Since 2012, Venezuela has undergone an economic war directed mostly by and from the United States that has targeted market prices of goods and services, in part by the impact of unilateral economic sanctions, but also by the manipulation of exchange rates in the illegal parallel market. The aim has been to disarticulate the economic and political stability of the Venezuelan constitutional order, within a plan that aims for regime change.
The economic war has partially achieved the intended goal by creating shortages and disrupting production. The result has been a spiraling inflationary process, kept at bay only by the recent monetary measures adopted by the Maduro government.
But in order to understand the importance of those monetary measures, it is first essential to understand the mechanism of the foreign-induced inflationary process that has gripped the Venezuelan economy.
The Inflationary Phenomenon
In her outstanding book ‘The Visible Hand of the Market – Economic Warfare in Venezuela,’ Venezuelan economist Pasqualina Curcio describes in full detail the mechanism by which “people in Venezuela have endured episodes of disproportionate and induced increase of prices, of galloping inflation, with repercussions on the purchasing power, especially the working class.”
She backs up her conclusions with statistical analyses and econometric models to show how the “economic crisis” is induced by external factors with the participation of domestic economic forces.
Inflation is basically a situation where there is a distortion of prices that affects the purchasing power of individuals. That is, prices rapidly go up while consumers’ purchasing power decreases. A high inflation rate is considered an anomaly in the economy. This anomaly is often caused by factors such as shortages of goods and services and/or high exchange rates resulting in a rise in prices.
First, it’s important to notice three features of the Venezuelan economy that are relevant to the way market prices are determined:
1. There are relatively few private importers in Venezuela, but they control an important economic sector. This implies that they have the power to fix prices differently from what demand and supply would dictate.
2. In Venezuela there has been a Currency Exchange Control since 2003 with a preferential U.S. dollar to the Bolivar (Venezuelan currency) exchange rate to favor imports.
3. Venezuela is a large importer of many products for direct consumption (20% of imports) and as inputs for national production (79% of imports); therefore, market prices are determined largely by the value of international currency. For example, if corn is purchased abroad at $1 a kilo, say, the retail price in Venezuela, under normal circumstances, should be $1 plus any other additional cost incurred by the importer/distributor/retailer, and his/her profit, in equivalent Venezuelan currency.
The first feature of the Venezuelan economy has allowed importers to control the supply of products, creating shortages and fixing higher prices. We can be sure that at a time of economic uncertainty they may be inclined to use the power to their advantage, financial or political.
The second feature is intended to help society with affordable imports of essential goods that would be retailed at lower prices.
The third feature makes it such that prices will be in turn determined by the exchange rate. Therefore, prices of goods and services can easily be manipulated by manipulating the exchange rate for financial or political gain.
But another reality — the one outside Venezuela — is central to understanding how prices are pushed out of control. A parallel and illegal exchange rate 'market' has been represented by a website identified as Dollar Today established in Florida that is overtly anti-Venezuelan government. The site has been publishing subjective rates drastically devaluing the real market value of the Venezuelan currency. What makes this market illegal is that it is totally unregulated and it is driven by websites and social media, not to mention by its political intent.
Keeping these few elements in mind, I will try to provide a simple hypothetical example that might help clarify the mechanism of the inflationary process that been wrongly attributed to the socialist administration of the Maduro government.
This might actually point out that it is capitalist behavior, particularly when it is politically motivated, that has manufactured the economic crisis in Venezuela.
Let’s say an importer wanted to buy 1,000 kg of a certain product in the international market at a cost of US$10 per kilo. The importer would need to get US$10,000 from the Central Bank of Venezuela at the official preferential exchange rate of, say, BsF (Bolivar Fuerte) 10 for US$1, for a total of BsF 100,000 in Venezuelan currency (we are using the old currency here, the Bolivar Fuerte, since it was used as the time.)
Let’s say the importer uses a mark-up of 100%: the price of the product in Venezuela should be the equivalent of US$20/kg (BsF 200/kg), using the same preferential rate of exchange (assuming no other costs for the sake of the example).
However, the importer (and/or any other economic players, including individual speculators) may use their economic power or opportunity in either or both of the following ways:
1. Reduce the supply in order to increase the price (this has explained in large part the shortages of certain essential products and the corresponding price increase).
2. Jack up the price by claiming a much higher parallel and illegal exchange rate posted in the website Dollar Today. If the website posted, for example, an exchange rate of BsF100,000 for US$1, the speculative retail price of a kilogram of the product in question would be BsF 2 million (BsF 100,000 x US$20/kg), instead of BsF 200 (BsF 10 x US$20/kg).
The example is simple, but the price fixing based on the parallel exchange rate market is real and proven by Pasqualina Curcio in her book.
The Maduro government has implemented corrective policies like the CLAP (Local Distribution and Production Committees) to offset shortages and price hikes. However, the Venezuelan government has been unable to stop the parallel market based in the United States. This market has falsely and relentlessly devalued the Venezuelan currency over time.
How Monetary Conversion Is Solving The Problem
Last August, the Maduro government announced an ambitious but realistic plan called the Program of Economic Recovery, Growth and Prosperity. The program has 10 strategies including a new redesign of fiscal and tax policy, a new policy of subsidizing gasoline, an increase of four percentage points to the Value Added Tax (IVA), a guaranteed minimum wage, and the establishment of a single exchange rate, which will fluctuate according to the auction system under the Venezuelan Central Bank (BCV) regulation.
In fact, on Sept. 7, Venezuela took a further step towards freeing up the exchange of its new Sovereign Bolivar (BsS) currency, with the government authorizing public and private firms and banks, as well as ordinary citizens, to trade in other currencies for the first time since 2003.
When Maduro launched the plan, he said: "We are going to dismantle the perverse war of neoliberal capitalism in order to install an honest, balanced, sustainable, healthy and productive economic system." This might have not been a coincidental reference to the IMF's neoliberal measures being forced on the Mauricio Macri government in Argentina, causing, by the way, high inflation and popular unrest.
The centerpiece of the economic plan, however, has been the implementation of drastic monetary reform in order to stop the rampant inflation that was facilitated by a financial system dependent on the U.S. dollar as a reference currency. The reform slashed five zeros off the old currency and linked the new BsS to the crypto currency Petro, in turn anchored to one of the largest of Venezuela’s natural resources: oil. Currently, one Petro equals US$60, based on a barrel of Venezuelan crude, and that is equivalent to 3,600 BsS. More significant is that the minimum wage is now BsS 1,800, which dramatically increased the purchasing power of workers. Before the reform the minimum wage in today’s currency would have been BsS 51.96.
Maduro has said anchoring serves to lower inflation because "we are not going to be subject to the value of our monetary sign being determined by a web page, [but] it will be determined by the oil market, which may be unstable at some point but has its regularity, its own structuring, and many countries are involved."
There is no shortage of critics saying that the monetary reform will not work, but I have yet to read any sound explanation for the criticism.
Certainly, price fixing and control remain issues to watch carefully. The Venezuelan government and 35 companies, including Cargill, Polar and El Tunal (among the largest in the food sector), have agreed and made public the first 25 prices of items prioritized by the Venezuelan government that will be subject to regulation, under a scheme of sustainable prices and which will be subject to modification. More items will be regulated in the near future.
The new economic program will reduce or mitigate the temptation of illegal resale, contraband, or hoarding, because the new price structure is now anchored to an international reference currency that cannot be manipulated.
Another important outcome is that by de-linking the currency from the dollar, Venezuela is effectively able to bypass the multiple sanctions from the United States, Canada and European countries.
Although it is too soon to see any real impact, these new measures promise to put an end to inflation by regaining control of the economy that was left in the hands of a small powerful minority taking advantage of the possibilities of speculation and corruption allowed by the illegal currency exchange market.
Internationally, the new economic plan has been implicitly endorsed by China. The online media outlet venezuelanalysis.com reported that Maduro’s visit to China at the beginning of September has resulted in Venezuela and China signing 28 bilateral agreements, including a new US$5 billion Chinese loan and joint plans for a fourth space satellite, in addition to strengthening political ties.
Even further, Venezuela will now join China’s ambitious New Silk Road commercial plan, which is estimated to be worth US$900 billion. The project looks to connect Europe, Asia and the Middle East in a monumental economic road and maritime chain that will include 60 countries, 75 percent of the world’s energy reserves, and 70 percent of its population. Venezuela is the second Latin American country to sign up for the project, bringing with it the world’s largest oil reserves, following Uruguay earlier this year. A China-Venezuela economic partnership builds confidence in the Maduro administration’s recent reforms.
It is important to remember that classic economics talks about the determination of prices based on supply and demand. But in practice, geopolitical factors may have more relevance in determining prices. At its worst, this problem occurs when undue control over the economy is exercised from another country for political reasons, to such an extent that speculation and abuses on the part of consumers and producers alike become the norm.
Venezuela has a major challenge: the U.S. determination for regime change despite all international covenants. The U.S. government is implementing unilateral punitive actions based on uncorroborated human rights violations, shumanitarian crisis and a migration crisis. All these accusations have been disproven at the highest international levels.
The Organization of American States (OAS) overall has restrained itself from condemning Venezuela, except for its secretary general, who seems to be pursuing a personal vendetta by calling for a military intervention in Venezuela, against the mandate required by his position.
Venezuela has been subjected to an economic war well demonstrated by economist Pasqualina Curcio in her book, which is orchestrated outside the country and therefore out of its control. For instance, the currency values published daily on web pages and disseminated via social networks do not respond to any real economic criteria. They respond instead to political intent, seeking destabilization through the distortion of markets and of the Venezuelan economy generally.
The Maduro administration has responded to all economic impacts with policies that protect the population, as well as with unique programs aimed at recovery and a prosperous future. A strict control of the implementation of the plan by all economic players is necessary, even when neoliberal policies enforce tight controls on the economy. The IMF and World Bank are typical examples. The real issue is to what end the policies and controls are practiced and whom are they meant to benefit.
More importantly, the Venezuelan government has constantly invited the private sector and the political opposition to partake of the new opportunities.
However, there is also a clear message that the foreign ‘visible hand’ of the market will meet the ‘hard hand’ of the state if necessary.