What adjustment is, and what it isn't

Stable, but not resilient
Stable, but not resilient
Stable, but not resilient

In the wake of the Red Adjustment, Venezuela is on its way to macroeconomic stability. It’s a statement that seems especially prone to misunderstanding, so maybe it’s not surprising we have to keep going back to it again and again to explain.

As usual, it’s Francisco Rodríguez of Bank of America who explains all of this most lucidly. It’s a message you may not want to hear. But you need to.

Nonetheless, maybe I can attempt a “for dummies” version of the same argument:

In Venezuela, the last few years have seen an especially perverse combination of terrible policies for the real economy together with terrible policies for the money economy. But what drives the day to day economic chaos that drives the collective arrechera is the acute mismanagement of the money economy – the “macroeconomy”, in the lingo.

Adjustment – what we’ve been seeing for the last 14 months – is the extremely unpleasant process of working out imbalances in the money economy. That’s the process we’re now probably 2/3rds of the way through. It’s no one’s idea of fun. But it has a beginning, a middle, and an end. And we’re closer to the end than we are to the beginning.

At the end of adjustment, what you get is stability.

“Stability” seems to rhyme with prosperity. It doesn’t. There are plenty of countries – think of Cuba – that avoid extreme volatility in prices, interest rates, supply levels and employment without becoming more prosperous at all. The drivers of economic prosperity are conceptually – but also in real life – separate from the determinants of economic stability. The real economy can suck for decades on end without sending the money economy haywire.

Saying the adjustment is slowly, gradually meeting with success does not mean chavismo is taking effective steps to make people more prosperous. It means it’s slowly doing things likely to curb the chaos of shortages, inflation and uncertainty that’s done so much to fuel protest this year.

This is a message people badly need to grasp, because not to grasp it is to be unprepared for what’s ahead. There’s a naive sense in much of the opposition that it’s the micro policies – the price controls and the expropriations and the regulatory thicket – that are driving day to day chaos.  Since there’s no sign they’re to reform the micro policy framework, people figure the chaos is likely to drag on and on forever.

That’s badly misleading. It’s bad macro management that’s driving the chaos. And the macro management is improving. Improving enough that they may even be able to afford a bit of a populist splurge ahead of A.N. elections next year.

Guerra avisada…