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Venezuela’s embattled President Nicolás Maduro may have bought himself some time on Wednesday when he raised gasoline prices and devalued the bolivar, but the South American country’s problems will likely worsen in the coming weeks unless he does something more.
For his part, Maduro defended the measures as being necessary to save the economy, which is expected to contract eight percent this year after a ten percent drop last year. Maduro blamed the crisis on flagging oil prices and a concerted effort by his country’s business elite to wreck his socialist revolution. Whatever the reason for the economic problems, his critics were outraged. “Venezuelans woke up poorer this morning with the president’s actions last night,” Deputy Rafael Guzmán said during an emergency session in the country’s National Assembly. “Why should the poorest Venezuelans have to pay?”
As he spoke, lines were already snaking out of many gasoline stations as consumers rushed to fill their tanks before the new prices took effect on Friday. The increase, the first in 19 years, raised the price of 95-octane gasoline to six bolivars a liter ($0.60 at the official foreign exchange rate and less than a penny at the black market rate), up from 0.097 bolivar the day before.
The 60-fold increase might be shocking, but even now, Venezuela’s gasoline will remain the cheapest in the world. “It’s still cheaper than water,” Felipe Romero, a 38-year-old carpenter in the central industrial city of La Victoria, told me as he waited to fill up his tank. “But I used to be able to fill my car up for less than four bolivars. Now it’s going to cost me 240 bolivars.” By comparison, a beer costs 300 bolivars ($30 at the official rate, or $0.29 at the black market rate) and a loaf of bread 120 bolivars ($12 at the official rate, $0.11 at the black market rate). In other words, gasoline is still a relative bargain.
Maduro’s move came just days after he fired his finance minister and reshuffled his economic cabinet (all in all, their tenure lasted about 40 days). The president is trying to beat back the opposition's calls for him to step down or face a recall referendum, and Maduro is trying to convince his countrymen that he is working hard to right the sinking economy.
Likewise, he also adjusted the country’s foreign exchange system, abolishing one of the government’s three sanctioned exchange rates and promising to make one of the two surviving rates free-floating. Under the government’s new foreign exchange system, the official rate is ten bolivars to the dollar for imports of basic foodstuffs, medicine, and other approved materials. Meanwhile, the so-called Simadi rate, which applies to everything else, is now 200 bolivars to the dollar and will be allowed to float. Theoretically, a floating currency should help the economy by making more dollars available to Venezuela’s importers and businessmen. However, the government has introduced several currency schemes over the past three years, all of which have failed because the promised changes were never fully implemented.
But “the devaluation fell far short of what is needed,” Luis Oliveros, an economist at the Central University in Caracas, told me. Some economists had expected Maduro to set the base exchange rate at 70 bolivars to the dollar. “The mini-devaluation,” Oliveros explained,“will have no impact.” Oliveros and others point out that the bolivar’s true value is far less than the latest government-sanctioned exchange rate, especially when a dollar goes for 100 times the official rate on the black market.
In fact, combined with Maduro’s other piecemeal fixes, it may make things worse. As of March 1, Maduro also announced, the country’s minimum wage will be set at 11,578 bolivars a month, up from 9,647 bolivars a month. He also promised to review prices for select goods and services that the government sets. The measures—although needed—will only further stoke inflation and shortages because they fail to address the root causes of Venezuela’s economic woes: price and exchange controls, as well as the nationalizations that have gutted the country’s productive apparatus.
More turbulence is something the Venezuelan economy can ill afford. It is facing an estimated 700 percent rise in inflation this year, up from last year’s estimated 180 percent. (Venezuela has had the dubious honor of having the world’s highest inflation rate for the last three years.) Shortages of basic foodstuffs such as cornmeal, rice, flour, pasta, milk, and sugar are grinding; consumers have to spend hours in long lines whenever hard-to-find products appear. Many medicines aren’t available at all, and spare parts for cars, motorcycles, and machines are lacking. “All I do is stand in line,” Alicia Gonzalez, a 42-year-old housewife in Caracas, told me. “Finding food is a constant struggle.”
Apart from such day-to-day concerns, experts fear that Venezuela is edging toward a debt default. The country is due to make interest and principal payments of about $14 billion this year. With oil prices down 70 percent over the last two years, the country is nearly broke. In response, the government has reduced imports to conserve funds to make debt payments, apparently hoping that oil prices will soon recover and replenish state coffers.
Although Maduro might be right that weak oil prices are to blame for the current acute crisis, his predecessor, Hugo Chávez, laid the groundwork for it in 2003 when he implemented price and foreign exchange controls. Under that system, the government set exchange rates and also determined who would receive hard currency, a rule that Chávez was looking to use to punish his enemies. Businessmen had played a leading role in a 2002–03 strike that was intended to force Chávez from office. The strike resulted in a massive capital flight, something the currency controls were also intended to stem. The government began allocating dollars to its supporters, who created their own companies. These companies often existed only on paper. Once they got the currency, they would resell it for a huge profit.
Chávez’s decision thus led to the birth of a black market as Venezuelans who found their dollar requests rejected looked elsewhere for their hard currency. The new system also fostered corruption. Chávez’s own ministers, including former Planning Minister Jorge Giordani, said that more than $20 billion was lost in this way. Given the paucity of dollars being made available legally, Venezuela’s economy—save for wages—has for all intents and purposes become dollarized, as importers have been forced to access the black market for their dollar needs. They subsequently charge consumers prices based on the black market dollar rate.
By devaluing the bolivar and raising prices, Maduro is hoping to stall efforts to recall him by showing his countrymen that he is indeed taking steps to end the crisis. However, his Band-Aid measures may backfire, since they may only stoke inflation and shortages in the short term. The country’s opposition, which won a sweeping victory in December’s legislative elections, has repeatedly stated that it wants to force Maduro out of office within six months, and well before his term ends in 2019. Opposition leader Henrique Capriles Radonski, who narrowly lost to Maduro in a special election in 2013 after Chávez’s death, said that the opposition will move ahead with plans to hold a recall referendum later this year or else cut short Maduro’s term in office by a constitutional amendment.
“A change in governments is necessary,” Capriles told supporters on Wednesday. Even the president’s “own supporters don’t want him in power.” To move ahead with a referendum, more than three million Venezuelans would have to sign petitions. A similar recall movement in 2004 led to a vote against Chávez, which he easily won. And those who signed against Chávez were subsequently discriminated against, being barred from working for the government. It is hard to imagine, then, three million people signing on. But Gonzalez isn’t deterred by the threat of reprisals. “If the opposition moves ahead to recall Maduro, count me in,” she said. “I can’t imagine another three years of him in office.”
If Maduro’s measures do make the economy worse, the opposition believes that it will have a clear shot at unseating the president and forcing a new election. Such a strategy seems likely to work, especially if international oil prices remain at current levels. Maduro also has his hands tied: he cannot disavow Chávez’s economic policies without risking a backlash from hard-core supporters of the late president, and he cannot continue with those policies without destroying the economy. As things stand, then, Maduro is stuck between a coup within his own party and a potential explosion of anger among the public.