FINANCIAL TIMES

Opinion Venezuela

AUGUST 23, 2018

Nicolás Maduro will not reverse Venezuela’s economic collapse

The president’s latest measures do nothing to address the main causes of the crisis

Ricardo Hausmann

When presenting his economic stabilisation plan on August 17, Venezuelan president Nicolás Maduro proudly argued that no government has ever done it this way. He should have wondered why. Venezuela is undergoing an economic collapse without precedent outside of war or the fall of the Soviet Union. 

This is accompanied by hyper-inflation. Annual inflation is running at over 80,000 per cent and the IMF has predicted it will hit 1m per cent this year. The price of the dollar has added three zeroes in 15 months. 

The reason for this collapse is two-fold. On the one hand, the Chavista revolution — through expropriations, foreign exchange, price, labour and profit controls — destroyed the market mechanism, whereby the needs of some become the livelihood of others. As a consequence, rampant shortages and disinvestment ensued. 

The second reason is an extreme dollar shortage caused by the collapse in oil production and prices and by over-borrowing during the boom years: at over 600 per cent, Venezuela has the largest foreign public debt to export ratio in the world. When the oil price collapsed in 2014, the government refused to restructure the debt and opted instead to cut private sector imports, leading to a collapse in output due to shortages of raw materials and spare parts.

To make matters worse, oil production, hampered by mismanagement, over-taxation, expropriations and a ridiculous exchange rate, went into a tailspin. It stands now at barely over a third of where it was when Hugo Chávez took power in 1999 and 30 per cent below a year ago. 

With collapsing output and imports, both oil and non-oil tax revenues collapsed. Twelve-month rolling non-oil tax revenues, measured at the parallel exchange rate, went from $8.6bn in January 2014 to just $1.1bn by March of this year. To limit the ensuing fiscal deficit, the government opted to delay wage adjustments. The minimum wage went from $280 per month in 2012 to about $1 before Mr Maduro’s speech.

This decision translated into a draconian cut in real public sector wages and pensions. But this proved insufficient to stem the deficit, forcing the government to use the money printing press. 

In the midst of this havoc, Mr Maduro finally decided to present something that has a family resemblance with an adjustment programme. He announced a still unclear exchange rate regime that implies the official price of the dollar will go up by a factor of about 30. He also announced an increase in the value added tax from 12 per cent to 16 per cent, the introduction of a financial transactions tax between 0 and 2 per cent, and an increase in petrol prices to “international levels”, with subsidised fuel for households. All this sounds fairly conventional.

But Mr Maduro accompanied these decisions with a one-year tax holiday on the corporate income of the oil industry and an increase, of more than 3,000 per cent, in the minimum wage starting on September 1, with the government paying for the increase in private sector wages for 90 days. Price controls are to be beefed up to prevent the private sector from raising them and people are encouraged to denounce violations to the price police. 

What will happen? Notice that the two causes of the crisis — the destruction of the market mechanism and extreme dollar shortage — have not been dealt with. So it is hard to see how output and imports would rise. People will have more money in their pockets, but there will not be more goods to purchase, with obvious consequences. Public spending is to go up dramatically as the government takes responsibility for the nation’s wage bill. But the revenue measures are postponed to at least the fourth quarter, meaning that the printing press will have to go immediately into overdrive. By the end of September, the exchange rate will have depreciated so massively that the government is likely to balk at setting petrol prices at international levels and may abandon other aspects of the programme. 

Price controls, if effective, will force companies to sell below replacement cost, de facto expropriating their working capital. Businesses are threatened with expropriation if they shut down or violate price controls — not exactly the kind of measure likely to ignite a sudden burst of investor enthusiasm. 

The bottom line is that there is no road to recovery without the freedoms that underpin the market mechanism and without international financial assistance to kick-start imports and output. That will only happen after Mr Maduro leaves and this regime ends. 

The writer is a professor of economic development at the Harvard Kennedy School and director of the Center for International Development at Harvard University