Wednesday, June 1, 2016

Overdose of heterodoxy, failed Keynesian policies or same old balance of payments constraint?

The hunger games

Ricardo Hausmann blames the situation in Venezuela to excessive heterodox policies. The piece is not particularly well written, but if you look for the deep cause of the crisis, according to Hausmann, then you must conclude that it is a fiscal one. The government spent too much, and got into too much debt. In his words:
Governments often struggle to balance their books, leading to over-indebtedness and financial trouble. Yet fiscal prudence is one of the most frequently attacked principles of economic orthodoxy. But Venezuela shows what happens when prudence is frowned upon and fiscal information is treated as a state secret... Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money.
So fiscal problems, too much spending and borrowing, too much money printing, which caused inflation and the currency crisis (the black market gap between the official and parallel value of the domestic currency). As I have discussed in many posts (too many to link) and in a recent paper causality is upside down. It is the external problem, the current account deficit (as I noted in the previous post) that is at the heart of the problem.

Actually, as far as I know the authorities remained for a long while very anti-Keynesian and not particularly in favor of spending. In the immediate aftermath of the global crisis in 2008-9 Venezuela did not pursue Keynesian anti-cyclical policies vigorously. If memory doesn't fail me Mark Weisbrot actually organized a symposium in which government officials encountered a few heterodox economists to try to convince them of the need of counter-cyclical policies. Mind you, many on the left also assume that the problem is the failure of Keynesian policies, like Michael Roberts suggests in a recent post.

On the problem of food shortages, it is important to note that for the most part the wealthy are fine. Only regulated products are scarce, and those tend to be the ones needed by the low income groups (see here; you can follow this guy who keeps showing how much food, and how well the wealthy live in Caracas here). Contrary to what Hausmann suggests nobody is dying for lack of food, even though the situation for the poor is incredibly difficult. And yes, the opposition and orthodox policies are all about making the life of the poor easier, aren't they?*

Again, the problems of Venezuela are perennial, and have to do with the excessive dependence on oil, and the need to diversify production, including probably having a preoccupation with food security, and diversifying exports. Hausmann should know, since he has been writing about the importance of what a country exports, or maybe he thinks that orthodoxy (laissez faire, in this context) would magically produce a more diversified export structure. History is not on his side on this.

* If you have any doubts see what happened in Argentina after Macri's election. That would be a guide (perhaps a moderate one) to what to expect if a Brazilian like parliamentary coup occurred in Venezuela.


  1. The link for you your paper is broken, Matías.

  2. Here. Thanks.