Mauricio Macri successfully dismantled a strict FX control regime in Argentina within the first few days of his government. Many doomsayers had called it a suicidal move. Despite the fear-mongering pushed by Kirchnerismo and the legitimate concerns about the social impact raised by several economists, Macri’s devaluation and dismantling of FX controls is so far a success. And he did it without calling the IMF.

Macri’s move had all the potential to be chaotic, dealing a significant blow to the first non-Peronist government in decades in its first days. Instead, nightmare scenarios were averted. The cepo – as the FX control was known – is gone. It’s like it never existed.

Can a reform like this be applied in Venezuela if a new government takes office? Well, It’s unlikely.

Conditions in Argentina were far from favourable, just like they would be in Venezuela if the controls are lifted in the near future. Macri took office in a country with rising inflation, record-low international reserves, amid a commodity prices downfall, rigorous price controls, export and imports restrictions, and political controversy pretty much everywhere.

How did Macri dismantle the cepo in just a few days?

The first thing you need to lift a FX control like the cepo is dollars. A lot of dollars. And you need them fast, readily available from day one. The first consequence of FX controls is the creation of a parallel market and a high demand of hard currency due to restraints to the supply of greenbacks through official channels. When controls are lifted, this demand will flow into the new open market. If there are not enough dollars to satisfy it, the price will shoot up.

To satisfy the initial demand for dollars, countries usually depend on their hard currency stocks held in the Central Bank’s international reserves. But these were pretty much gone in Argentina. Reserves could have been replenished before lifting the controls, but the only way to achieve that quickly would’ve been with loans from a multilateral organization like the IMF, or by issuing lots of debt.

How did Macri get those additional dollars with record low international reserves? His plan was to have other people’s dollars flood into the open market. It would satisfy the pent-up demand, and keep the initial devaluation from overshooting to undesirable levels.

There’s no blueprint for what Macri did, as conditions vary from country to country. For starters, Argentina’s greenbacks’ laying goose is the private sector; specifically agro-exporters – from soybeans to wheat. When Macri’s victory started to look more likely, these producers started hoarding their products and hard currency by delaying exports or the exchange from dollars to pesos. One of Macri’s main campaign promises was lifting the cepo, so they waited for more favourable exchange rates once he delivered on his pledge.

Once the cepo was lifted, they flooded the market with dollars. The process was coordinated with policymakers in negotiations that took place before lifting the controls. In addition, Macri eliminated export regulations and taxes to boost hard currency inflows and to keep the FX market active with fresh supply, alongside additional loans from international banks.

There’s also a subjective component in the recipe: confidence. If the people, the private sector, and the local financial system have no confidence in the government’s word and actions, the FX system and rate goals could be shattered. Macri got the confidence he needed in a simple way: he did exactly what he promised in his campaign. His crystal clear promise and proposals gave him the mandate to do so, as it could be argued that Argentines had voted to lift the cepo.

Venezuela is a completely different animal in terms of the source of foreign currency. Non-oil exports are registering their worst performance in two decades, thus the “export delay” strategy used by Argentina’s agro-exporters doesn’t apply here. 

With the Venezuelan oil basket selling well below $30 per barrel, PDVSA – which generates 96 out of every 100 US dollars coming into the country – will not be able to provide the greenbacks needed to get our precarious economic system (corruption included) functioning. And the company – due to under-investment, poor incentives, lack of maintenance and other factors – doesn’t have the technical capacity to significantly increase its oil output overnight.

Worse, international reserves are alarmingly low, and the country and PDVSA have to make foreign debt payments of more than USD 10 billion in 2016. Under this scenario, the initial picture of lifting the Cencoex/Cadivi FX cepo à la Macri is as scary as a Luis Salas paper on inflation (or should I say on “bourgeois speculation”?).

But there’s a way to get some of the needed greenbacks supply back. And no, I’m not going to talk about that same old argument on “sembrar el petróleo” or about issuing more external debt, as this is a Ludacris move at current bonds prices.

Did you know that Venezuela’s private sector has a net foreign position of around USD 147.5 billion abroad? If not, check BCV’s website in Balanza de Pagos and “Posición de Inversión Internacional”. Granted, we don’t know what portion of this money is liquid or easily convertible to cash, but this is private sector money, from Venezuelans. From the middle class professional that fled to Miami to the richest businessman running a successful transnational. This position has increased by more than 550% since 1998, precisely because so much capital has fled the country.

It’s money that could come back if conditions in the country are suitable and sufficient to guarantee not only a safe return on investment, but also the legal security to scare any “exprópiese” ghost from chavismo. Even just a small portion of this money abroad could help in holding back a large devaluation.

All the fears that have kept this money from coming back could dissipate quickly under a reform-minded government. Moreover, in terms of Purchase Parity Power, Venezuela would be more than attractive for investors holding hard currency if local conditions favor fresh investments.

But it’s not as simple as it sounds. These resources will not come back as easily or as fast as we’d need them to to stabilize the forex market, at least not at first. As Macri’s economic team assertively explained, in order to lift an FX control you need money instantly. Available in the short-term. In weeks, to be more specific.

Money follows incentives. Someone has to decide whether those incentives are good enough, and that that takes time. Time we cannot afford during the early stages of an FX transition.

The reasons for capital flight are not only economic ones. To me, they’re mostly politically-driven. A major overhaul of the legal framework to protect investment flows pushed by a responsible and credible new government, and enough political stability to boost Foreign Direct Investment (from Venezuelans and non-Venezuelans alike), would probably need to be in place first, just to make thinkable the elimination of the FX controls without an extreme overshoot of the exchange rate.

None of this could happen in Macrinomics standard time. We’re just starting from too far behind.

Sadly, Venezuela does not have the capacity to lift its FX controls in the short term without loans from multilateral organizations. At least not without enduring a huge, politically destabilizing devaluation. It’s too late for that, even if we get a new government that enacts deep pro-market reforms across all economic activities, and is trusted to competently rule over the messiest inheritance in Venezuela’s modern history.

Before lifting controls, the Venezuelan government would need to devise a medium-term strategy. It would take at least months to bring in enough hard currency FDI inflows, replenish international reserves, and persuade foreign oil companies to open up shop in the country. It’s not only a slow process, but would also require extending FX controls for a while longer, no matter how ugly, disruptive and corruption-inducing the delay might be.

This leaves one option to get it done in the short-term without a massive devaluation: a bailout. And as we have been debating in the blog for months, the IMF is the most suitable party to grant a big loan quickly. No one will like the strings attached to this money. Everyone can see it could be politically harmful to a transition government. But, so far, nobody’s had a better idea.


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  1. Un artículo acertado que ayuda a saber lo que le espera a Venezuela una vez pase el delirio chavista y dónde está el país en términos macroeconómicos. Thanks…

  2. Ludacris or ludicrous?

    Ether way, excellent article. It’s sad but for all the chavista fear mongering of the FMI, they accelerated the need of it for the country

  3. Is not that complicated.
    Adapt the $ as the official currency and you solve two problems really fast.

    1. Inflation goes intermediately down to the exact same rate as the USA.
    2. No more corruption getting preferential $.

    As a Bonus you finally gain financial stability.

    Ecuador did it and they are doing just fine.

      • OpOno: There are 25 countries using the $ officially. You dont need the permission of the US Federal Reserve. Hell, even North Korea has pegged their currency to the $.
        Ecuador has 15 years using it with great success. Unlike Maduro, Rafael Correa is an Economist.
        Just before Ecuador adopted the $ their economy was is shambles (they had bill notes of 50000 Sucres!).
        After the $ adoption went official they gained stability incredibly fast !

    • Whenever you star a comment on a complex issue of monetary macroeconomics with “it’s not that complicated”, it’s a fair bet you’re about to argue something monumentally ill-thought out.

        • It’s a heuristic. A “pretty good bet.”

          Look, dollarization isn’t a serious policy idea: it’s an expression of exasperation. Understandable, I guess, but a distraction: a shiny thing you can run off and chase after if you’re so minded. But c’mon..

          • Venezuela as well as Argentina are in urgent need of some economic stability.
            Find stability first and then you can start dreaming about having your own currency and making gambles with Macroeconomic policies.
            I rather give up control on currency if that means stopping inflation, corruption and $ inaccessibility.

          • Quico, you’re going to have to do a post as to why dolarisation isn’t valid. From my simplistic non-economist view, it seems a valid option. I’d really like it explained as to why it is not.

    • I believe is not that simple Toro Volt. Dollarization means you simply tie your hands leaving no way out to that system and resigning permanently to any kind of monetary policy. In addition, Ecuador passed very tough times after they established the USD as official currency. Is a very harsh “solution” that kicks you in the face the first years of its implementation. Moreover, it has the potential to make you very expensive in comparison to your regional peers. In a country longing for having another source of hard currency apart from oil, dollarization could be very harmful.

      • “no way out of that system”. Typo.

        In other words: to go back to your currency after a dollarization it’s almost impossible. It has huge costs.

        • “Today, the Ecuadoran economy is doing quite well on several standard macroeconomic indicators. The American economist Steve Hanke provides one way to rank its performance in his article in the magazine Globe Asia in May 2014. There he defines and applies a “misery index” in which a country’s current misery index = inflation rate + lending interest rate + unemployment rate (all bad things), minus per capita GDP growth over the previous year (a good thing). Venezuela has the worst score, the #1 highest measured macroeconomic misery not only in South America, but in the world. Ecuador’s score is the best in South America. Is dollarization responsible? Yes. The only two countries with better scores in Latin America are El Salvador and Panama, the only other dollarized countries.”


      • Javier, you don’t have to believe me. Here are the facts.
        Ecuador’s success with dollarization

        “Although some local critics of dollarization in 1999 predicted that the transition from the sucre to the dollar would cause a deep recession with high unemployment, the opposite happened. Due to high inflation, the people had of course already dollarized themselves by the end of 1999. Making dollarization official in January 2000 helped to complete the transition from the disorder of a collapsing currency to the calm of a relatively stable currency. The economy did not fall further into recession but responded with growth. After a steep drop in real output in 1999 (-4.74%), output growth returned to the positive range in 2000 (1.09%), then resumed a healthy pace in 2001 and 2002 (4.02% and 4.10%). Growth under dollarization has continued to be much healthier than under the sucre regime. From 2000 to 2013, Ecuador’s real GDP grew 75% in total, a compound annual rate of 4.4%. During the previous 13 years, 1987 to 2000, total real growth was only 36%, an annual rate of only 2.4%.”


        • Dollarization is a terrible idea. And a very lazy policy. Instead of fixing what’s wrong, you intend to discard it. Even if the things you are discarding are pretty damn useful, especially in an oil-rich economy. Things like “Monetary policy” and “Exchange rate policy”. And citing Ecuador as an example of dollarization is cherry-picking (and it’s not even a beautiful cherry). Let’s talk, for example, about Greece. It adopted a foreign currency over which they don’t have any control. Their process of “euroization” is basically the same as adopting the dollar. And just look at them. Proponents of dollaritzation say it will handcuff the government into behaving responsibly. That’s a blatant lie. Euro/dollarization did not prevent the Greek government from running huge deficits and issuing ridiculous amounts of debt. Now they’re screwed, and the one thing that could help them – a devaluation – is not available to them without going into a chaotic, disruptive and painful process of change of currency.

          I wrote about dollarization in Venezuela about two years ago (in Spanish). The figures are out of date, but the ideas stand:

          • Pedro, Currency policy is just one aspect of the Economy.
            Greek economic issues are not because of the Euro but Governance and Culture. They took loans they couldn’t afford to pay, that has nothing to do with the Euro.
            In fact, thanks to the Euro they don’t suffer from inflation, currency exchange corruption and $ unavailability.
            Of course Dollarization is not a Panacea, people still has to work to produce something and it won’t cure cancer either but at least it brings a framework for economic stability.
            Actually you can keep the Bolivar if you want as long as you stop printing. But still you have the issue with Dollar anxiety if people don’t trust the economy and the exchange rate, prompting people to keep their $ off Venezuela.
            Hard to find $?
            $ goes up, –> Devaluation, —>Inflation –> Repeat Loop.

          • Toro Volt, every single thing you mentioned: inflation, currency exchange corruption and $ unavailability… Should we mentioned all the countries that have low inflation, free currency exchange and $ availability, and have their own currency? You keep citing cases of dollarization or pegs, like El Salvador, like they are the only countries in the world with low inflation. Just look at the inflation numbers for Peru, Colombia, Chile, Bolivia, Uruguay, Paraguay, etc, all with their own currencies. You talk of exchange rate policy as if its an intractable problem, a puzzle impossible to solve, something better left to geniuses. Many countries, very similar to Venezuela, have independent and effective FX policies. And many of those countries are the same ones that, not that long ago, you would have said “lack the fiscal discipline” to have good FX policies. Many of them have gone through high-inflation, even hyper-inflation, episodes.

            A note on history: Your argument that FX policy is too complicated for Vzla, and better left alone, or that we don’t have and will never have the discipline to make it work, reminds of when the VAT was first discussed in Venezuela, in the early 90’s. Many politicians said “That VAT thing sounds too complicated for Venezuela”. A tax that was in place in hundreds of countries was “too complicated for us”. The VAT’s implementation was delayed for years because of this. There are other examples. Medina Angarita and his pals thought Vzla was not ready for full democracy, that most people we were too dumb for that. Bolivar said the same in his Angostura speech. That position, the “we wouldn’t know what we’re doing”, is self-defeatist and intellectually lazy.

          • Hmm, so your revs are mostly in USD, and your imports are also mostly in USD. You have rampant inflation, an illogical and massively exploited multiple exchange rate regime, shortages of basic products, no real economic or central bank policy etc.
            How dollarization could be a terrible idea seems to be more an emotional rather than a rational response.
            Yes, the introduction will be initially harsh for low income earners, pensioners, and crazy Bolivar deposit holders… as well as those exploiting the system right now (i.e. the majority supporting the status quo).
            But let’s be honest: Venezuela is effectively a dollarized economy already. Call in the IMF, take the pill, and let’s talk in a month or so.

        • The problem with dollarization is that it is not a one-size-fits-all policy Toro. You have also examples of disaster after a country tried to dollarize (or did something closely similar) or entered a monetary union. One of them is Greece, for instance. They entered the monetary union or the euro, without sufficient macreconomic conditions to do so. The euro made them very expensive to boost their productivity and competitiveness (among other relevant factors as a lack of fiscal discipline), and eventually they ended needing financing and more financing, until they could not take any more and crashed.

          Another example is the “caja de conversión” in Argentina. An FX reform that in practice was a dollarization thanks to its deep Constitutional reform to peg 1 peso as 1 dollar, leaving no easy way out. The only way to print a single peso was to have a dollar as income and so on. In the end, the cost of getting out of that system was the biggest economic crisis in Argentina’s history. Those consequences are still being paid with the litigation against holdouts on Argentine defaulted debt.

          Is not a formula for every country. And definetely not one for Venezuela. The transition from a messy economy to a stable one in the long-term via dollarization is not a bed of roses. It’s a bed of blades and fire. It erupts your economic disparities until you find equilibrium in time. And for a reform-minded government after chaviso, craving for political stability, sweating to mainting chavismo at bay and needed a massive amount of hard currency, a dollarization could be a tiro por la culata. It leaves you no chance of flexibility on your policies. No chance to adapt. Is to cure cancer by cutting one of your arms. You can cure it…granted, but it cripples you. There’s no way back from it, and you make yourself dependent of the monetary policy of foreign countries.

          I rather have a floating and free FX system anytime.

  4. Great article !! Evidently confidence is key , eventually you need the offshore forex deposits to return and there are two things standing in the way , fear of getting stuck in an entrapment situation if the political situation reverses and of course the existence of rampant inflation which has to be licked before people trust the country enough to bring their forex back to it ……

  5. Today the government barely allocates dollars for the private sector which mostly uses the black market for their needs.
    That means a free FX market for them would mean mostly a lower rate.

    OTOH, for the government imports they just need to have the necessary Bolivars approved by the congress because the amount of dollars they would spend would be the same and they can keep subsidizing the prices in the local market.

    So I do not see the advantage on maintaining the currency control.
    Legalizing the purchase of dollars and eliminating the import/export bureaucracy would initiate the process of normalization of the economy and return of foreign capitals.

  6. Adopting the USD as Venezuela’s currency would simply deprive Venezuela of policy flexibility, since monetary decisions would now be made entirely in Washington. The likely result would be a too-expensive currency and a brake on exports, since other countries will be able to devalue.

    That’s okay if Venezuela wants to remain an oil monoculture, but otherwise, no.

      • Oh and mark my words.
        Argentina doesn’t have the fiscal discipline or the Macroeconomic wisdom to keep their Economy stable.
        Dollar anxiety will prevail and the $ will be kept off shore.
        At least they are doing something in the right direction but I don’t think it would work long term.
        I predict further devaluations and inflation.

      • Roy, having control of the Currency has advantages but only *IF* you know what you are doing.
        Given the complexities and consequences that changing the currency value has is better to leave that sh*t alone.
        There are other less dangerous Macroeconomic tools.
        At least for now, I would rather have stability by fully embracing the US$ than making big gambles with misguided Macro economics policies.

        • I guess it all boils down to whether or not you think that Venezuelans are capable of acting like grownups. I submit that after surviving 2016 (assuming we do, of course), Venezuelans will be forced to grow up and accept that we don’t live in Never-Never Land and that the laws of economics apply equally to Venezuela, the same as the laws of physics.

          • Your expectations don’t take in count the cyclic behavior of the Venezuelan society and history. So, don’t bet all your money on there won’t be another populist-messiah and a lot of stupids that will believe him.

    • Given the apparent results of Venezuela having policy flexibility all these years, i wouldn’t bet on how a policy restraint can be a bad thing.

      Venezuela is not mature enough to handle all of its own woes.

      You could, for example, kill the inflation Hydra: The single most influential parameter on country’s economic and political history.

  7. Normally, I would argue for the immediate lifting of currency and price controls, such as Argentina did so elegantly. In Venezuela’s case, though, this would probably result in immediate famine. A treatment which is so strong that it kills the patient can’t be considered a good idea. So, no matter how messy and ugly, Venezuela will have to suffer through a planned transition, lasting as long as a year or two. And, yes, IMF funds will be needed. But, in order to get them, Venezuelan will have to present its transition plan for acceptance. And, there is no way that the IMF will disperse credits while there is a divided government and without commitment by all of the parties to the transition plan.

    The dollarization concept has its merits. But, it leaves the government without the tools to control its own monetary policy. To dollarize is to accept “little brother” status in the community of nations. If Venezuela is to regain its status in the world, this measure should be avoided, if possible. Of course, this means reestablishing the independence and competence of the Central Bank of Venezuela. If you don’t think this is politically possible, then by all means, you should dollarize.

    • Dollarization would lend credibility to the chavista accusation that the opposition wants to deliver Venezuela to the US.

      Also, it would be a terrible fiscal straight jacket.

      • My comment was not promoting dollarization, nor did I address the political aspects. I think I was clear that this course would subordinate Venezuela’s fiscal policy to the U.S., and for this reason it is not the optimum solution. However, if you arrive at the conclusion (I haven’t) that the Venezuelan politicians can never be trusted with fiscal policy, then this is the best alternative The latest decree makes the BCV subordinate to the Executive (Maduro) with no AN oversight. That decision needs to be overturned and the BVC de-politicized.

  8. Keeping the bolivar will actually help bring more foreign investors, the key factor here is trust, and as long as they keep appointing the kind of people they have been appointing that will never happen, I don’t see anyone boarding a bus with those guys at the wheel (heh).

    Money is shy and no amount of seda will be enough for that mona to make believe they will be trust worthy even if they were remotely close to The right track…

  9. Muy buen articulo.

    Referente al punto de la “credibilidad”, Macri pareciera ser un fiel creyente del libre mercado y de las ideas de Ayn Rand. Eso suma a su exitosa propuesta.

    En el caso venezolano, TODA, o casi toda la clase política, o es socialista hard como los chavistas o socialistas light como la oposición.
    Con la excepción de un microcosmos como lo que representa MCM, yo no veo como un mayoritario grupo político que cree en controles y en un papel interventor fuerte del Estado, pueda lograr lo que hizo Macri en Argentina.

  10. First thing to do: Kick fanatical chaburros out of office, there won’t be any confidence as long as those thieves are in power.

    Second: Completely stop confiscating stuff and privatize unproductive enterprises as soon as possible, so they can be put to production again.

    Third: Stop charging freakin’ dollar for export licenses, that’s another stupid measure chaburrismo took explicitly to destroy the private sector and stop non-oil exports.

    Fourth: Stop printing fake cash.

    Fifth: Gradually destroy the FX control, starting by eliminating the corruption rocket that’s the 6,3 bullshit and completely depenalizing non-official currency trades so dollar owners can have a reason to sell their dollars.

    Inflation’s unavoidable, in Argentina there was an inflation spike in some products, but then the prices stabilized, because the prices will adjust to their actual levels once you get rid of those useless controls.

  11. So… Take short term economic measures protected by careful negotiations, maybe some economists here can think of one or two, build rep, which is unavoidably inversely proportional to chavismo’s rep, get a solid gvmt going and start puttig through serious legislation to bring in dollaz.

    Then, maybe by the end of the first oppo gvmt, we eliminate the bugger.

  12. Question: If we eliminated FX controls tomorrow morning in Venezuela, would the black market price of the US$ (about 900 Bs) go up or down?

    Thank you,

    • There’s no correct answer for that one. My guess is that it will go up in time, because an overshoot in dollar demand (as you would be able to buy them with no legal consequence and through easier channels, without even considering the unexistent bolivares demand and the will of the people to keep their savings in any way except for local currency). In the supply side, with the Venezuelan oil barrel below $30, there will not be enough dollars to avoid an FX overshoot even above Bs900. Some people could trade their saved dollars to be liquid in bolivares and make front to the economic hardships, but this circumstancial supply will not be even a lightyear close to be sufficient to maintan the FX rates below 900bs. That’s my take, but there’s a myriad of possible scenarios with a FX control overnight lift…the vast majority of them are not pretty.

    • The $ would vary in Value by Objective and Subjective metrics.
      Rendering the entire Venezuelan Economy hostage to the up and downs of theconversion rate is crazy and is one the reason why before the FX control we had Inflation and devaluation issues.
      Adapt the Gold Standard, the $, Euro or someting more stable is the better way to gain stability.
      Argentina is up for a “fun” roller-coaster ride. good luck.

      • Ok. Let me get this straight once again. You say that a country completely reliant on oil – which is a commidity that apart from its intrinsic price volatiliy is also vulnerable to the changes in the global price of the dollar – should be also dependent of a currency that it cannot control, that would make it more expensive and hamper the capability of the private sector to become competitive once again? I don’t buy it. Is not one-size-fits-all.

        Besides, how are you going to dollarize an economy that is in a massive and historic hard currency liquidity shrinkage?

        And all of this sould be made overnight with no planning on the political economy side? With a possible transitional government starving of funds, stability, confidence and credibility?

        Again, I rather fo with a floating FX system, reformed in a gradual (but not too slow) way.

        • With a Populist and inept government a floating FX system will lead to capital flight and inflation.
          Floating FX only works for relatively stable economies and the Government has to always actively maintain it to prevent wild swings.
          Gambling with the Bolivar value is the last thing we need now.
          You need something of steady value to stabilize the economy.
          The problem with the oil price fluctuations is solved by building reserves, just like Norway does. In computing it is called Buffer and also works in agriculture with Damns.
          Currency manipulation is a silly trick that shouldn’t be used anyways.

  13. Excellent article Javier! I would underscore your point on how key it was for Macri to have campaigned with a clear economic reform proposal. This is quite different from case of the Venezuelan opposition.

    I think also a major factor in Argentina was the relatively slim (vis-a-vis Venezuela) gap between the official and the “blue” rates. In the end, there was convergence towards a mid-point somewhere closer to the blue. I think that, for Venezuela, we should separate the moment of the devaluation and decriminalization of the black market with the moment when capital controls are lifted. The latter should occur once the difference between each other is not beyond two orders of magnitude. The earlier devaluation and decriminalization would help in both raising the official rate and lowering the black market rate through increased supply and transparency – Venezuela is just way too cheap at Bs/$ 878.

    • You are right Jose Ramon. The gap between the official and the Blue was not bigger than 65%. It is not comparable to the gap between 6.3, 13.5 or 200 and almost 900.

      I agree with separating devaluation and decriminalization moments with the capital control lift. Sadly, I haven’t heard about any opposition leader or diputado discussing these options or timing. The monster is too big and scary.

  14. I would hope an article asking for an IMF bailout would at least mention how great that went in 1989 (caracazo anyone?). When I lived in Venezuela for most of my life nobody ever talked about the reality of what happened in 1989. I marvel at how a social upheaval/massacre a decade before was wiped off the collective memory of the better off social classes of Caracas. Apparently the amnesia persists. Might as well call the world bank for some structural reforms while we’re at it.

    • I fully understand what you mean. But…

      To put some “puntos sobre las íes”, I did not ask for an IMF bailout. The problem with our economic distortions now, is that any attempt to remove the FX control regime in the short-term would be futile, if there’re no sufficient dollars to do so without an extreme rates overshoot. The way to get massive amounts of hard currency cash in short time is through a bailout, which could make possible such lift. As I mentioned at the end of the article, no one will like the strings attached to this money. Everyone can see it could be politically harmful to a transition government. But, so far, nobody’s had a better idea.

      At least there’re no options to get it done fast. That leaves you the mid-term and a gradual FX control lift, alongside a set of pre-policies to prepare the context for a floating rate system.

      • In Venezuela, the political has always overshadowed rational economics. No one/ non-IMF entity will bring significant $ to Venezuela as long as the current Govt. is in power, or, perhaps, as long as Chavismo still has supposedly 40% popular support.

      • Javier, I totally get what you are saying. The FX situation is beyond f’d up and whatever the solution is it’s not going to be popular and its gonna hurt. Your analysis of different solutions is great. I just shudder a bit to hear IMF loan thrown out there without at least a sentence or two of historical background. IMF/Worldbank has a very negative history in Venezuela, Latin America and the rest of the developing world (not black and white either). Now the readership of this blog probably hasn’t been exposed to some of the more critical analysis of this (as evidenced by every comment that doesn’t even blink an eye at this). TBH until I was older and delved into history I was oblivious to the IMF and Worldbanks role in Venezuela, the Caracazo, the 90s golpes, eventually electing Chavez.
        Now the rest of the population that has been exposed to perpetual government rhetoric and probably a bit more analysis of what happened in Venezuela pre-Chavez i think would strongly oppose IMF/Worldbank in Venezuela and the mere suggestion by the opposition might turn a lot of people off. Im staunchly anti-chavista and it turns me off.
        Anyways, having real talk about all these solutions is great, and offering different perspectives is key. I commend you. I hope the oppo will delve heavily and transparently into these convos.

    • One might argue that this problem is self-correcting. I would suggest a Darwin Award, but these deaths by stupidity are so common and plebeian, they don’t merit so much fanfare.

  15. This is a very interesting piece. Thank you. This analysis is another indicator of how the regime has unintentionally compromised Venezuela’s sovereignty and democracy, by taking a know-nothing stance that has deprived it of the ability to mitigate the effects of an adjustment through early and prudent measures, and which will eventually result in decisions being made by external institutional interests (when the dust clears, which is a big “when”). Luis Salas and Nicolas Maduro are neo-liberalism’s best enablers without knowing it.

  16. Don’t forget the shock of suddenly realizing that everyone is way more pela bola than we want to believe, that will hurt… A big part of the country trying to live a “we are middle class” lie crashing into a “your salary is nothing” wall.

    It will happen anyway, but will be hard nonetheless.

  17. Lets not follow Argentina but Ecuador and many others !

    Zimbabwe Inflation Rate.
    November 2008

    December 2015
    -2.5 %

    What Happened?
    Did sudenly Zimbabwe figured it out Economis? –> Nope
    The Official Zimbabwe Currency collapsed after years of Hyperinflation so people started trading in US$.
    The Goverment had no other choice but to finally adopt the US$ as Official currency a few months ago. LOL

    Current Salvador Inflation Rate
    0.8 %
    Official Currency US Dollars since 2001.

    Similar story for Ecuador….
    Dollarization the Escape Plan for Venezuela (Good read)

  18. How about rising gas prices? Venezuela loses over $30 billion worth of gasoline a year. That money could very well be spent elsewhere. But hold your horses!

    I agree with the gas price being raised ONLY under a new government. My reasoning is that, if the subside ends, Maduro and his crew wouldn’t invest the money that is currently used to subsidise gas prices on the people’s well being, but instead, as they’ve proven many in the past, they’d mismanage (and I’m using this term lightly) that money; and sadly the only way Venezuelans benefit from this money, and the only way’ll they benefit from it under the current chavista regime, is through subsidised gas prices.

    • David, the subsidized Gas is being smuggled to Colombia by government connected mafias for huge profit margins.
      Yes lets make those corrupted bastards richer at the expense of public money !
      Gas prices should be left unregulated. The government could issue instead limited Gas cards at no-profit Gas cost.
      That would stop Gas smuggling in its tracks without hurting the poor.

  19. The topic about dollarization or better dismantling the national currency policy is just a mere political-will-issue and something i don’t see happening with the venezuelan pusillanimous-political-class. Basically because there’s a lot of people who naivelly thinks the society will transform itself in the future, in the same stupid sense the Chavizts propose that nonsense of the New-Mankind (el hombre nuevo).

    No venezuelan goverment will be interested in sacrifice the populist opportunity of make money from the air, and that is the big issue here, not the impact in the economy or how factible would be the adoption by the society.

    Francisco Toro argues that dollarization is not a serious policy, but he forgets that the use of a single and common monetary currency favors the international trade, attracts the inflow of capitals and investments and detracts the outflow of local money. So, it is a very serious policy, specially if we take in mind the effect of the liberty of movement of people and capitals in the economic blocks of today e.g. the Europpean Union, the Caribbean and the South Africa Common Monetary Area to which is de facto tied Zimbabwe btw). In fact, the tendency in the global economy is towards the use of only three or four currencies not one per country. It is been applied in Africa where al least three monetary blocks are going to coincide in a mid future, two of them currently pegged to the euro, the same in Oceanía where the AUD, NZD and EUR are the common currencies in three different de facto blocks existing.

    Javier Ruiz explains that the change would be deletereal for any politician who adopts it. Of course, but it depends on how successfull the measure be, the proof is the Ecuadorian and Salvadorean experiences. Only applying dollarization is the same as doing little or nothing to revert the chaos in this economy, the benefits expected won’t happen if there aren’t complimentary measures to be applied, like the liberalization of the economy, the access to the credit, the freedom of investment, and some sort of legal and political stability and planning. It means, the government should behave as a government separating government policies from State policies, not acting like a bipolar teenager girl (“exprópiese, porque me sale del forro”).

    A myth or common-place in this topic is the shortage of currency to apply the model, it is a false idea, as how much would depend on how far the government wants to devaluate the currency. In a country like ours, where the value of the money is nothing, and the impact of the losing of the saving is null; the bigger the devaluation the better, as it will create an adjustment in the size of economy, and will dismantle the distortions between productivity and earnings in one only hit.

    It would be very hard to accept it for the society, as Carina II mentioned previously? maybe, but remember, the purchase-power is totally eroded today, so everyone have realized that they are poors, but the duality of official bolívars and de facto bolívars used by the regimme propaganda is the only stone of the “we are a rich country” story. I have been thinking that the price should be higher than the comparison-goods-price, the one that can be calculated by comparing how much cost a basic basket of goods here in Venezuela and in our neighboring countries, we have to exclude services as services are totally subsidized here and they are another factor of distortion to be corrected. According to what i have stimated, the exchange value is around 500 VEF/USD, which will lead to everyone into the international nominal poverty as we are in the reality, like cubans are.

    Now speculating if applied, how could a government survive this? Well it has to apply complimentary measures.

    a) Devaluation should be higher than the above-mentioned 500 VEF/USD to guarantee an excedent of cash flow, maybe 15-20%, so it will render the capacity of the reserves to exchange the whole monetary mass in bolívares without running out of cash to kick forward the economy at start.

    b) Savings should be forgotten or sacrified, they worth nothing today as inflation told us every week.

    c) Prices will stabilize in something like 3-4 months, so minimal-wage policy shouldn’t be adjusted until then, people will have to survive with food coupons in the meantime, there’s no another way.

    d) Services should be adjusted in the mid-term, after the salaries were adjusted, and their costs have to be distributed amongst the whole people, so, no more free electricity for ranchos or free water for mid class neighborhoods, no more free gasoline for the people with cars, and so on.

    e) Minimal wage shouldn’t be higher in Venezuela than in our neighbors, just enough to survive, that’s the sense of the minimal, around 120+services USD/month should be enough, minimal-wager are poors they can’t be middle class. To be competitive against Colombia labor should be cheaper here than there, that’s what they applied to us in the 2000’s.

    f) Production should be encouraged with a tax policy favourable to instalation of projects and the investment; we have to produce for us and to export, it should be tied with an absolut warranty of the freedom of money movement, if dollars in dollars can out, that’s the only way to attract dollars to be multiplied here.

    g) Bureaucracy and economy should be fixed to the real extent of their productivity, in the meantime a lot of people would be unemployed, so they have to live from the food coupons tied to the scholarship of kids, and training programs for adults for example.

    h) the labor market should be adjusted with freedom of cheap firing and cheap hiring of people, it would allow in the run that people could have two-three works when the economy allows it.

    i) Economy should be competitive, and the government has the tax, labor and credit policies to make it competitive, there’s no need to devaluate currency to favor exports, just keep cheaper the labor, dynamize the credit, and set low the taxes when appropiate. Then adecuate and enhance the infrastructure and became more competitive.

    j) Open the strategic sectors. The only way to attract investments at the start is by exploiting what we have that others don’t in order to became prettier than Colombia or other countries in the region.

    It is a very very neoliberal plan, yes. Which is the counterpart?, of course keeping education, health and transportation, the three things people need to became useful for society (with the addition of security) of universal access, free for the two firsts and subsidized of equally distributed for the last one.

    Someone will ask about the impact of such a measure on the financial system, well the local banks are the main tenders of public debt, so they will have to adapt and sell their positions to a governmental policy of restructuration of debt and will have to use their own foreing positions to continue existing. So as people’s saving are worthless seeing falling some artificial banks won’t hurt.

    People will adapt in the short term as we are poor and miserable now, looking for coupons won’t hurt, in 6 months people would be able to fix their budgets, as the economy start to absorb and employ people at the equillibrium labor prices. If social measures like coupons and access to education, transport and health are guaranteed there won’t be any riots or the mithic Caracazo, remember Caracazo started when people couldn’t go work because of the lack and the rise of the public transport in the suburbs, not directly by the economics measures itself.

    Freedom would be the final goal, you will have the freedom granted from the value of the labor is the same here and out, it will be higher as higher be your productivity, of course it needs investment in tech and research, otherwise we have to think about becaming some sort of American 80’s-China with low qualified works and low labor prices, just aiming to be competitive on our closeness to Europe and the East Coast of the States.

    Why all of this couldn’t be attained without dollarization, well, in my opinion the “if cash in, cash can out” is key. And the Messianic-demons will be ever present in our society, so we have to render ourselves from the possibility of the use of the money-maker-machine by populists. Also, the credit cost should be low and with a national currency, credit will be more expensive, as Central Bank has to keep a little-higher-than-depreciation plus FED’s rate to guarantee the credit in local currency without printing inorganic money and, as credit is key to growing the economy, we have to keep it as low as possible. That is only possible if it is tied to hard currencies, but remember that having credit tied to hard currencies and running own currency is the worst scheme possible, it leads to the catastrophe when local currency is devaluated or the credit rate rises in the hard currencies markets.

    • What about the huge informal sector that does not get food coupons? How do you feed three meals to a family out of coupons for one meal?

      How will any government survive implementing this?

      It is refreshing to hear the options being frankly discussed here. But they underline the magnitude of the challenge.

      • As i stated, people don’t need to be employed to get the coupons.

        The distributive mechanism should be tied at first to your ID, then to the scolarship of your sons and your enrollment into formative programs.

        How a government would survive implementing this? with part of the 15-20% surplus of currency reserved after devaluation and dollarization and part of the taxes. Possibly it will need the aid of the multilateral entities. The only justifiable use of money from IMF/WB should be that, it is a nonsense to fund bureaucracy at the cost of dismantling apart the country to the IMF/WB, bureaucracy should be cut to the real size of economy.

        In a moment it would work as some sort of humanitarian aid, but after the prices stabilized to the market and economy start to absorb workforce, it should migrate to some sort of palliative aid tied to the building of human capital.

        And it should be food coupons, not money, to avoid the disgrace of the Misión Madres del Barrio, aka Misión-abre-tus-piernas (open-your-legs) that paid every woman half of a minimmal wage per child and a whole minimmal wage per missfunctional each one. A total pervertion that promoted lazyness and raised the reproductive rates in the lower socioeconomical stata of the population with no useful consecuenses in the development of those childs apart from letting them buy cellphones, expensive clothes and raise the teenager pregnancy rate.

    • Simple, just by using the money we really have, avoiding to bringing money from loans or aid to low the exchange rate. As savings in bolívares are worthless we don’t need any favourable to the bolívar exchange rate, we need at the contrary, vaporize more the bolívar to ensure the amount of the existing bolívares to be extinguished completely with the stock of strong currency we really have.

      After the exchange, cash could flow into, not before. People have to get used to cover as much as the extent of the blanket lets.


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