During my last stay in Venezuela the handful of analysts I talked to with ties to the government all concurred on one point. Nicolas Maduro’s talk of an economic war is not a show used to distract followers. He actually believes the economy is being sabotaged by his national and international opponents.
Of course Venezuela’s economic performance is reaching crisis dimensions. Inflation reached 5.1% in October and 54.3% over the past 12 months. The scarcity index reached 22.4% (meaning in any given retail outlet 22.4% of basic consumer goods are unavailable) its highest level since early 2010.
But there should be no mystery regarding the causes, as the Venezuelan economy has the basic ingredients of any inflationary context: stagnant production and an expanding money supply.
While oil prices are still high, Venezuela’s oil production has stagnated in recent years. More importantly they get fewer dollars for their oil as a half million barrels a day go to China to pay for resources it has put into the China Fund.
This means not only that the government has less money to spend; it has fewer dollars to distribute to importers. Add to this a wildly overvalued exchange rate and the situation gets even more complicated as there are incredible incentives for dollars to be siphoned off into corruption and capital flight. The dollar crunch creates scarcities directly—by making it harder to import finished goods—and indirectly—by making it harder to import components needed to manufacture. It also creates a wildly undervalued parallel exchange rate that becomes a reference point for the pricing of many imported goods and even real estate.
At the same time, Venezuela’s monetary supply has grown by 70% in the past year. Thus the Venezuelan economy has a lot of local currency, but not enough things to buy. Goods whose prices are effectively controlled are scarce; the prices of everything else are soaring.
Mark Weisbrot has usefully pointed out that Venezuela is not Greece and is not on the verge of default. He is not alone. Institutional investors who look at the numbers beyond politics have made money hand over fist on Venezuelan debt in recent years. Sitting on immense oil wealth, Venezuela itself is still creditworthy; PDVSA could still take on more debt; the Central Bank could convert some of its gold into dollars. The government could take any number of measures to absorb excess liquidity or reduce pressure on the parallel dollar. It could also reduce subsidies to foreign allies.
But these measures require actual execution and it is not clear that Maduro has enough of a grasp of the problem to do so. On Wednesday he announced much anticipated “economic” measures. But most were quixotic plans to combat the “economic war.” He said they would fight speculation and hoarding through new processes of examination and controls: “we’ll go to every corner to look at the prices of every product.” He singled out web-based market places, suggesting they would call in their administrators “so that they can explain to us how it is that they fix speculative and false prices.” He also announced the creation of a new institution: the National Center for Foreign Commerce which would coordinate the different institutions administering foreign exchange.
There were a couple of non-war measures, but they seemed like too little. He suggested they would seek to coordinate and facilitate internal transportation with 5000 new trucks purchased from China and Brazil, incentivize worker production during December vacations through subsidies to enterprises and institutions, and roll out a new program to stimulate savings. Interest on savings is currently far below the inflation rate meaning most people logically spend their money as soon as they get it.
The futility of Maduro’s economic announcements have led some to suggest that he is not up to the task. That may be. But just as important is a political structure in which so much power is concentrated in the president that the people around him have little incentive to honestly lay out difficult facts. For months it looked like Finance Minister Nelson Merentes was putting together a pragmatic, concrete plan to address the crisis. But alas he was sidelined in favor of people who recommend continuity.
This could get much worse. If 50% inflation has not provoked a change in course, it is not clear what will. Again, Venezuela’s immense resource base means it is not on the verge of collapse or default. But it is sliding into serious economic dysfunction and that could seriously undercut Chavismo’s viability as a democratically supported political project.