Stop­ping Venezuela’s har­vest of sor­row

Financial Mirror (Cyprus) - - FRONT PAGE -

Two years ago, pub­lic protests erupted in both Kyiv and Cara­cas. Whereas Ukraine’s Revo­lu­tion of Dig­nity quickly took power, po­lit­i­cal change in Venezuela fol­lowed a much slower path. But Venezuela’s par­lia­men­tary elec­tion on De­cem­ber 6, which gave the op­po­si­tion a two-thirds ma­jor­ity, is mov­ing po­lit­i­cal devel­op­ments into the fast lane.

Al­though Pres­i­dent Ni­colás Maduro ac­cepted de­feat on elec­tion night, his gov­ern­ment has promised to dis­re­gard any laws that the Na­tional As­sem­bly en­acts, and has ap­pointed an al­ter­na­tive As­sem­bly of the Com­munes not en­vis­aged in the con­sti­tu­tion. More­over, he used the Na­tional As­sem­bly’s lame-duck ses­sion to pack the Supreme Court and has called on supporters to pre­vent the newly elected As­sem­bly from be­ing seated on Jan­uary 5. Like Ukraine two years ago, Venezuela is head­ing to­ward a con­sti­tu­tional cri­sis.

But there is an older and more omi­nous par­al­lel be­tween Venezuela and Ukraine: the Soviet Union’s man-made famine of 1933. Stalin’s de­ci­sion in 1932 to force in­de­pen­dent farm­ers – the ku­laks – into large col­lec­tivised farms caused 3.3 mil­lion Ukraini­ans and eth­nic Poles to starve to death the fol­low­ing year.

The catas­tro­phe was un­leashed when Stalin, con­vinced that the ku­laks were hid­ing grain from the Soviet state, req­ui­si­tioned the seed grain, be­liev­ing that this would force the ku­laks to use the hid­den grain as seed. But there was no hid­den grain – and thus no seed to plant the 1933 crop. Stalin blamed the en­su­ing col­lapse in food pro­duc­tion on con­spir­a­cies by the dead and dy­ing.

In­stead of deal­ing with the un­fold­ing catas­tro­phe, Stalin in­creased grain req­ui­si­tions, de­spite dis­mal pro­duc­tion lev­els – a move that led to mass star­va­tion. In­for­ma­tion was hid­den from the pub­lic, pre­vent­ing re­me­dial ac­tion. Even of­fers of in­ter­na­tional hu­man­i­tar­ian as­sis­tance, es­pe­cially by Poland, were re­jected. A famine in a coun­try as fer­tile as Ukraine was hard to imag­ine be­fore it hap­pened. And it is hard to imag­ine a sim­i­lar catas­tro­phe in a coun­try with the world’s largest oil re­serves. But, head­ing into 2016, Venezuela faces pre­cisely such a sce­nario.

There are four fun­da­men­tal in­gre­di­ents of such man­made dis­as­ters: re­pres­sion of the mar­ket, sup­pres­sion of in­for­ma­tion, sys­tem­atic per­se­cu­tion of dis­sent, and at­tri­bu­tion of blame for the dis­as­ter to the vic­tims (which jus­ti­fies rad­i­cal­is­ing the poli­cies that led to the prob­lem in the first place). Sadly, Ukraine is not the only ex­am­ple: The hu­man toll in China of Mao Ze­dong’s Great Leap For­ward of 1958-1961 was even greater, caus­ing an es­ti­mated 15-45 mil­lion deaths.

As in Ukraine and China, Venezuela’s gov­ern­ment has been try­ing to col­lec­tivise pro­duc­tion. Af­ter Hugo Chávez was re-elected in 2006, he de­cided to ac­cel­er­ate the “revo­lu­tion” and na­tion­alised banks, tele­coms, ce­ment, steel, su­per­mar­kets, hun­dreds of other firms, and mil­lions of hectares of land. And, as in Ukraine and China, the af­fected firms’ out­put quickly col­lapsed.

Be­yond out­right ex­pro­pri­a­tion, the gov­ern­ment im­ple­mented a sys­tem that at­tacked the mar­ket’s nat­u­ral abil­ity to self-or­gan­ise the econ­omy. The mar­ket is no panacea, and it can work only with a state that op­er­ates prop­erly, but it is a pow­er­ful sta­bil­is­ing force. Mar­ket prices pro­vide in­for­ma­tion about what is in short sup­ply. Prof­its cre­ate in­cen­tives to re­spond to the in­for­ma­tion con­tained in prices. And cap­i­tal mar­kets al­lo­cate re­sources in pur­suit of prof­its. Mar­kets may fail, and poli­cies can im­prove on out­comes; but Chávez and Maduro, like Stalin and Mao, at­tacked the mar­ket mech­a­nism it­self.

In Venezuela, a gen­er­alised sys­tem of price and for­eignex­change con­trols is caus­ing havoc. For­eign ex­change is al­lo­cated ad­min­is­tra­tively at a price that is about 130 times cheaper than the mar­ket rate. Not even drug traf­fick­ing is as prof­itable as this ar­bi­trage op­por­tu­nity, with ob­vi­ous con­se­quences.

A for­mula for “just” prices keeps all prices ar­ti­fi­cially low (set­ting higher prices buys vi­o­la­tors a ticket to prison), caus­ing short­ages, ra­tioning, and queues that con­sume many hours of most Venezue­lans’ days. Short­ages of crit­i­cal items have al­ready cost many lives, not to men­tion the dev­as­tat­ing ef­fects on pro­duc­tion. And, de­spite price con­trols, in­fla­tion is above 200%, be­cause the cen­tral bank mon­e­tises a fis­cal deficit of more than 20% of GDP.

The ris­ing oil prices that ac­com­pa­nied the adop­tion of th­ese poli­cies ini­tially muted their im­pact, as im­ports could make up for the fall in out­put. In 1998, when Chávez was first elected, oil was lan­guish­ing at $8 per bar­rel; in 2012, prices av­er­aged $104. But, rather than us­ing the wind­fall to build a fi­nan­cial cush­ion for a rainy day, Chávez chose to use high oil prices as col­lat­eral to bor­row mas­sively, qua­dru­pling the pub­lic ex­ter­nal debt. This al­lowed him to spend in 2012 as if the price of oil were $197 per bar­rel. But now, with Venezue­lan crude be­low $30 dol­lars and the coun­try cut off from in­ter­na­tional cap­i­tal mar­kets, im­ports are de­clin­ing to a frac­tion of their 2012 level. The pre­vi­ous de­struc­tion of pro­duc­tive ca­pac­ity has come home to roost.

The im­pli­ca­tions of this mad­ness are omi­nous. To pre­vent a hu­man­i­tar­ian catas­tro­phe, swift ac­tion needs to be taken: restora­tion of the mar­ket mech­a­nism; ex­change-rate uni­fi­ca­tion (as Pres­i­dent Mauri­cio Macri just im­ple­mented in Ar­gentina); an al­ter­na­tive sys­tem of so­cial trans­fers to sub­sti­tute for ra­tioning; fis­cal re­trench­ment; or­derly for­eign-debt re­struc­tur­ing; and mas­sive fi­nan­cial sup­port from the in­ter­na­tional com­mu­nity.

Maduro is not try­ing to do any of this; in­stead, he is de­vot­ing his en­ergy and cre­ativ­ity to main­tain­ing power, by fair means or foul. But time is run­ning out. Un­less Maduro changes, the new Na­tional As­sem­bly – where the op­po­si­tion’s two-thirds ma­jor­ity en­ables it to amend the con­sti­tu­tion – will have to change him.

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