Is it possible to escape the misery-spiral Venezuelans face? In a post for Prodavinci, Ricardo Hausmann and Miguel Ángel Santos propose a solution.

Firstly, how deep is the crisis? Although the images and stories of the crisis are well-known, the authors point out some devastating figures to give a sense of the magnitude: A GDP fall of 37% in the last 4 years and a fall in real terms of 87% of the minimum wage. Moreover, a 48% fall in the oil-production compared to ‘98 levels.

Depressing.

Decline in imports levels are so high that they are larger than those experienced by African countries during their civil wars, such as Nigeria (1987) or Sierra Leone (1998).

Chavismo can be worse than war…

Well, what brought us here? Several things didn’t help.

  1. No access to foreign currency since 2013: A combination of falling oil prices (101 $ per barrel in 2013 to 35 $ in 2016), declining production and no access to international debt markets since 2014, have greatly reduced available dollars for our economy. In short, lower prices, less production and no-one wants to lend. The few dollars we generate go to Wall-Street and the remains to medicine, food, the military and corruption.
  2. Too much debt: Although we come from a 10-year oil boom, our current debt load stands at around 178 billion dollars (178 millarditos). To put the number in perspective, the debt is the equivalent of 6 times our yearly exports. That’s 3 times the average of Latin America and more than Sudan (4,1), Yemen (3,9) or Burundi (3,3). What a club!
  3. BCV finances the fiscal deficit: In the past 12 months, the amount of money the central bank printed rose by… 716%. Basically, when the government runs out of bolívares, they just print s’more. For inflation, that is the equivalent of throwing gasoline to a house on fire.

Ok. But, how do we get out of this?

Hausmann and Santos think the prerequisite for recovery is that the current regime must change. Economic recovery without political change is impossible. Once it comes, they have three main proposals:

  1. Unifying exchange rates. Among economists, there is a discussion whether unifying exchange rates – which would imply an important devaluation of official exchange rates – would cause more inflation since all imported goods would then rise in the same way the exchange rate would. The authors argue that in the context of unifying exchange rates with an opening to international trade, the bolívar would stabilize at a rate stronger than the black market’s. Additionally, ending the scope for currency arbitrage would close off the transfer of public wealth to the connected elite. The money that comes from the elimination of the subsidy would go to closing the fiscal deficit and thus stopping the crazy ongoing creation of bolívares by the Central Bank, and the inflation that goes with it.Wait… can the exchange rate really go down? First, let’s start by acknowledging that the black market rate is higher than it would be if we were open to international trade. The logic is that, for example, if potatoes cost $1in Barranquilla, they should cost more or less the same (expressed in $) in Barquisimeto, because there is trade. Currently, that relation does not hold.
  2. Turning around the country’s currency cash flow: Given the ill-state of PDVSA, increasing oil production is not a viable solution… in the short term. Asking the IMF for loans is – according to the authors – the only way of generating more foreign currency for the public sector. This would be at a 2% interest rate, which is way lower than the 48% rate that the government accepted in the Hunger-Bonds operation with Goldman Sachs in June. Nonetheless, this would increase debt, so it is not sustainable if it does not come with other measures.
  3. Restructuring debt: Besides an IMF loan, the old debt has to be restructured, which, accompanied with a reform program, would lower interest rates and thus reduce the necessity of having to ask for more debt just to pay debt. Imagine you are a student with complications preventing you from paying a loan and your folks commit to help you, while ensuring you are more responsible and find a good job that would make your debt less riskier.

Recovery can only be achieved through an expansion in production and consumption, which requires a significant reduction of controls and respect for private property with a simultaneous increase of imports.

Hausmann and Santos argue that international loans, debt-restructuring and a reversal of the country’s currency cash flow are the pillars for an economic environment that can lead to recovery.

But remember, none of this can take place with the current regime in power…

29 COMMENTS

  1. “Recovery can only be achieved through an expansion in production and consumption, which requires a significant reduction of controls and respect for private property with a simultaneous increase of imports.”

    Agreed. Venezuela is ripe for private investment, but not if there is the slightest chance that this equity will be confiscated by the government.

    Chavismo must go and it must stay gone for Venezuela to pull themselves out of this mess.

  2. Great piece but the order is wrong: “The few dollars we generate go to Wall-Street and the remains to medicine, food, the military and corruption.” Should read “corruption, military, food, medicine.” Priorities matter.

  3. No mention of FDI, my question is how to convince investors to put their money in country? The first to come in will demand huge incentives considering the recent past of expropriations. Those whom have left and/or remain will expect to be paid past amounts owed. Are not the right of private property already enshrined in the Venezuelan constitution? How do you demonstrate that this time will be different and the constitution will be respected.

  4. As long as you have the Bolivar, Venezuela will be corrupt. It is that simple.
    Last time i looked Venezuela couldnt print $, and that is the only currency that can make change here.

    • Pride before a fall, and in this case, the country has already fallen:

      Venezuelan “pride” will never accept conversion to the $. Hell, 90% of the people posting here on CC…the “opposition”…wouldn’t want it either.

      The $ can save them, but it will never happen.

  5. I’ve had a staggering question to most analytics when they talk about exchange unification.
    My problem with that is that they never talk about an scaled, controlled and planned devaluation of the currency. With which companies can increase their profit margins and therefore in theory rising employees’ salaries.
    It sounds abrupt and unconsidered to end an almost 15 year control of the bolivar in a matter or weeks.
    What i’m implying in all this “perorata” is that no one has the amount of money necessary to handle a globalized economy in Venezuela now and yes, 1 Kg of potato might be at a much higher price here than across the border but it is also true that a taxi ride costs .50c, a doctors hours costs 5 dollars at best and basically every other service in our nation is ridiculously subsidized

    • Services, in US$’s, are indeed ridiculously low. In terms of BsF, however, they are ridiculously high for the average person in the country. Cashiers, conserjes, store sales people, cleaning people and a long etc. all make minimum wage.

  6. Overseas companies will set prices at a rather high level so they can recover their investments in 5-6 years, just in case the new government ends up being chavista. This will negatively affect “el pueblo”; which would then vote chavista in the following elections, thus proving that investrs were right in the first place.

    • Do you know that there are national journalists being paid huge salaries who write dozens of paragraphs on the subject…

      And fail, every time, to explain it better or more accurately than your itty bitty post here?

  7. While these are viable solutions, they are in effect pie-in-the-sky solutions because they would be implemented only if the Chavista regime is replaced. The only solutions the Chavista regime will implement would be “more of the same” that got Venezuela in its current mess. For example, as the multi-tiered exchange rate gives the enchufadosa license to steal, there is no way Chavismo is going to unify the exchange rate.

  8. Estimates of corruption costs over the last 18 years go as high as $350 billion (350 millarditos).
    The current debt load stands at around 178 billion dollars (178 millarditos).

    If only half of the funds stolen by well-connected Chavistas were recovered, the debt would dissolve entirely. Please factor this in.

    Surely, any solution must include a regime change plus strong recovery operations. A major concern is that corrupt Chavistas will fight to the end and they have the money to do it. The opposition needs to start collecting intelligence now before any regime change.

  9. I’ve been telling my wife for years that if the chavistas leave Miraflores on Monday morning, I’m on a plane on Monday afternoon. Venezuela will be a land of imaginable opportunities and I for one will invest right away. But I agree that it has to be clear that they don’t return to power ever. Which I think won’t happen since I’m pretty sure a new government will investigate the saqueó first thing and show the people the enormous amounts of hard cash that has been stolen from the first day Chavez took over the country.

    • And what do you think they will find out with the investigation? The result will be that everybody was involved. EVERYBODY!!!!
      That’s our main tragedy, not the economy. The biggest damage this administration did to Venezuela is the normalization of corruption. Social and Moral values are not longer part of our nature, it became a nation of survivors.
      Do you think people care if chavismo stole money? Do you really think they don’t really know it?

      • The hardcore chavistas are still in denial and need to be shown what went on and who stole what. Yes corruption won’t go away, I understand that. But I won’t be as bad as it has been (still is). Also I probably won’t need 13 different licences to set up a business and probably won’t have to bribe as much as would have to do today. Last but not least the country will be dollarized so at least I can get my money out in a currency that is accepted WW.

        • Ira, I think I like you better when you are on a rampage, f….king this, and sh.ting on that

          I am wondering, have you ever used the word “Excellent”. on this board. jaja

  10. The biggest damage this administration did to Venezuela is the normalization of corruption.
    ————–

    In my experience, corruption was always normal in Venezula. What public official didn’t look at his job as a business opportunity, and didn’t leverage that job to extract a little (or a lot) something extra whenever possible? What goods ever got offloaded at Puerto Cabello without a little kickback to the jefes in charge? How much sooner did you get your documents if you slid a few bolos to the chamo working the desk? What legal problem couldn’t get resolved you know how?

    If you took the perks and kickbacks out of ALL public offices and positions, how many people in Venezuela would take them and carry out there duties fairly and responsibly and take pride – not dinero – in doing so? Many, I believe, but the culture of taking what you can runs so deep – reaching back for decades if not centuries – that the line between corruption and business as usual is fluid as Salto Angel.

    The idea that anything can get fixed by throwing enough money at it has never been more absurd than in regards to the way business was often done in Venezuela,BEFORE CHAVEZ.

    In the recovery movement, it is axiomatic that you first transform your character, then the rest follows. As is, even if the IMG bailed out the country and we got an entirely new government, without a transformation in the culture, I wonder how much fundamental change is even possible?

    There’s a reason they call it the Devil’s Excrement. It fashioned an illusion the country was sitting on a vast piggy bank, and that everyone was entitled to it just because. What got lost in here was any sense or value for fair means. As many have said, expecting something for nothing is a fundamentally dishonest approach because most everyone knows the world – or their private lives with others – never actually work that way.

    • I wonder if a new, better “culture” can be taught. The way people were taught how to behave when riding the new Caracas metro when it first open. Just a thought 🙂

      • In 5-6 years the people’s mentality can be changed with official propaganda through the media apparatus.

        It’s the only useful thing that will remain from chavismo, a monolithic media emporium that coule be used to fire propaganda on the people.

  11. Santiago, you expressed very well several possible solutions. What really frustrates me is there is no one trying to explain these things to the masses, oppositio, ninis or the minority chavistas without power (no reason to explain to the thugs in power).
    These things need to be explained well but they are not rocket science.
    I have always believed one of the tragedies in Venezuela is that our intellectual “elite” and the politicians who more or less get it consider most people to be incapable of understanding these realities.
    That is wrong. Only when most Venezuelans are able to explain why these policies or most of them make sense will they be able to neutralize the soldiers and cops serving the mafia in power

  12. As I’ve pointed out before (and was belittled for the comment) when one neighbor steals the other neighbor’s harvest the night before he planned to sell his crop, it’s going to take some serious time and self-reflection for this country to recover.

  13. Hola Caracas y Venezuela!

    Exchanging from one digital and crypto currency to another is easy & automatic & instant with CRYPTOFOREX. CryptoForex gives you instant access to the exchange’s Discount System, offering you discounts on the exchange fees starting from 5% up to 25% based on volume.

    The platform works automatically 24/7/365. You can change Bitcoin to Ethereum or Litecoin or Litecoin or Ethereum to Bitcoin instantly, for example. Just select the exchange direction and follow the instructions.

    Shop for the best stress-free, simple, convenient and best delivery digital currency or cryptocurrency exchange rates right here on CryptoForex.

    http://www.cryptoforex.shop/

    Gracias Amiga y amigo!

  14. There are always viable solutions.

    Hola Caracas y Venezuela!

    Exchanging from one digital and crypto currency to another is easy & automatic & instant with CRYPTOFOREX. CryptoForex gives you instant access to the exchange’s Discount System, offering you discounts on the exchange fees starting from 5% up to 25% based on volume.

    The platform works automatically 24/7/365. You can change Bitcoin to Ethereum or Litecoin or Litecoin or Ethereum to Bitcoin instantly, for example. Just select the exchange direction and follow the instructions.

    Shop for the best stress-free, simple, convenient and best delivery digital currency or cryptocurrency exchange rates right here on CryptoForex.

    http://www.cryptoforex.shop/

    Gracias amigos hombres y mujeres!

Leave a Reply to Pepe Trueno Cancel reply