Greg, a great many people are confused about what is happening in Venezuela, and why. Indeed you recently wrote an insightful article about it for Telesur English. The situation is certainly complicated but I hope in this interview we can manage to help folks see through the complexities to the essentials by taking a step back from economic lingo and addressing everything in common terms that relate to daily life and require no prior knowledge. The main concerns for leftists looking at reports about Venezuela are economic turmoil – not least inflation in 2015 close to 200 percent, long lines, shortages, etc. – but also issues of treatment of dissidents and particularly widespread corruption and ultimately a decline of popular support.
So, to start, when Chavez began the Bolivarian project to fundamentally reorganize the economy, what circumstances did he confront? What was the “starting point” of the population and institutions, in brief?
The starting point that Chávez confronted when he first took office was one in which the price of oil had dropped to a historic low of about $10 per barrel, there was massive corruption, massive inequality, a poverty rate of about 50%, all state institutions in the hands of a small elite that had governed the country without interruption for 40 years, and population that had come to reject the ossified political system – as shown in increasing abstention rates and general political apathy.
What were Chavez’s focuses for changes – and what impact did his efforts have on the broad population and institutions?
Chávez came to tackle all of these problems in the course of his presidency, but started with the ones that were perhaps what touched on the interests of the old political elite the most, which were the institution of a new constitution that swept all the old elite out of office, pursuing a foreign policy of reinvigorating OPEC and reversing what had been the gradual privatization of the state oil company, and launching a fairly comprehensive land reform program. Later on he pursued a policy agenda that focused more on redistributing the country’s oil wealth via social programs, which included massive investment in the educational sector, and increasing citizen participation in their self-governance via the communal councils, thereby reversing decades of political apathy.
What was the response of corporate elites to Chavez’s agenda?
The response to removing the old elite from office and of taking greater control over the country’s oil resources and land was very swift and included the April 2002 coup attempt and the December 2002 oil industry shutdown. Of course, during the entire time he was in office Chavez also faced a constant onslaught from the private mass media of Venezuela.
Chavez re-won his position, due to popular support, reversing the coup’s most obvious effects, but what other effects did the opposition have?
One of the main after-effects of the coup attempt and the oil industry shutdown was a massive bout of capital flight during the time of these actions and thereafter. In this case it meant that those who had financial assets exchanged their money into dollars in order to deposit these in foreign bank accounts.
What difference did that make, say, for the value of the Bolivar – Venezuela’s currency – and for other dynamics affecting daily life?
Those who have a lot of money – investors, bankers, business owners, etc. – can take their money out of the country in a variety of ways, depending on whether the money is in the local currency or in a foreign currency. While both types of capital flight are a problem, because they mean that less money is available in the country for productive investment, taking it out of the country when it is held in the local currency is an even greater problem because it means exchanging the local currency, the bolivar, for dollars. If large sums are being traded, that is, dumped for sale, it means that the value of the bolivar relative to dollars goes down. In other words, it takes fewer dollars to buy the same amount of bolivars. Likewise, if a good is being sold for dollars, it takes more Bolivars to buy it. If this happens, imports get more expensive for people who have to buy them with bolivars. In Venezuela, over 60% of all goods are imported – so ultimately prices in Bolivars, the local currency go up for everything, which is also known as inflation. If the inflation is not compensated with rising incomes, then poverty also increases. With the same income in Bolivars as earlier, a person can buy less food, goods, etc.
Another consequence of political and economic destabilization is that fewer foreign investors would be interested in investing their money in the country to start businesses there such as in the oil industry for example, which means that fewer foreigners are interested in buying bolivars to operate in Venezuela with them, thus further increasing the glut of bolivars causing the price of the currency to go down even more.
What was the government’s response to try to limit capital flight? Why didn’t it just say no, you can’t take that wealth out? How, in particular, did it try to stabilize the value of the Bolivar? Finally, how did Chavez’s policies work for the Bolivar, and what other effects did they have on the government’s resources and on the capital flight itself, and why?
The government’s response was, first, to stop the decline in the price of the bolivar by purchasing bolivars – thus decreasing the supply of bolivars on the market – using dollars from the Central Bank’s dollar reserves garnered from oil sales. But this action, to be sufficient, caused the Central Bank’s dollar reserves to decline incredibly fast, thereby in effect giving more substance to the capital flight, since in most cases these were dollars that were literally taken out of the country. It was an odd situation, to stop the economic problem of the decline in value of Bolivars brought on by capital flight, the government was buying Bolivars with dollars, which were then – taken out of the country thus adding to capital flight.
By March 2003 the government realized that the situation was unsustainable and decided to limit capital flight by another tactic, introducing a currency control. This meant that Venezuelans who wanted to take their money out of the country had to fulfill very specific conditions to sell their bolivars and dollars useful elsewhere. Sure, they could, in theory, dodge that by simply taking Bolivars out, but given that the bolivar is a currency that no one else uses, that would be pretty much pointless. Once arriving elsewhere they would have nothing, they would not be able use the bolivars, in Miami, say, and nor could they exchange for dollars. So they had to get the dollars while in Venezuela. In that context a currency control becomes one of the most effective ways for a country such as Venezuela to limit capital flight. There are other tactics, such as placing limits on bank withdrawals, but I think that would have been far more complicated than a currency control.
What exactly is an exchange rate and what were Chavez’s policies for it, and their intensions? Using an exchange rate, who more specifically buys dollars and why? And who sells the dollars to them?
The exchange rate tells you the price of the local currency. For example, if you have bolivars and want to take your wealth out of the country, you need to sell the bolivars for dollars or some other currency, since the bolivar cannot be used outside of Venezuela. The exchange rate thus tells you how many bolivars you need to give up to receive a dollar or vice-versa. Before March 2003, the Venezuelan exchange rate fluctuated depending on how much bolivars were being sold and how many dollars were being offered, If more bolivars were being sold than there were people with dollars ready to pay at the old exchange rate, then the price of the bolivar would go down. Occasionally the government would step into the currency market by selling dollars from its Central Bank reserves. This would decrease the supply of bolivars and increase the supply of dollars, thereby countering the sell-off of bolivars and keep the exchange rate stable.
One common and often relevant explanation for a declining price in the local currency is that there is a “lack of confidence” in the currency or in the government’s economic policies and so people want to take their money out of the country.
While this certainly might be true in the Venezuelan case, I think the term “lack of confidence” obscures more than it reveals. What was happening in Venezuela was that the government was acting against the material interests of those who have a lot of money and so, of course, that sector wanted to take their money, their assets, out of the country as quickly as possible. They lacked confidence, or more accurately feared losses, but not the broad population. The failures of the coup attempt and of the oil industry shutdown were signs to the wealthy sectors that changing the government was not going to happen in the short run and that if they wanted to preserve their assets, they better get them out of the country.
Why did people violate the exchange rate even at the outset – engaging in transactions at different rates? What caused there to be an alternative or black market rate? What does it even mean that there is one, that is, in practice, who exchanges at the official rate, who exchanges, back in the period we are addressing, at the alternative rate – and where do they each do it, if one is legal and one isn’t? Why doesn’t everyone just use the official rate?
The black market for dollars happened because not everyone who was interested in taking money out of the country could fulfill the fairly strict requirements for getting dollars at the official exchange rate. As a result, they began to sell their bolivars to anyone who was willing to buy them, which would probably either be mostly foreign companies that needed to pay expenses in bolivars in Venezuela or people who did manage to access the official exchange rate and wanted to make a large profit by taking advantage of the price difference between the official and the black market rates for the bolivar. In that case, if they trade a few Bolivars for a dollar, but can then exchange the dollar for many more Bolivars – in terms of Bolivars they are making a big gain.
The actual process for making black market exchanges is very simple and practically impossible for the government to control. That is, as a Venezuelan, all you need is a bank account in your name outside of Venezuela, probably in the U.S. and you find a black market currency broker who agrees to make the transaction for you. That is, let’s say you want to sell X bolivars for Y dollars – you just transfer the X bolivars into the Venezuelan bank account of the broker and he or she then transfers the Y dollars from his or her account in the U.S. to your account in the U.S. No money ever crosses any borders which is why it is practically impossible for the government to control. The government could perhaps limit the amount of bank-to-bank transfers within the country, but a control like that is extremely unpopular and would represent tremendous problems for the economy, since such transactions are necessary every day in order to pay bills.
How did the approach to stabilizing the economy, despite capital flight, work for its first years? What was the basis for its success?
The currency control worked quite well during the first years, from 2003 to 2008, mainly because the government had enough dollars from its oil revenues – because the price of oil was high during this time – to more or less fill Venezuelans’ desires to have dollars. Of course, those who could not use the official rate used the black market, but the size of the black market at that point was modest and therefore not much of a problem.
Now we come to the global economic crises of 2008. What did it mean for Venezuela and why did the precipitous drop in oil prices matter for the affectivity of the exchange rate arrangements? What was the Venezuelan response to the new context, and what was its logic and intent?
The relatively sudden drop in the price of oil in the second half of 2008, meant that the government had less income from which to meet the domestic demand for dollars, much or most of which was used for importing essential products. The government’s response in this situation was three-fold.
First, it tightened the conditions under which people could buy dollars at the official rate. Second, it introduced new official exchange rates, at which the dollar was more expensive to buy – but not as expensive as it was on the black market. Third, again due to its reduced revenues, it started to borrow dollars for some of these transactions. The logic behind these actions was to reduce the amount of dollars the government had to provide, while still fulfilling the basic dollar needs for importing the vast majority of products that Venezuelans consume. In many cases the government also began importing goods directly instead of providing dollars to private companies who would then import goods.
What were the actual effects of the new policies? I am not looking for statistics but your description of the impact as it affected daily life?
The main effect of the increased restrictions on access to dollars at the official exchange rate was that more bolivars ended up being sold on the black market, thus making that kind of transaction a larger part of the economy. Also, as more money was being traded on the black market when there were fewer dollars available meant that the difference between the black market exchange rate and the official exchange rate increased. That is, while the official exchange rate remained at 6.3 bolivars per dollar, on the black market you had to pay up to 18 bolivars per dollar – three times as much.
This gap between the official and the black market exchange rates meant, in turn, that more and more people tried to take advantage of this price difference, since the rewards of doing so were increasingly large. For example, if you buy 1,000 bolivars worth of goods that had been imported at the official exchange – meaning they cost about $160 to buy outside of Venezuela (1,000 bolivars divided by 6.3, the official exchange rate), you could try to sell this product in Colombia for $160 and then exchange those $160 back into bolivars at the black market rate of 18 to 1, meaning you have 3,000 bolivars now. This way you earned a 300% profit on your original purchase that cost you 1,000 bolivars, simply by buying something in Venezuela and selling it in Colombia.
The exchange rate difference also drives up inflation because many importers see an opportunity to sell products at prices that are the equivalent black market rate in Venezuela, for example, selling a product for 3,000 bolivars, even when they got the product at the official rate, costing them only 1,000 bolivars.
Another major consequence was product shortages. Since products can be sold for far more gain in neighboring countries such as Colombia or Brazil than within Venezuela, people take goods out of the country, leaving the Venezuelan market undersupplied causing shortages. This is especially the case for basic food items, such as milk, beans, unprocessed meats, etc. because in addition to the basic problem, the Venezuelan government introduced price controls on these so people cannot under any circumstances charge as much for them in Venezuela as they can charge in other countries, unless they sell them illegally on a black market in Venezuela.
This brings us to Maduro’s narrow election victory and the violent aftermath. Was the violence just an upsurge and gone, or did it have lasting effects, albeit operating less visibly than the street violence?
The violence had a lasting effect in the sense that it pushed the dollar black market into overdrive, causing a vicious cycle. That is, while the violence and destabilization of 2002 caused the introduction of a fixed exchange rate in order to control capital flight, by 2013 and 2014, the black market for dollars had already become a large fixture of the economy and the destabilization efforts after Maduro’s election caused a new pressure to get rid of bolivars, a push that could no longer be controlled via the currency control that was already in place. As a result, the value of the bolivar relative to the dollar dropped again, meaning that you needed to provide still more bolivars to get dollars in return. In turn, the gap between the official exchange rate and the black market rate increased even more, which created still more opportunities and incentives to make money off of the gap, which, in turn, further increased the size of the gap between the two exchange rates.
Please explain, once more, since it is so critical to understanding the events, why the existence of the official rate – what was it a little over 6 Bolivares to buy a dollar? – and the black market rate of about 18 per dollar (in early 2013) – created an almost impossible to avoid incentive for diverse types of corruption?
Well, the 300% profit that you can make not by producing anything, or working, but just by getting dollars for bolivars at the official rate but then bolivars for dollars at the black market rate is a tremendous incentive to smuggle or to game the system. But, with every transaction the gap between the official rate and the black market rate further increases, thereby further increasing the profit margin and the incentive. This is the kind of vicious cycle that makes for disaster.
And then why did the gap between the rates keep growing to a black market rate of 100 bolivars per dollar in late 2014 and 800 bolivars per dollar by late 2015 and what were the implications of this for corruption – and, well, when we talk of corruption, who are we talking about?
Once you have a vicious cycle in place, the gap begins to grow very quickly, which is what we see happening in 2014 and 2015. As for who is involved in corruption, the first people to become involved are those who guard the border and are supposed to make sure that products are not smuggled out of the country. Most of these are military personnel, who are being bribed to look the other way. No doubt, many are involved in the trade themselves, though. Also, other government officials and private businesses, who one way or another have access to the official exchange rate would also be involved.
Finally, government salaries, relative to inflation and to how many dollars they can get from exchanging on the black market have become ridiculously low, so anyone who in any way can access dollars is going to have a tremendous incentive to do so. For example, an employee earning 30,000 bolivars per month, which is a common salary, can generally not exchange this salary into dollars at the official exchange rate. If he or she could, then they would have $4,762 (30,000 / 6.3). However, it is almost impossible for someone to access this rate. If you translate this salary at the black market rate, which is closer to 800 now, then this employee would only be making $37.50 per month. Neither pay calculation is real, though, since you should take into account that most basic goods can be bought extremely cheaply in Venezuela, measured by the black market rate. Still, salaries have become quite low, relative to the increasing cost of living.
Another way to get dollars is via kickbacks with foreign contractors – that is, if you are contracting a foreign company for some sort of investment or infrastructure project, the profit from a relatively small kick-back in dollar terms would be enormous in bolivars, relative to the government employee’s salary.
Along with all this, what was the effect of Venezuela’s price structures? Maybe take two examples, gas for cars, and foodstuffs, I think milk was a good example, it that right? Again, what impact did the gap between prices inside Venezuela and those outside have? And why were these prices so different?
Prices in general are extremely dichotomized. Price controlled products, such as milk, beans, rice, unprocessed meats, cooking oil, sugar, which can be difficult to find or for which you have to stand in line for a few hours, will be ridiculously cheap – a few pennies per unit at the current black market exchange rate. Gasoline is practically free. People usually tip the gas station attendant far more than what it cost to fill the tank. So you can see, making a 10-fold profit from exporting a subsidized and price-controlled product, is an enormous incentive. This incentive is further fueled by the fact that anything that is not subsidized by the official exchange rate is now ridiculously expensive. For example, a dinner at an average restaurant or a piece of furniture or a TV set have become prohibitively expensive, relative to most people’s normal income. So, unless you want to forego such luxuries, you have yet another incentive to make money on the side. The same thing would go for purchasing a car, an apartment, or anything else that is not price controlled.
What is the effect of all this on the availability of goods on shelves in the stores? On people’s incomes? On the mentalities of people?
The different consequences have different impacts on people’s mentalities, I would say. For example, one impact that an inflation rate of over 100% has on people’s mentality is to find ways to turn any bolivar income into something that does not lose value as quickly, such as real estate, a car, or dollars. This, in turn, drives up the prices of each of these goods, further fueling inflation.
The shortages have the effect that whenever there is a line somewhere, you first better get in line and find out what is being sold later – even if you don’t need it, since you could re-sell it to someone who does not have the time to stand in line. Also, it means that an awful lot of productivity is lost – in the form of absenteeism at work – due to waiting in lines, unless you can afford to pay someone to stand in line for you.
Finally, the low income relative to the price of unregulated goods means that if there is any way to get some extra income, you will try to do so.
I should also note that I have heard that these conditions are often damaging the sense of solidarity that has been developed over the past few years.
Now we come to the current situation and a question that is very widespread – if the low fixed exchange rate has led and continues to lead to so many economic problems, why has the government not raised the rate? What is their calculus that accepts the tremendous dislocations and threats, as well, to the government’s support, instead of simply changing the exchange rate policies?
I think there are two main reasons that no change has been made so far to these economic policies. Having said that, the government has tried to introduce a wide variety of other measures, such as a new official exchange rate, more price controls, maximum profit rules, and other regulations, but none of these have been able to stem the tide of effects that I mentioned here. It thus seems to me and to most knowledgeable observers that changing the exchange rate system on a deeper level is the only way to tackle this problem.
The first reason I think no fundamental change has been introduced is that a move to adjust the official exchange to something closer to the black market rate would mean a tremendous price increase for the imported and price controlled basic goods. This would cause an enormous uproar and without an equivalent adjustment incomes would also mean a decline in living standards and an increase in poverty.
In theory I think adjusting both incomes and the exchange rate is possible, but it would be a huge undertaking, one that the government definitely does not want to risk shortly before a major election.
The second reason for the lack of action is that a currency adjustment would mean a declaration of defeat in the face of what the government is calling an economic war. Again, such a declaration might have to be made sooner or later, but not before an election.
Perhaps now we can sum up and you can offer an opinion – if the current situation in Venezuela is a result, first, of the exchange rate control that was meant to defend the currency against the destabilization attempts of 2002, which themselves were the result of the Chávez’s government’s attack on capitalist class interests, and because, second, an already relatively fragile exchange rate control became worse in the wake of the oil price declines of 2008 and again in 2014, and third, because this made it increasingly difficult for the government to meet the demand for dollars without going further into debt, and fourth, the opposition’s new destabilization efforts against the Maduro government the day after Maduro’s election in April 2013 and again in early 2014, turned the existing economic volatility into a vicious cycle of inflation, shortages, black market devaluation, and renewed inflation, what do you think ought to be done by the Maduro government, or any Bolivarian government, to get back on track toward developing Venezuela in a humane and participatory direction?
I think there is no way around a currency adjustment. I understand why the government wants to subsidize basic goods, which is what the current official exchange rate amounts to, but having such a massive price difference within the country relative to its neighboring countries creates far too many opportunities and incentives for undermining the economy, for corruption, and for smuggling. If Venezuela were an island it could perhaps get away with such a large gap between domestic prices and those of its neighbors, but it is not an island thus inevitably it has to arrive at some sort of price parity between the two markets.
However, as I said earlier, for reasons of justice any kind of exchange rate adjustment has to be accompanied by a redistribution of subsidies, from basic goods to salaries so as to prevent an increase in poverty. In the public sector, which employs a relatively large proportion of the population it should be relatively simple to shift the exchange rate subsidy to salaries. And in the private sector, it should be doable too, since it already charges high prices for unregulated goods and would be able to raise prices for price-controlled goods. Profits would and should decline, of course, but it would be possible.
Ideally, such changes would be accompanied by a participatory consultation process with the general population, to explain the issues and to determine the best way to implement these types of changes. That, unfortunately, would probably take too long for a policy change that at this point should be implemented as soon as possible.