Ni­colás Maduro will not re­verse Venezuela’s eco­nomic col­lapse

The pres­i­dent’s lat­est mea­sures do noth­ing to ad­dress the main causes of the cri­sis

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY RI­CARDO HAUSMAN, FT CORRESPONDENT The writer is a pro­fes­sor of eco­nomic de­vel­op­ment at the Har­vard Kennedy School and di­rec­tor of the Cen­ter for In­ter­na­tional De­vel­op­ment at Har­vard Uni­ver­sity

When pre­sent­ing his eco­nomic sta­bil­i­sa­tion plan on Au­gust 17, Venezue­lan pres­i­dent Ni­colás Maduro proudly ar­gued that no gov­ern­ment has ever done it this way. He should have won­dered why. Venezuela is un­der­go­ing an eco­nomic col­lapse with­out prece­dent out­side of war or the fall of the Soviet Union.

When pre­sent­ing his eco­nomic sta­bil­i­sa­tion plan on Au­gust 17, Venezue­lan pres­i­dent Ni­colás Maduro proudly ar­gued that no gov­ern­ment has ever done it this way. He should have won­dered why. Venezuela is un­der­go­ing an eco­nomic col­lapse with­out prece­dent out­side of war or the fall of the Soviet Union. This is ac­com­pa­nied by hy­per­in­fla­tion. An­nual in­fla­tion is run­ning at over 80,000 per cent and the IMF has pre­dicted it will hit 1m per cent this year. The price of the dol­lar has added three ze­roes in 15 months.

The rea­son for this col­lapse is twofold. On the one hand, the Chav­ista rev­o­lu­tion — through ex­pro­pri­a­tions, for­eign ex­change, price, labour and profit con­trols — de­stroyed the mar­ket mech­a­nism, whereby the needs of some be­come the liveli­hood of oth­ers. As a con­se­quence, ram­pant short­ages and dis­in­vest­ment en­sued.

The sec­ond rea­son is an ex­treme dol­lar short­age caused by the col­lapse in oil pro­duc­tion and prices and by over-bor­row­ing dur­ing the boom years: at over 600 per cent, Venezuela has the largest for­eign public debt to ex­port ra­tio in the world. When the oil price col­lapsed in 2014, the gov­ern­ment re­fused to re­struc­ture the debt and opted in­stead to cut pri­vate sec­tor im­ports, lead­ing to a col­lapse in out­put due to short­ages of raw ma­te­ri­als and spare parts.

To make mat­ters worse, oil pro­duc­tion, ham­pered by mis­man­age­ment, over­tax­a­tion, ex­pro­pri­a­tions and a ridicu­lous ex­change rate, went into a tail­spin. It stands now at barely over a third of where it was when Hugo Chávez took power in 1999 and 30 per cent be­low a year ago.

With col­laps­ing out­put and im­ports, both oil and non-oil tax rev­enues col­lapsed. Twelve-month rolling non-oil tax rev­enues, mea­sured at the par­al­lel ex­change rate, went from $8.6bn in Jan­uary 2014 to just $1.1bn by March of this year. To limit the en­su­ing fis­cal deficit, the gov­ern­ment opted to de­lay wage ad­just­ments. The min­i­mum wage went from $280 per month in 2012 to about $1 be­fore Mr Maduro’s speech.

This de­ci­sion trans­lated into a dra­co­nian cut in real public sec­tor wages and pen­sions. But this proved in­suf­fi­cient to stem the deficit, forc­ing the gov­ern­ment to use the money print­ing press.

In the midst of this havoc, Mr Maduro fi­nally de­cided to present some­thing that has a fam­ily re­sem­blance with an ad­just­ment pro­gramme. He an­nounced a still un­clear ex­change rate regime that im­plies the of­fi­cial price of the dol­lar will go up by a fac­tor of about 30. He also an­nounced an in­crease in the value added tax from 12 per cent to 16 per cent, the in­tro­duc­tion of a fi­nan­cial trans­ac­tions tax be­tween 0 and 2 per cent, and an in­crease in petrol prices to “in­ter­na­tional lev­els”, with sub­sidised fuel for house­holds. All this sounds fairly con­ven­tional.

But Mr Maduro ac­com­pa­nied these de­ci­sions with a one-year tax hol­i­day on the cor­po­rate in­come of the oil in­dus­try and an in­crease, of more than 3,000 per cent, in the min­i­mum wage start­ing on Septem­ber 1, with the gov­ern­ment pay­ing for the in­crease in pri­vate sec­tor wages for 90 days. Price con­trols are to be beefed up to pre­vent the pri­vate sec­tor from rais­ing them and peo­ple are en­cour­aged to de­nounce vi­o­la­tions to the price po­lice.

What will hap­pen? No­tice that the two causes of the cri­sis — the de­struc­tion of the mar­ket mech­a­nism and ex­treme dol­lar short­age — have not been dealt with. So it is hard to see how out­put and im­ports would rise. Peo­ple will have more money in their pock­ets, but there will not be more goods to pur­chase, with ob­vi­ous con­se­quences. Public spend­ing is to go up dra­mat­i­cally as the gov­ern­ment takes re­spon­si­bil­ity for the na­tion’s wage bill.

But the rev­enue mea­sures are post­poned to at least the fourth quar­ter, mean­ing that the print­ing press will have to go im­me­di­ately into over­drive. By the end of Septem­ber, the ex­change rate will have de­pre­ci­ated so mas­sively that the gov­ern­ment is likely to balk at set­ting petrol prices at in­ter­na­tional lev­els and may aban­don other as­pects of the pro­gramme.

Price con­trols, if ef­fec­tive, will force com­pa­nies to sell be­low re­place­ment cost, de facto ex­pro­pri­at­ing their work­ing cap­i­tal. Busi­nesses are threat­ened with ex­pro­pri­a­tion if they shut down or vi­o­late price con­trols — not ex­actly the kind of mea­sure likely to ig­nite a sud­den burst of in­vestor en­thu­si­asm.

The bot­tom line is that there is no road to re­cov­ery with­out the free­doms that un­der­pin the mar­ket mech­a­nism and with­out in­ter­na­tional fi­nan­cial as­sis­tance to kick-start im­ports and out­put. That will only hap­pen after Mr Maduro leaves and this regime ends.

Not far from the US, a des­per­ate leader is steer­ing a once-pros­per­ous democ­racy to­ward dic­ta­tor­ship

These are the bru­tal emer­gency mea­sures it would take to pull Venezuela back from to­tal col­lapse right now

As a re­sult of the gov­ern­ment’s mea­sures, peo­ple will have more money in their pock­ets but there will not be more goods to pur­chase © Reuters

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