Debate on Venezuela’s “Economic War”

Shoppers quickly take advantage of a shipment of imported milk at a Caracas supermarket. 

David Smilde

Last week I engaged a couple of colleagues on Facebook regarding the economic situation in Venezuela and whether the term “economic war” fits. The exchange began with a post by Steve Ellner, reproduced below. (This discussion occurred before, and so does not take into account, news reports that argue the occupation of Herrrera C.A. was a staged photo op, and claims by the company that they are actually at 12% capacity.)

Steve Ellner: PROOF THAT THE “ECONOMIC WAR” IN VENEZUELA IS NOT FICTITIOUS, AS OPPOSITION LEADER HENRIQUE CAPRILES CLAIMS:

The Venezuelan government’s occupation of the warehouses in eight states of the firm Herrera C.A. that have hoarded goods, obviously to be smuggled into Colombia, demonstrates these tie-ins. Goods like diapers, detergent, milk and corn flower, which are highly scarce throughout Venezuela and impossible to get without waiting on long lines for many hours, had been lying around for long periods of time in warehouses that the government raided in the states of Falcon, Zulia and Anzoátegui. Herrera C.A. is the exclusive distributor for Kellog’s, Nestle, General Mills and Avelcasa in 8 states, as well as for key merchandise of Procter and Gamble and Pfizer. Peggy Carolina Quijada, a leader of the right-wing Voluntad Popular (whose jailed leader is Leopoldo López) is tied to the ownership of Herrera C.A. There is an arrest order for the Herrera brothers who are currently on the run. For those who read Spanish, check this out

David Smilde So they discovered a warehouse. What exactly is that evidence of? If it was on its way to Colombia, why had it been waiting around for so long? Let’s just say it was indeed on its way to Colombia, is that evidence of an “economic war” or simply the type of contraband that inevitably appears when you have a radical difference in prices across borders. “War” seems like they are doing it to try to undermine the Maduro government. But such contrabandistas make money hand over fist and are probably quite happy with the Maduro government’s policies. Or they could simply be adjusting to new economic realities in which contraband and dollar scams are more profitable than commerce the old fashioned way. But this is simply a response to dysfunctional and long discredited policies. And thinking that government officials and the National Guard, themselves poorly paid and easily corruptible, are going to stop this is like thinking you can stop a hurricane with a broken umbrella.

 

Steve Ellner I would say, David, that there are many factors at play here. Certainly the wide disparity between the official exchange rate and the open market rate encourages contraband. And it also encourages corruption; a scourge that nobody denies is a problem. But when large economic groups are directly involved in this, you can’t help but think that there are other motivations involved as well. After all, in 2002-2003 the opposition created scarcities in order to overthrow Chavez. And historically this has always been the case, ie. Chile under Allende when Nixon promoted an economic war by calling on the CIA to “make the economy scream). Plenty of documentation on this). Indeed a passage from Isabel Allende’s first novel “The House of the Spirits” (1982) has been circulating widely in Venezuela recently because it describes a similar situation of scarcity that Chile faced under Salvador Allende.

Regarding your statement “If it was on its way to Colombia, why had it been waiting around for so long?” With such urgent demand for some of the goods that were encountered in the Herrera warehouses, they should have been shipped out immediately. However, if the intention was to illegally ship them off to Colombia it may have been necessary to have waited a certain period of time in order to arrange logistics for such a dangerous mission, including payoffs to government officials along the way. It’s quite feasible that such contraband planning would have taken many weeks or even months.

One can squabble about the applicability and implications of the term “economic war” but the fact of the matter is that politics and economics are always intertwined. I know you are in agreement with me on that. Don’t have to be a Marxist to believe it. One last anecdote, David. I know businesspeople here in Venezuela who tell me that they don’t inject one bolívar in their business unless it’s absolutely necessary because they don’t want to help the government in any way. If that’s the case with small-medium businesspeople what do you think the large scale ones are saying and doing?

David Smilde And you don’t have to be an anti-Marxist to think the discourse of an economic war is a giant red herring being used to distract from destructive and dysfunctional policies. Fred Block has argued that one of the distinctive characteristics of capitalists is a relatively short timeframe. Capitalist definitely can engage in economic aggression. But it is usually going to be relatively short term, for example in the months preceding an electoral event or at key moment of conflict. But the Maduro government has been saying there is an economic war now for over a year and a half. Are we to believe that capitalists are really forgoing a year and a half of profits without any end point in sight, to defeat the Maduro government?

In front of my house in Caracas there is right turn light that is basically red all of the time causing traffic jams. As a result motorists cross the median and go the wrong way on the side access road, causing chaos and fear among pedestrians. Are they engaging in a “traffic war” against the Maduro government? No, they are simply accommodating their interests and actions to failed road maintenance in ways that are destructive to the collectivity. Again, you don’t have to be an anti-marxist to think stories of an economic war are a red herring. See, for example, the writings of Victor Alvarez.

Steve Ellner Just look at where nearly all of the political donations go in U.S. politics and you can see that the statement about a short time frame on the part of the capitalists is misleading. Does anybody on the left side of the political spectrum get even a fraction of what the Koch brothers contribute? Nearly all the money goes to the right and the center. If the working class were as class conscious as the private sector is, U.S. politics would be radically different. And the same is true with capitalist nations throughout the world. Venezuela can’t be the exception.

David Smilde Yes but it is one thing to give political donations, quite another to stop production or withdraw your products from the market for an indefinite period of time, reducing not just profits but your entire gross, and doing permanent damage to your business. If the Koch brothers were to stop producing paper cups and paper towels and convince all their competitors to do the same, in preparation for the 2016 US elections, that might be a good parallel. But giving political donations doesn’t work as evidence for an economic war of the kind being hypothesized in Venezuela.

And the evidence that Venezuela’s economic problem is systemic is overwhelming. One of the biggest scarcities is cement, production of which the government controls completely. If this were a case of entrepreneurs somehow carrying out an indefinite economic war you would expect the government to be able to demonstrate this by happily satisfying the market in the ample sectors of the economy it now controls. But exactly the opposite is true.

Chris Carlson This is an interesting debate guys. I think you are right David, that economic agents are responding to the incentives generated by dysfunctional policies. Why exactly that leads them to stockpile goods is still somewhat of a mystery to me though. Are they simply staging the goods before trafficking everything over the border to Colombia? Or are they hoarding to generate scarcity and then selling on the black market at a higher price? 

Where I think you might be wrong, however, is in assuming that by engaging in an “economic war” they would necessarily be forgoing profits. They could easily be accomplishing both goals of making higher profits through hoarding while also undermining the government policies like price controls that they oppose. If hoarding still allows them to eventually sell the products on the black market, or over the border in Colombia, then they are still making profits, while at the same time accomplishing their political goals.

However, I think the real problem with Venezuelan capitalists is not an “economic war” or their political agenda, and I think Steve hit the problem on the head in that they simply do not have to pump investment into their businesses. In other words, they aren’t compelled by competitive forces to maximize profits through capital accumulation like most capitalists in a highly developed market economy. This is a significant difference that means they can operate very differently than capitalists in the North. When Fred Block says capitalists operate with a short timeframe he is talking about capitalists in a highly competitive market who can quickly lose out by not keeping up in investment. I don’t think capitalists in Venezuela operate in that framework, and therefore can forgo investment for much longer without the same consequences.

I’d be interested to know what each of you think the solution is. It seems like removing price and exchange controls might be the obvious choice and what the opposition might do. But would that not risk sending consumption among the poor back to 1990s levels and really piss off the vulnerable majority? It might solve the shortages, but prices for basic and imported goods would rise, forcing the poor to cut back consumption.

Steve Ellner Thanks for your questions and comments Chris. There are areas of convergence between what David is saying and my own comments. I agree that Maduro has missed the boat by not taking seriously enough the market including the market for dollars, even while speculation distorts that market to an extent. He should have taken advantage of the upper hand that the Chavistas had politically after their electoral triumph in the municipal elections of December 2013 and the defeat of the guarimba in mid-2014 by increasing regulated prices especially on gasoline and decreeing devaluation. As I suggest in my New Left Project article the devaluations and price adjustments have to be handled carefully with compensations to popular sectors and done gradually.

On the other hand, I believe that David’s economist position passes over historical reality. The ruling class has always been willing to forfeit immediate economic interests in order to further political and military objectives. In other words political and military domination trumps dollars. In the long run they all go hand in hand. Block is largely referring to the fact that in the U.S. corporations stay away from assuming political positions on issues that aren’t directly related to their economic domain (though in recent years their political involvement has been on the rise). But businesspeople put their money where their mouth is, by pouring billions into foundations, electoral campaigns and the like. (Although the “instrumentalists” tend toward reductionism and dogmatism, Ralph Milliband argued persuasively about the tie-in between economic interests and politics). Every time leftist parties have come to power and there is the perception that the hegemony of the ruling class is in danger, there have been organized attempts to create economic crises. It’s not only about market forces. Nixon’s order to the CIA “let the economy scream” speaks volumes about how powerful forces act in situations like that by helping create an “economic war” (regardless of whether or not the threat is being channeled electorally and democratically).

David Smilde  Steve, what you say about “historical reality” amounts to broad brush strokes that cover over important differences between cases and contexts. “Every time leftist parties have come to power…there have been organized attempts to create economic crisis…” Really? So how do you explain the economic success of Lula, Morales, Corrales and other left projects that have actually led to dramatic increases of production and consumption? Why didn’t economic elites huddle together and sabotage that? Or, why does their sabotage work sometimes and not others? For the most part during Chávez scarcities were pretty well controlled. But during Maduro they have been greatly exacercabted. Why is that? Entrepreneurs somehow feel more threatened by Maduro than Chavez? That’s absurd.

Working with an inflated exchange rate began under Chavez and was the brainchild of Jorge Giordani. During Chávez the parallel rate was often twice or three times the official rate, creating distortions. Now it is 25 to 30 times higher than the official rate. Unsurprisingly, scarcities have been exacerbated. There is an incredible demand on the nation’s available foreign currency that simply can’t be met. For example, most appliance stores are empty. Why? Some retailers don’t have access to dollars. Those that do only use a small percentage of them for actually importing, using the rest to export their capital or put them on the black market. Calling that an economic war is silly. It is simply economic dysfunction created by the government. Without a doubt large scale mafias have developed that work with “empresas de maletin” to export capital, or with large scale contraband. Many in the government and armed forces are involved. Taking an occasional picture of a warehouse here and there says nothing. All large scale economies work with stocks and flows. Even the most efficient “just in time” supply-chain operations like Walmart have huge warehouses where they store inventories.

As far as solutions, I actually don’t think the problem is price controls. Many economies do just fine with price controls on basic goods. They simply have to be adjusted with the rate of inflation. Actually I am not even against exchange controls since I think small economies with their own currencies are vulnerable to speculative attacks. For a country like Venezuela a crawling peg exchange rate can work well. The problem is the combination of an anchored exchange rate and the printing of inorganic money. If you expand your monetary supply without increasing the value in your economy, the only possible result is inflation. And if you have inflation and an anchored currency, the only possible result is going to be pressure on available foreign currency. When you do this in dramatic fashion as the Maduro government has: increasing the monetary supply by 60-70% each of the past two years at the same time that there is less production and less dollar income in oil, the result is obvious: the dyad of inflation and scarcities.

Chris, for a long time I think the analysis you provide which poses economic fundamentals vs. consumption of the poor, basically worked. Indeed it is important to remember that periods of “scarcity” in Venezuela have actually been accompanied by higher levels of consumption, which can be a little mind-bending to think about. It is because in normal circumstances poor people suffer “scarcities” when they simply cannot buy goods. But that doesn’t generally make the news. In recent years the dynamic is that everybody can afford goods, but it takes more effort to get them–lines, multiple shopping trips. But in the current circumstances, scarcities are starting to affect the poor more than the middle class as the poor are more dependent on price controlled goods, can’t afford to buy them in the informal economy, etc. They have to spend hours in lines day after day to get what they need. This explains why Maduro’s popularity is dropping so fast. It is no longer a situation where economic scarcities are affecting middle class routines more than lower class (just take a look at the pictures of the lines).

In sum, there are left economic projects that work. Trying to print your way to wellbeing is not one of them. Portraying what is happening in Venezuela as some sort of inevitable conflict between a left project and economic elites discredits the left and will do lasting damage in Venezuela and elsewhere.

Here and here are two blog posts I wrote with a student in 2013 that explain the logic of scarcities in Venezuela. And here and here are two posts from November 2013 on the “economic war” as well as a radio interview I did back then.

Chris Carlson How sure are you that they are simply printing money though? I’ve heard that accusation but never seen proof. I’ve always thought inflation is much more complicated than that, having to do more with rising consumption that simply isn’t being met by increased production. Also it seems like it must be more complicated than simply adjusting price controls and exchange rates more frequently. There must be a bigger reason why they don’t do this other than sheer incompetence especially when it is such a major problem. As for warehouses, yes all businesses use them, but not when the products being stored can’t be found to buy anywhere. This is obviously an attempt to not sell these goods either because they prefer to sell them across the border or on the black market. Of course that doesn’t necessarily mean they are engaging in an economic war, but simply responding to the incentives of policy.

David Smilde The BCV makes public how much money it prints. The amount of Bs circulating in the economy grew by 66% in 2014 at the same time that the economy actually contracted in the first 3 quarters (4th quarter figures not available yet). Dollar assignations also decreased in the second semester. Is there any way this cocktail could not produce inflation/scarcities?

Chris Carlson Interesting… That certainly does seem like sheer incompetence. Amazing that they can’t figure out that they are generating the very problem they seek to solve. Thinking about this more though, the root of the problem still seems to go back to capitalists’ lack of investment. Of course, printing inorganic money on that scale drives inflation, but largely because the increased demand that all that extra liquidity creates is not met by increased production from the private sector. Increases in circulating money create increased demand and consumption, so the rational response in a competitive economy would be for capitalists to increase capacity to gain market share, increase profits, etc. But this doesn’t seem to happen in Venezuela. Of course, that doesn’t exculpate the government from their role in all this either.

David Smilde Not if the currency is anchored and inflated. In such circumstances it is more profitable to import and distribute than produce. This is the infamous “Dutch disease” which progressively distorted the economy from 2004 to 2012 or so. Since 2013 the dynamics have been somewhat different.

Chris Carlson Yeah, I’m pretty skeptical of the whole “Dutch disease” framework. I think DiJohn (2009) does a pretty thorough job of showing why it doesn’t explain much in Venezuela. Capitalists in Venezuela have a long history of not channeling investment into productive activities (Coronil 1997), and that hasn’t changed much over time regardless of exchange rates, currency regimes, etc. “Dutch disease” would predict a decline in agriculture, for example, but actually production grew continuously throughout the oil boom, just not as much as consumption. It may be more profitable for some to import rather than produce, but that only confirms what I am saying about capitalists who feel no need to keep up with investment in their firms because of a lack of competitive pressures. Instead they channel profits into import schemes. Take away those import incentives and there is little guarantee they would go back to productive investments.

*Steve Ellner is a professor at the Universidad del Oriente, Puerto La Cruz, Venezuela

*Chris Carlson is a graduate student in sociology at the City University of New York, Graduate Center.