The New York Times: Maduro's economic package will not even stabilize the country’s misery

September 05 2018, 11:30 a.m.

Miguel Ángel Santos * / The New York Times

For years, many Venezuelans have been obsessed with the myth of a practical Chavismo. According to this notion, there would come a time when the government of Hugo Chávez, first, and Nicolás Maduro, afterward, would begin to administer the economy with some criterion of efficiency, while accelerating political repression and bolting itself in power.

Reactions to the myth also evolved to the extent that the situation in the country deteriorated. From the fear that a better management of the economy would perpetuate Chavismo in power, we went on hoping that, in the midst of the humanitarian catastrophe that surrounds the country, some common sense would prevail. But, like the scorpion in the fable, the Chavismo cannot help but bite the frog that helps him cross the river. It's its nature.

The practical Chavismo expectation was revived on August 17, when President Nicolás Maduro appeared on national television to make a series of economic policy announcements, which contained some of its most conspicuous elements. Maduro announced a devaluation of 97 percent of the official exchange rate and said that we would go "to a new exchange system" with "a single fluctuating exchange rate anchored to the Petro", a crypto-currency launched in February. He also declared his intention to eliminate the printing of money as a financing mechanism for public spending, the origin of the hyperinflation that plagues Venezuela. A tax on financial transactions would be imposed and the value-added tax would rise from 12 to 16 percent. In the same speech, Maduro decreed an increase of 35 times the minimum wage, along with an additional bonus. The new minimum wage would be about $30.00 at the new official rate, equivalent to the daily dollar amount that is used internationally to identify the poverty line. The price of gasoline, which today is practically free, would be brought to an international price level, a measure that would be complemented by a direct subsidy to the local consumer.

Although some of these announcements would be part of any reform program aimed at recovering the Venezuelan economy, the package of economic measures lacks elements to solve its two main problems. In a very short time, the five zeros that have just been eliminated from the old Strong Bolivar to create the new Sovereign Bolivar, will once again be added to the right of the new currency.

In the first place, the set of measures taken does not include how to generate the necessary foreign currency to import the products that the country is not capable of producing. The plummeting of oil production, the exhaustion of its debt capacity during the boom years and the inability to attract foreign investment in an environment that does not guarantee property rights, have forced the country to reduce its imports per capita by 84 percent in the last five years.

Secondly, twenty years of expropriations, nationalizations and regulations aimed at appropriating the cash flow of the private sector have exhausted the industrial apparatus, so the country has no way of producing the things it can no longer import.

In this context, the maximum that could be expected is that the measures taken would stabilize the country’s misery. One week has been enough to show that even that was a goal quite ambitious.

Although he has proclaimed the contrary, Maduro has no means to pay the salary increase of public employees and the decreed bonus, except by printing money. Only in September, the impact of the announcements - without considering the impact of the pensions payment increase and the three months of the salary increase by the companies in the small and medium industries that cannot afford it and that the government promised to assume- would amount to 80 percent of the money in circulation today. By inertia, the amount of money in circulation is already doubling every thirty days and inflation exceeds 125 percent per month. The introduction of these measures is equivalent to putting out a fire with gasoline, the increase of which has been postponed until the end of September.

Despite the mega-devaluation announced by Maduro, the price of the dollar in the parallel market continues to rise and is already trading at least 54 percent above the official exchange rate. To put an end to the initial doubts, the government published a new list of agreed prices (they are no longer called controlled prices) and arrested several store managers for "re-pricing" product prices and speculation. In the last few days, the Venezuelans have pounced on the stores with what little money they have, the queues at the stores’ cash registers have multiplied and the product shortages have increased.

Basically, what is happening is that the policies that the regime needs to perpetuate itself in power do not coincide with those that the economy requires to function normally. To subjugate Venezuelans, the Chavismo needs a system of controls and absolute administrative discretion. Only thus can it distribute the increasingly meager income among the different factions that hold it in power and keep the population submissive. After all, that has always been its nature.

The Venezuelan economy, however, requires regaining access to foreign currency through a program that includes extraordinary multilateral financing, a significant restructuring of debt and the opening of the oil sector to private investment.

It also needs to restore the market mechanism that allows society to organize itself to make the most of its resources and solve its own problems.