Now that the municipal elections are over and Venezuela faces an unprecedented-during-the-Chavez-era period of at least 18 months without an election, speculation is mounting that Nicolás Maduro will use the relative freedom of action that gives him to make some politically difficult, but economically necessary reforms. On Tuesday of last week, the Hugo Chávez’s former planning minister Felipe Pérez Martí wrote a guest blog post on the Financial Times beyondbrics blog exhorting the need for reforms to avert a crisis and outlining a series of more or less orthodox macroeconomic reforms that Maduro should take. Francisco Toro was very critical of the post, arguing that his reforms essentially amount to suggesting that Maduro could solve the problems afflicting chavismo and save it with just a couple easy steps, with step one being: stop being a chavista. Then Mark Weisbrot responded to some of Pérez Martí’s criticism and bizarrely argued that monetary emission has nothing to do with Venezuela’s inflation—and argues that that type of monetarism is some sort of fringe ideology on the right—meaning that it’s all a result of the exchange rate controls which could easily be fixed.
There’s a lot to dissect in all of this, but Pérez Martí is absolutely right that Maduro will need to address the macroeconomic distortions he identifies if Venezuela is to avoid a severe crisis and that they will likely take a form similar to what he outlines. However, Toro’s critique is salient. Hugo Chávez dedicated a lot of political discourse toward critiquing neoliberalism and establishing his political ideology as being in opposition to neoliberalism. Pérez Martí is ingenuously suggesting that Maduro adopt a set of reforms that would, in essence, amount to a neoliberal adjustment similar to the paquetazo in 1989 that sparked the Caracazo riots and galvanized Hugo Chávez’s 1992 coup attempt.
As Toro points out, and as I’ve argued multiple times on this blog, when you build your entire political economy in opposition to orthodox economic policy, once that political economy stops working, you’re left with very few politically tenable options. That’s how you end up with the mess that is Venezuela’s political economy. The solutions may seem simple—end currency controls, reform the tax code, stop monetizing the deficit—but untangling the mess leads to further economic dislocations that upset the pueblo and requires adopting policies that alienate your ideological base. That’s hardly the type of advice a weak leader staring down an economic crisis wants to take.
That makes Weisbrot’s response to Pérez Martí all the more bizarre. As usual, he tears down the straw man that the whole world has been predicting collapse since day one, because a fringe that has always argued that the government was on the precipice proves that people who look at 50 percent (and rising) inflation, 20 percent scarcity, and an unknown quantity of largely illiquid reserves now are just the same scare-mongers from before. After that, he goes on to say that “the most urgent problems can be fixed with a change in the exchange rate regime.” This is because, in his view, the monetization of the deficit and the accompanying huge increase in the money supply has nothing to do with Venezuela’s inflation problems.* Even accepting his (wrong) assertion about the monetary expansion, his blithe confidence in the efficacy of an exchange rate shift to solve Venezuela’s problems doesn’t stand up to simple scrutiny.
Put simply, if all it would take for Maduro to control Venezuela’s accelerating inflation was a simple tweak to the exchange rate regime, the government would already have done it. The idea that the government would tolerate 50 percent inflation in the lead up to an important election and then adopt radical price control measures when all it has to do is adjust the exchange rate regime is ludicrous. The only way Weisbrot can mean this that makes any sense is if he literally means the process of adjusting the exchange rate system would be something the government could just do—that would just require publishing a decree in the Gaceta declaring an end to the currency controls. The actual adjustment, however, would be hugely disruptive. The gap between the official rate and the black market rate is running near 1,000 percent, and even assuming there is a significant transaction cost premium in the black market price, that’s still a potentially catastrophic adjustment that would almost surely trigger a spike in inflation and a collapse in real incomes. Venezuela could try (as it certainly appears to be) to ease down the gap through a series of microdevaluations, but that runs a severe risk of depleting the reserves, triggering a sudden adjustment once the government is forced to abandon the crawling peg (think Argentina in 2002).
Venezuela is going to go through a painful adjustment eventually. The economy is simply too distorted in too many different ways to gently untangle the mess without causing a lot of short term pain. While the reforms are simple to describe, they will not be simple to implement and that fact explains why Madurocontinues to address the problems by creating more controls rather than just making the needed reforms—though there is some evidence that he really believes the crazy things he says.
* Weisbrot’s dismissal of the effect of monetary policy on inflation reads like someone who is completely unaware the 70s happened in the West or the 80s and early 90s in Latin America. Most mainstream economists, not just Republicans and Libertarians, have incorporated the importance of the money supply to inflation into their models (unless Paul Krugman counts as a right-leaning economist now). Moreover, his argument that since quantitative easing hasn’t caused inflation in the US that monetary emission can’t be causing inflation in Venezuela completely misses the fact that in the US is in a liquidity trap; a situation that most certainly doesn’t describe Venezuela.