Thursday, May 26, 2016

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the increase in the cost of transportation, led to public protests and government repression.

These are the problems of an economy that is excessively dependent on oil exports, and that has been unable to diversify its economic activity. Sometimes this is seen as the result of a Dutch Disease (or the Resource Curse), the deindustrialization associated to the changes in relative prices related to favorable terms of trade, which lead to an inflow of imports of manufactured goods and deindustrialization. I would be reluctant, however, to suggest that this is the case in Venezuela, since Import Substitution Industrialization (ISI) was weak there when compared to say Argentina, Brazil or Mexico, and the industrialization process was never strong in Venezuela.
In both cases, back during the Caracazo and now, the current account deficit has been at the center of all problems (see figure above). And while one can blame the left of center governments of Chávez and Maduro for not being able to break the structural dependence on oil, it is hardly the case that this is a problem just of the left of center governments. In fact, even with this terrible collapse of the economy, for the period as a whole starting in 1999 (or 2003, after the Chávez administration survived the US sponsored coup, and took over the oil company), the economy grew considerably (see figure below).
So growth has been tied to terms of trade and the price of oil. Also, not only the economy collapses when the price of oil collapses, but exchange rate depreciation, in the black market now, leads to high inflation, which goes often with shortages. Anybody that has lived through high inflation in Latin America in the 1980s knows this. It has nothing to do with fiscal policy, or with the central bank printing money. The fiscal situation worsened as a result of lack of growth and the external problems (see figure below).
This is a tragedy, and there are no good solutions. Mark Weisbrot suggests depreciating the exchange rate. But normally this operates by making imported goods more expensive, and leading a recession and lower imports. As he notes, the recession has already done a good chunk of that job, and imports have already collapsed. And Venezuela cannot expect much external help, certainly not from the IMF and the US, not while Maduro is in power. My guess is that there is a good chance that the government of Maduro will not resist and that a right wing government will come to power and adopt a neoliberal program. This would bring almost no relief in the short run, even though access to IMF funds might mitigate the balance of payments for a while, and allow to reduce the worst elements of the crisis, like the food shortages.

I should note also, that while it is not surprising that Maduro's government is unpopular in the middle of this crisis (like Dilma was in Brazil), it would be a stretch to suggest that most people want a return of neoliberal policies (in fact, in Brazil the country remains divided, as much as in Argentina, were the neoliberal Macri only won a narrow victory by deceiving the electorate). The problems of the long cycle of the left in the region, tied to the high prices of commodities, and the reduced popularity of left of center politicians, does not translate into an acceptance of neoliberal policies, and more popular resistance can be expected now, as compared to the 1990s, when the Washington Consensus policies were adopted.


  1. It's important to note that the 1989 Caracazo meant the collapse of the two parties that monopolized political power in Venezuela since 1958 (Acción Democrática and Copei). The image that comes to mind is Greece, where PASOK and New Democracy all but vanished.

    If an anti-Maduro movement managed to gain power, chances are they will find themselves with a very volatile political basis. For a while the largely non-white lower income population may cut them some slack; but the honeymoon may prove extremely short-lived.

    And they cannot rule with the consent of the white disgruntled middle-class/oligarchy only.

    I wouldn't be surprised times of political violence were ahead.

  2. You are confident that depreciation is responsible for 450% inflation? Here in Ghana and other parts of sub-Saharan Africa we've experienced record currency depreciation and attendant high inflation, nothing close to triple-digit. The ridiculous amount of inflation in Venezuela has nothing to do with the plane loads of money flown in to compensate for the drop in incomes?

    1. Yes, depreciation is the initial shock, and the propagation mechanism is the increase in wages and and margins of of those that use imported goods as inputs. The result is a price-exchange rate spiral. There is a reason why Purchasing Power Parity works well in high inflation environments. Mainstream authors suggest it goes from money to prices and from prices to the exchange rate. Causality is most likely in reverse, from the exchange rate to prices, and from that to money (which is accommodated by the central bank). I suggest you read this

    2. Well i read another explanation which says its about a struggle between labour and capital for who will lose more in terms of wages (labour) and in terms of profit (capital).

      Since someone have to lose but nobody want its create afterwave shocks which rose into hyperinflation.

      Anyway i have interesting wikipedia article about this case.

      Israel in the 80-s suffered 450% hyperinflation as well.

      Thats how israel solved this.

      I believe that this plan worked because its freezed union salary rises while imposing strict price control on products.

      This 2 steps together stopped the rising inflation.

    3. Hi Daniel. If you read the entry cited above you'll see that heterodox models emphasize relative price shocks (exchange rates, food prices, etc.), class conflict (wage resistance) and inertia. So inflation is not driven by excess demand.

    4. of course they freezed unions salaries while they put price controls.

      its classic class struggle.

    5. Salaries have not been frozen as far as I know. Indeed Maduro has, as all the other left of center governments in the region, aggressively increasing the minimum wage.

    6. its about how israel dealt with hyperinflation where they froze salaries of unions and put strict price controls in order to deal with hyperinflation.

    7. Oh I see. Again freezing wages happened in all LA countries too. And it did not solve high inflation or hyper. Because the source was both depreciation, caused by current account problems with external obligations, and wage resistance. So you needed to resolve the external problem. That is always the case. In Germany in 1923, it was solved with the Dawes Plan. In LA, eventually with the Brady Plan, and a commitment to follow the Washington Consensus policies. Israel has a priviliged relation with the US, which helped resolve the external issue. Then you can hold the exchange rate, and wages, and you control inflation. Again, no relation to printing money or excess demand. As I suggested read my paper on inflation. This is well understood by now, and the mainstream ideas that you expose are completely wrong.

    8. first of all i would say that i had a struggle in my head between the MMT point of view (which expressed for example by bill mitchell in his blog),and post keynesian view which expressed for example by your blog,since my first comment i changed my mind after i researched more about the issue and i support your point of view about balance of payements constraint.

      but i have to note something

      i am not exposing mainstream ideas cost push inflation is not exclusively mainstream idea.

      not to mention that cost push inflation can create class struggle between capitalists and the workers about who should bare the costs and the losses of this cost push inflation.

      which can be caused by current account deficit shock specially if its related to higher prices of raw materials like the famous stagflation which came after 1973 oil shock,or an opposite shock if the prices of raw materials become suddenly radically lower like with venezuela.

      or by wages which growing higher than productivity is growing (mostly is conseuqence of long term low productivity growth).

      both of this factors can create a class struggle which in turn will create inflationary spiral

      is not mainstream idea is actually somehow marxian and post keynesian,for example people who spoke about that are sidney waintraub in his 1971 paper kaldor in 1951 paper and they are not mainstream economists.

      also demand led inflation can be caused only in case there is full employment and we both know that neither in venezuela neither in 70-s europe they had full employment.

  3. Undollarise the currency and go to free floating.the currency peg has created the hyperinflation by lowering demand for domestic currency and increasing demand for foreign currency.

    And stimulate domestic production.

    1. Easier said than done. Floating will not magically de-dollarize the economy. And domestic stimulus is complicated with the current account situation. There are no good options when you hit the external constraint. But in principle you're right that de-dollarization and domestic stimulus are needed.

  4. I wouldn't argue that money creation always leads to inflation. Clearly, it won't if the increase in money /credit puts to productive use which increases output. However, if you increase the money supply when your productive capacity or ability to earn income is severely impaired , or you do it to pay for a war or a pay off a foreign debt, you very likely will have hyperinflation. Money printing is necessary for hyperinflation, no. Venezuela wouldn't have such a high amount of inflation if it wasn't increasing money supply without a commensurate increase in output.

    Thank you for responding and the link. Will take a look. Cheers.

    1. Hi Paul. Actually money tends to lag, and the velocity of circulation changes significantly. The problem with all these conventional stories is that inflation caused by money printing implies that there is too much demand, and the economy is supply constrained. It must be, by definition, close to full employment. And no economy with a hyper is at full employment. Actually output and employment are often collapsing. The constraint is often external, which forces the need for contraction to control imports, and depreciation, which fuels inflation.

  5. I thought the root of the problem was that government debt is denominated in USD instead of being denominated in the country's own local currency. Could they cure the problem by re-denominating their government debt in local currency?

    1. Easier said than done. The origin of borrowing in foreign currency, is that you need dollars to buy intermediary and capital goods (and many consumer goods too in a country like Venezuela), and that is part of the broader problem of diversifying production and exports to be less dependent on borrowing in foreign currency. So the issues associated to the structural transformation of the economy are at the core of these problems.

    2. I'm still deeply puzzled by this. My impression (please correct me if I'm wrong) was that countries such as Venezuela and Nigeria have valuable exports (eg oil) that bring in USD and result in them typically running a trade surplus. But because they have USD denominated government debt, the huge cost of servicing that debt results in current account deficits and crisis. If it were not for the USD denominated government debt, they would be able to use the revenue from their exports to amply pay for the inports they needed. I don't understand why some countries such as Singapore managed to avoid the trap and denominated their government debt in local currency and so did great whilst other countries fell into the trap of having USD denominated government debt. I don't get the argument that countries need a diverse economy to avoid this. Norway has a massively oil-based economy and does great. It really looks to me as though denomination of government debt is a root-cause of most of the problems rather than just being a symptom.

  6. excellent post, very informative. I wonder
    why the opposite specialists of this sector don't notice this.
    You should proceed your writing. I'm sure, you've a great readers' base already!


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