Venezuela’s economy under siege

Hugo Chavez' presidency was characterised by a strong social focus, a permanent commitment to defending workers’ salaries, a transfer of power to communities and workers and a strengthening of the role of the state in the economy

Cira Pascual Marquina interviews former Venezuelan Vice President for Productive Economy Luis Salas about the impact of United States sanctions on the Venezuelan economy and the Maduro government’s economic policy responses.

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The arrival of the Iranian oil tankers to Venezuela breaking the US blockade made headlines around the world. How important is this event, and how do you interpret the new petrol distribution system?

The arrival of the Iranian tankers is an important geopolitical event. Two countries blocked by the US, two nations under siege, succeeded at overcoming the sanctions and the blockade!

Along the way, the Iranian tankers had to circumvent the US fleet in the Strait of Hormuz and a sort of naval siege off the Venezuelan coast. In fact, there were overt threats from the US. From a geopolitical, geostrategic and geoeconomic perspective, we can call this a victory.

Regarding the new petrol distribution system, it’s a bit too early to evaluate. The shift includes a price hike for subsidised and rationed petrol [120 litres per car/month] and the dollarisation [US$0.5/litre] of non-rationed petrol. The first days of the new distribution system were quite traumatic. In Caracas, which is always favoured by the central government, the situation is somewhat normalised now, but days-long lines to purchase petrol persist elsewhere in the country.

We still have to see what impact the price hike will have on prices of other goods and services, but there is no doubt that the new scheme widens the gap between those who have access to US dollars and those who don’t.

Given the circumstances, my opinion is that the government’s priority should not be to adjust the price of services. Internationalising prices in a country where the minimum wage is about US$5 a month and where most public employees make about US$10 … that’s not the way to go!

President Nicolas Maduro’s attitude toward dollarisation is shifting. In the presidential campaign two years ago, Maduro harshly criticised candidate Henri Falcon’s proposal to dollarise the country. Yet, a few months ago he said: “I don’t look at it negatively ... it can serve for the recovery and deployment of the country’s productive forces and the activation of the economy ... Thank god it’s happening!” Does this reflect a change of tactics or simply a defeat?

In my analysis of the political and economic situation, I try to read not what the political actors say, which is often tainted by underlying personal and group interests, but what they do.

What has been happening is that the government has been allowing a laissez faire dollarisation. Hyperinflation plus a lack of circulating currency [due in part to fiscal and monetary policies] led to the economy being de facto “de-bolivarianised” [a term coined by Salas to refer to the process of spontaneous reduction in the use of the Bolivar, Venezuela’s national currency]. Then came a Supreme Court ruling allowing for paying salaries and services in dollars [Sentence 884, December 2018].

The tendency is becoming more and more explicit. And this goes hand in hand with President Maduro’s public celebration of the dollarisation process you mentioned.

The government is tacitly approving the economy’s dollarisation by every week adjusting the “agreed-upon prices” based on the market fluctuation of the USD. Obviously, the sale of non-subsidised petrol in dollars is also an element to take into account.

All this means that there is an implicit recognition of the dollar as a unit of account.

The policy aspects of this process are framed within the Economic Emergency Act, promoted by the Supreme Court and later ratified by the National Constitutive Assembly [ANC], which gives special powers to the president in economic matters. This is important because, as Maduro himself pointed out some two years ago during the presidential campaign, according to the constitution the only legal tender in Venezuela is the Bolivar.

Of course, there could be an open debate regarding what has primacy in Venezuela now, the Constitution, or the ANC which gave special powers to Maduro. In my reading, the dollarisation policies are outside the law and, what is worse, they widen the gap between those who have access to dollars and those who merely live off of their salaries.

Nonetheless, there is no doubt the government is advancing towards dollarisation, and this represents a hard turn away from [the late Hugo] Chavez’s economic and monetary policy. Is this a strategic shift? I don’t know, but the open question now is whether the government will carry out an overt process of dollarisation or if a future government will fully formalise the process.

There is much talk of covert privatisation processes underway. In the oil sector, “strategic alliances” are being signed, while we see services such as gas and city cleaning services being privatised. Meanwhile, the “inefficiency” of state companies becomes a pretext for silent privatisations. What can you tell us about these processes?

The process of privatisation underway is an open secret. It is going forward through the channels of the Economic Emergency Act. However, as opposed to more “traditional” processes of privatisation, this one is happening without public bidding.

For example, with the new model implemented some three weeks ago, petrol distribution is being privatised. Also, in some parts of the country, cooking gas distribution, previously under the control of PDVSA GAS, is in private hands and the same is happening with electricity.

There are also many state enterprises that have been privatised. One case is the Mercal-PDVAL-Abastos Bicentenario, which was the public network for food distribution. The infrastructure of this public distribution network passed over to private hands (without a public bidding process) becoming what is known as “CLAP stores” [not to be confused with the government’s food box program CLAP], belonging to a Colombian conglomerate.

There are many other examples of privatisations, from food processing plants to landed property.

In fact, many government officials declare themselves in favour of less state and more private participation in the economy.

You can hear the demands of the capitalist sector in the mouths of ministers, National Constituent Assembly members, and governors. Anybody that follows the media is a witness to this shift in discourse and policy.

Among certain sectors of institutional Chavismo, there is a myth that Chavez simply rode out the giant oil bonanza that coincided with his presidency. This becomes an argument to legitimise the processes of privatisation and structural adjustments underway. How important was the oil boom, and is it the key to understanding Chavez’s project?

It is true that during Chavez’s years as president there was an important hard currency revenue from oil exports, and that, for some time, the oil barrel was above US$100. But that wasn’t the norm.

When Chavez became president in 1999, the price of oil was around US$10 a barrel, and then it slowly went up. Around 2007 and then also around 2011, the barrel went above US$100.

Nonetheless, the average oil price under Chavez was around US$55, and many of Chavez’s important social initiatives were pushed forward when the barrel was quite low. Think, for instance, about the Barrio Adentro Mission, which was set in place around 2003, when the oil barrel was about US$27. So those who explain Chavez’s policies in a direct correlation with oil prices are not interpreting things correctly.

Also, if we examine “real prices” by considering factors such as world inflation, we can see that, when compared to the dollar’s buying power, the dollar in the 2000s had about one-fifth of the buying power of a dollar in the 1970s. Additionally, Venezuela’s population has more than doubled since the ’70s.

All this means that, in real terms, the true economic bonanza in Venezuela’s history was in the ‘70s with Carlos Andres Perez’s first government. By saying this, I don’t mean to hide the fact that Chavez’s government benefited from periods of high oil prices, but we should see the situation with a broader perspective. At the end of the day, this contemporary interpretation of Chavez is petty and self-interested: it is being used to validate fiscal adjustments and other orthodox policies.

There is now a gold boom in a country that has become one of the most active mining regions on the planet. How are these resources being managed?

At one point, the government made a big effort to push for gold exploration in the Orinoco Mining Arc, but the sanctions affected the initiative negatively. Nonetheless, it is true that Venezuela has ‒ in addition to the largest oil reserves in the world ‒ huge gold reserves. From my perspective, it is possible to develop a model partly based on the rational use of those resources. However, the sanctions and the corrupt logic around gold exploitation are a real problem.

In its discourse, the Venezuelan government defends the working class, but in practice, it tends towards a conventional model based on substitution of oil exports. This model is inspired by a “post-rentier” conception of development, ostensibly aimed at diversifying the country’s economy.

The attempted shift towards non-oil exports explains, in part, the policy of keeping the minimum wage at the lowest world level. The argument goes as follows: a cheap workforce together with the Special Economic Zones [offering incentives of all sorts to private investors, including extraordinary legal security guarantees and tax exemptions] will make Venezuela attractive in the world market, thus becoming a magnet for international investment. In other words, since the government launched the Economic Motors in 2016 [14 areas of economic development, from tourism to military industries to banking], and especially since 2018, the stated objective has been to become a centre for exporting goods.

How would you compare Chavez’s economic policies with Maduro’s?

While it is true that Maduro’s government is facing hard sanctions, it would also be wrong to paint too rosy a picture when it comes to describing the political and economic circumstances during Chavez’s presidency. Chavez lived through a brief but successful coup d’etat and multiple coup attempts; a lockout that brought oil production practically to zero; as well as long periods with low oil prices.

However, Chavez's presidency was characterised by a strong social focus, a permanent commitment to defending workers’ salaries, a transfer of power to communities and workers, a strengthening of the role of the state in the economy through price and currency controls and an important set of nationalisations. Finally, in the last three years of Chavez’s presidency, there was a firm commitment to supporting communes and other new economic actors.

If those are the key characteristics of Chavez’s economic (and social) policy, then we can safely say that the current government is going in a totally different direction…

What would you propose to come out of the current crisis in Venezuela?

From my perspective, the government should radically change its economic policy, which is driven by the idea of turning Venezuela into an export hub.

Even before the crisis, triggered by the coronavirus pandemic, this proposal had limited chances for success, and it would happen with a very high social cost for the country. After COVID-19, the plan became simply unfeasible due to slowdown of world trade. In other words, the international climate is even less favourable to the government’s proposed economic shift right now than it was in early 2020.

Given these unfavourable conditions at the global scale, and given that international markets are further closing up to Venezuela due to the sanctions and the blockade, we only have one option: building an internal market.

However, to incentivise an internal market, two key policies have to change: eliminating laws such as the 2019 Foreign Investment Law that favours foreign capital, and increasing wages to foster aggregate demand.

In terms of demand, what there is right now in Venezuela is limited demand from sectors that have access to hard currencies, while most of the population lives in a subsistence economy. Obviously, this does not favour the growth of an internal market, so it doesn’t foster production. From my perspective, that is the only way out of Venezuela’s current crisis.

[Reprinted from Venezuela Analysis. Luis Salas is a founder of the online journal 15 y Ultimo and a member of the economic think tank Vortice.]

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