. When we will return to the growth curve has yet to be mentioned, nor what our GDP might look like in the coming years. In any stabilisation program, the growth component is vital: the heart of any economic strategy in fact.

Nor is there any mention of denominating hyperinflation, or of what is going to happen if external debt is not paid (almost 90,000 millions of dollars), of malnourishment, of the lack of medicine for the poorest sectors of the population.

And as an economist, I can’t say I see much consistency in the fiscal and exchange policy. So for me regrettably, what this plan will achieve will only be a worsening of the recession and hyperinflation due to its lack of systematic vision. With threats, with takeovers of bakeries, of supplies, of businesses, the government will only aggravate the shortage.

This isn’t a problem of the police, the military, nor the administration or the justice department. It’s a problem relating to the political economy and the management of the market.

There are two main announcements that come into play regarding the issue of macroeconomic stabilisation. One of those is the so called “zero fiscal deficit”, a conventionalism that is no longer used in political economy since the decades of the 80s/90s when the neoliberal hegemony became fashionable.

What is discussed today is to foster economies that can manage responsible fiscal programs. It would seem like a positive step when a government announces that they will adopt a responsible fiscal regime, but the announcement is not believable because at the very same time, a salary raise without any relation to production, a rise in pensions of 3000% and the maintenance of the payroll in small and medium sizes businesses in the next three months was also declared.

All of this has been accounted for and requires around 5,900 millions of dollars. In other words, a pile of money that doesn’t exist, that nobody has. The central bank doesn’t have even 10% of this total.

The consequence is that the mechanism of the past 4 years that consists of the Central Bank financing and financing even more will continue. The President of the Republic claims to have resources but it’s not true.

He wants money to appear from nowhere, that can be directed towards a market with a shortage of goods due to a recession, which reinforces hyperinflation. 

The decision was also taken to exonerate the import tax for all capital goods, which is essentially hammering the tax authorities. And the exoneration of the payment of taxes on the income from petrol activity took place, taxes which are vital for the economy as they are the umbilical cord that tie together the fiscal policy of the state to petrol activity. The decrease of resources is predicted to be around 900 to 1000 million dollars this year alone. 

Such a delicate and grave situation may have called for the reduction in public ministry posts however a new one was created. And it was announced that a rifle factory with the help of the Russians would be created which would imply yet another cost for the state.

Regarding the exchange system, the intention is to create only one fluctuating exchange rate to bury the criminal dollar apparently. But it immediately becomes clear that the departure point is the anchoring with the Petro, accompanied by a devaluation of the 6 million bolivars, which was worth one dollar on the black market.

Someone though that to crush the parallel dollar it was necessary to change the exchange rate, but this only causes a brutal devaluation of the economy of the country. 

The hope of having a fluctuating exchange rate diminished when it was announced that the exchange rate would be maintained. Upon not suspending the exchange control and making incoherent announcements, the government is condemning the country to the parallel market and is doing little to ease inflationary expectations.

The most sustainable option would be to implement a real balanced exchange rate and for this exchange rate to be protected adequately with international reserves. And these reserves should be boosted.

An exchange rate of this kind needs a professional central bank that complies with the law, that provides credibility and confidence to the political economy, and this does not currently exist. 

The great conclusion is that, regrettably, the plan won’t work. 

JZ: Some 2,300,000 Venezuelans (more than 7% of the population) have abandoned the country in the last 4 years. The exodus that shows no signs of calming down has become a huge problem that transcends the borders of the country..

RC: Politics could be the underlying problem but the main reason is essentially economic. We have a young person who graduated with distinctions 3 years ago in our university in the state of Zulia.

He told us: I’m leaving because with the salary they’re offering me I can’t even buy a second or third hand car, I can’t buy a flat, nor can I offer my girlfriend the chance to build a home or a family. In the short term, there are no expectations. People are leaving because there are no possibilities for them to develop their lives here.

It should be a state priority that young people between 20 and 35 years old, in whom we have made a social, economic and cultural investment, these million or so professionals that have left should find a way to return. But for that to happen there must be expectations they can build a life there.

An aspect of importance that doesn’t appear in the economic figures nor in the statistics is the emotional impact of the crisis on families. Venezuela is not used to celebrating birthdays over WhatsApp.

An aspect of importance that doesn’t appear in the economic figures nor in the statistics is the emotional impact of the crisis on families. Venezuela is not used to celebrating birthdays over WhatsApp, with children far away and with the anguish they may not return.

An enormous sadness has overcome the nation. This emotional component hasn’t been measured, but it’s manifested itself in a dramatic way.

A minister recently proclaimed: “Let those who’ve left go, we don’t need them, nor do we need their return. This is a stab in the chest for every mother, for every father.

We’re dealing with an enormous problem that we must resolve and for those reasons it can be equated to economic factors. People haven’t left because of governance issues, people have left because there are no expectations.

JZ: I would like to end on an optimistic note, but the reality Venezuela’s experiencing doesn’t permit such a thing. It could be said that resolving the crisis requires changing paths and applying a real and feasible economic policy implemented by efficient individuals.

But those who are able to do it are not guided by economic principles but by ideology and it seems they are fighting a different battle from that which the country is in need of. I ask of you to please correct me if I’m wrong..

RC: I can’t negate that. Here, an absurd, sterile Marxist-Leninist dogmatism has taken centre stage promoted by those who haven’t even red Marx or Lenin. They haven’t even heard of Lenin’s speech to the Central Committee of the Communist Party when he defended the new political economy which was an adjustment of the program to expropriate country lands.

Nor are they aware of Marx’s declaration in France that the only thing he is certain of is that he is not a Marxist. It’s a sterile dogmatism, out of step with what is happening in the world today.

There isn’t even an intention to continue in the footsteps of the Chinese Communist Party, nor is there any desire to learn of a country which once suffered a terrible war but is now one of the nations with the highest export rates in the world in spite of its size, Vietnam.

And sterile dogmatism is blind. But the time has now arrived when we see the regime waning and it is in this scenario when the people will decide. The people anxious for freedom, progress, economic growth, will find the solutions. I will also take this moment to state that anyone who offers Venezuela a criminal solution should be condemned, and I personally despise such an act. 

I trust in the Venezuelan people, that have inherited a great emancipatory history when they were lead to victory by Simón Bolívar. 

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