From the Archive: Living Out Your Own Counterfactual

I wrote this post in September 2013, before I'd really met Moisés Naím, let alone started writing with him. The price of oil was at $111, and the term "economic degeneracy" already described our situation. It's only gotten more relevant in the three years since.

In his 2011 ProDaVinci interview with Rebelión de los Náufragos author Mirtha Ribero, Moisés Naím launched into a well-rehearsed riff about the inevitability of economic reform when he came into government in 1989.

Everyone advocated “gradualism”. They would come to my office or they would question me in congress and ask for gradualism. That, in practice, meant protection for the interests they represented and shock for the rest of the country. The labour unions, the industrialists, the multinationals, the SMEs, the indigenous people, the school teachers, the doctors, the bankers, the universities, the military, the business community…everyone got organized to pressure the government and try to extract protections and subsidies from the public purse that would shield them from the inevitable costs of the adjustment that had to be carried out. The truth is that no democratic government chooses to put its people through an economic shock if it can avoid it. That debate between shock therapy and gradualism was absolutely hypocritical, ill-intentioned and theatrical. We didn’t have the choice to do it differently. The country was out of options.

People didn’t understand or accept that there was no alternative. You could give speeches, you could grandstand, you could bleed for the poor, but in the end the reality is that we were out of money. That’s it. You didn’t have a state apparatus that could keep price controls in place, there was no way to keep handing out dollars through Recadi at an artificial rate, we could no longer keep protecting inefficient industries or bankrolling state enterprises that lost obscene amounts of money every year, or keep a giant and dysfunctional public sector that impoverished everyone. You had to take apart the controls that were starving the economy of air and impoverishing and corrupting Venezuelans, and all these things were intertwined.

It’s a key little rant, and still the most eloquent defense of the much-maligned neoliberal reform effort of the late 1980s.

There’s just one problem: it’s not true. 

Of course there was an alternative. Nothing. No hacer un carajo. If they’d really wanted to, they could have just done nothing.

It was not, strictly speaking, impossible for the incoming administration to stick its head in the sand and refuse to deal with the inflationary pressures that were barely kept under control by a dysfunctional, corruptogenic exchange and price control regime, or with a deliriously incompetent and loss making state-owned enterprise sector that was driving fiscal imbalances, or with the acute shortage of foreign exchange that made it impossible to finance an adequate level of imports, or with any of the really painfully obvious dysfunctions of the economy it inherited.

It’s just that, to a guy like Moisés Naím, the consequences of doing nothing were so dire, so extreme, that doing nothing was as good as impossible.

But “as good as impossible” doesn’t really mean “impossible”, does it?

That Moisés Naím couldn’t bear to think about the alternative to reform doesn’t mean al alternative didn’t exist. It did. From our vantage point today we can see it clearly: the alternative to reform back then was the Venezuela we have now.

Take price controls. Even knowing that the state apparatus that administered them was creaky and corrupt and entirely unfit for purpose, there was no law of nature saying the government had to repeal them.

It’s just that doubling down on price controls would’ve seen scarcity spin out of control, forcing people to spend hours on end waiting in line to score one or two measly packs of harina PAN to the point where even Maracucho Superman was going to peel balls to find any.

Sure, even then, continuism wouldn’t ultimately have done much to keep a lid on inflation, to say nothing of people’s salaries’ purchasing power, and sure, it would likely have fueled the rise of massive smuggling conglomerates devoted to taking the goods you keep subsidized across borders where they fetch several times the subsidized price – but was it literally impossible?

Not at all.

Or take the state owned enterprises. Sure, refusing to bring a minimal level of rationality to their operations would’ve cost the nation dearly, but if they’d been bloody minded enough they could have just refused to revise the collective bargaining agreements for years and years after they’d expired, let inflation eat away at their buying power and just taken the resulting labor blowback like a man, even if it meant shutting down one state own firm after another and bred crazier and crazier corruption schemes that ended up costing the nation literally billions. Crazy bad policy? You betcha!


In no way.

Or take RECADI, the 80s era version of CADIVI/Cencoex/DiPro/whatever it is they’re calling it this week. Caracas wasn’t going to fall into the Caribbean Sea in 1989 if they’d just  refused to wind up the currency exchange control regime merely because they had 10 people asking for every one dollar RECADI had to offer. It’s just that maintaining such a refusal would’ve seen the rise of an uncontrollable currency black-market breeding more and more corruption, with dire knock-on consequences for the rest of the economy.

As the gap between dollar demand and supply grew, the street rate would’ve climbed first to two times the official rate, then to three times the official rate, then four, then five, six and, in time, seven times the official rate. [2016 edit: imagine! we used to gasp that the black market exchange rate had climbed to seven times the official rate!]

Yes, the distortions you would start to see at these kinds of spreads would’ve tended towards dadaism in their absurdity. At some point people would’ve started doing bizarre things like buying airplane tickets that cost thousands of dollars for flights they never intended to board just to send a friend to Aruba with a credit card to cash in on some of those impossible arbitrage margins.

But, strictly speaking, if that was what they really wanted to do, they could have done it.

In a way, we’re almost fortunate. We get a chance to see what lay just beyond the bend along the road not taken. Venezuela is living out its own counterfactual.

To everyone who slammed the reforms of 1989 – to all those who said they were needless, destructive, mindless, unnecessary – history has taken the trouble to show us the alternative in clear, crisp, compelling technicolor.

And to Moisés, get it right: there was an alternative. Venezuelans are living in it every day.