Venezuela: Dismantling a Weapon of Mass Destruction

By Mark Weisbrot

Mark Weisbrot is co-director of the Center for Economic and Policy Research in Washington, D.C., and the president of Just Foreign Policy. He is also the author of the new book “Failed: What the ‘Experts’ Got Wrong About the Global Economy” (2015, Oxford University Press). Cross-posted at our sister blog, Triple Crisis.

The government of Venezuela has often denounced an “economic war” against it, and of course this is part of the current situation. The primary weapon of mass destruction in this war is the black market for the dollar. It is no coincidence that the main source of information for this market — the extreme right-wing “DolarToday” — is run by someone who played an important role in the U.S.-backed military coup in 2002. He was then an army officer — Colonel Gustavo Díaz Vivas — and he now resides in Alabama, with DolarToday operating out of the U.S.

This is also no coincidence. Washington has been trying to topple the Venezuelan government for at least 15 years, and almost every journalist I have talked to during this time — including from every major international media outlet — has been well aware of this effort; although they almost never write about it.

The black market for the dollar is especially destructive because it is part of an inflation-depreciation spiral that has been growing since the fall of 2012. When the price of a dollar on the black market rises, importers must pay more for the dollars that they need, and this increases inflation. But then the higher inflation encourages more people to buy dollars on the black market, as a store of value. This pushes up the black market dollar price, which increases inflation, in a continuing spiral. In October 2012, inflation was at 18 percent and the black market dollar was at 13 Bf (Bolivares Fuertes). At the end of 2015, inflation hit 181 percent, and the black market dollar had passed 800.

The main reason that the current spiral does not get even worse is that the economy is in recession. It shrank by 5.7 percent last year. But attempts to stimulate the economy through government spending would likely feed the inflation-depreciation spiral. This means that the economy is currently trapped in recession.

The government must therefore incapacitate this weapon of mass destruction. The only way to do that is to unify the exchange rate.

Many people are afraid of this vital change. Some think that everyone’s savings would suddenly rush into dollars, and the equilibrium rate would be even worse than today’s black market. It is true that many Venezuelans prefer to save in dollars (this is also true in Peru, Uruguay, and other Latin American countries). But they do not want dollars at any price; that is why the black market rate settles at an equilibrium price, e.g., at the current rate of about 1,000. If the government let the currency float — which is what it would have to do in order to terminate the black market — it would also settle at some equilibrium price, and it would be far less than the current black market price.

Others say that the government has no dollars to sell on a floating exchange rate market. But that is not true. Although its current oil revenues are not enough to pay for all of the country’s imports, it has tens of billions of dollars in international assets (and even more internally) that it could sell for cash. It would need to auction off about 9 to 10 billion dollars a year (about $36 million per day) in order to adequately supply the foreign exchange market. Last year it sold about $12 billion, but about 95 percent of that was sold at extremely low prices of 6.3 and 10. Much of this money was never used for imports, since it could be sold for superprofits on the black market. The whole system creates enormous incentives for corruption.

Interestingly, President Chávez allowed the currency to float on February 12, 2002. In the year prior to this move, there had been a lot of capital flight, and therefore falling Central Bank international reserves. But despite the political instability — this was just two months before the military coup —reserves actually grew after the float, until the oil strike near the end of the year.

Others argue, from the left, that a floating exchange rate is “neoliberalism,” and that keeping the fixed, overvalued rate is “socialist.” But this is also deadly wrong. The worst economic crises of the late 1990s — in Argentina, Brazil, Russia, Indonesia, Thailand, and other countries — were brought on by fixed, overvalued currencies. Most of these fixed, overvalued currencies were strongly supported by the International Monetary Fund and other neoliberals until they collapsed.

It is the black market that is “savage capitalism” — uncontrolled and unregulated. And it is a way of subsidizing capital flight, and feeding the government’s enemies. You give them cheap dollars and they take them out of the country, worsening the balance of payments problem. By contrast, letting the currency float is a way of taxing capital flight: Whoever wants dollars must pay more for them.

And Venezuela is very lucky compared to other countries that have faced this problem: the vast majority of the country’s dollars come to the government through oil revenue. This means that the government will have much more revenue to spend, in domestic currency, when the currency has been floated. It can use this revenue, as well as other funds in domestic currency, to finance subsidies for food and medicine.

This makes much more sense than trying to subsidize food or other essentials through the exchange rate. And the price controls on food are not working very well: Food inflation for 2015 was 300 percent, nearly twice the (181 percent) rate of overall inflation.

Unifying the exchange rate is thus the first and most important step toward economic recovery. Once that is done, it will become possible to address other imbalances and problems — including shortages, price controls, inflation, and economic growth. But first things have to come first.

Our March/April Issue Is Out!


We sent our March/April 2016 issue to e-subscribers last week, and the print copies are now arriving in print subscribers’ mailboxes!  (Not a subscriber? We hope you’ll consider subscribing today–just click here.)  We’ve already posted three articles from the issue to the D&S website: Why Higher Ed Can’t Wait, by Biola Jeje and Belinda Rodriguez; John Miller’s take on Clinton and Sanders’ financial reform proposals; and (just posted today) David Bacon’s No Country for Old People.  Here is the issue’s note from the editors:

Bill of Indictment

How has contemporary capitalism failed, in the United States and around the world?

It has failed on sustainability. For decades now, there has been no sensible way to deny the looming catastrophe of climate change. Yet, only now are we taking the first steps to abandon “business as usual” and avert the worst.

It has failed on stability. The boom-and-bust cycle of capitalist economies has been adrenalized by the deregulation of finance. As Nina Eichacker shows in her study of Iceland’s financial collapse (p. 21), no country has the institutional capacity to cope with the instability inherent in a deregulated and “supercharged” financial system.

It has failed on security. Even wealthy countries fail to guarantee the basics in life—like housing, medical care, or education. As Gerald Friedman explains (p. 32), millions in the United States are still without access to health care, and millions more lack adequate coverage—even though universal care could be achieved at lesser cost than under the current system.

It has failed on dignity. In many countries, the young today face a bleak and uncertain future. Describing the disaster of unemployment in Greece today (p. 17), Evita Nolka quotes a young adult obviously tormented by “being deprived of the opportunity to work during the most productive years of your life.”
Just as the particulars of the indictment are clear, so are many of the possible responses. Friedman explains how a single-payer health insurance system could reduce waste and achieve universal coverage. Biola Jeje and Belinda Rodriguez describe the burgeoning movement, of which they are a part, for free higher education in the United States today (p. 5). David Bacon advocates a human-rights approach to economic security in old age (p. 26). John Miller describes proposals to rein in the financial system (p. 9). James Boyce shows that serious action on climate change would benefit the majority of people today, both in terms of health and wealth (p. 12).

If anything, though, the readiness of solutions to our most pressing problems only casts the current system in a more negative light. Nolka’s example of a shuttered Greek textile factory—its unemployed workers meticulous in caring for the machines—serves as a case in point. It would take so little to restart production and get them back to work, but the factory remains closed and they remain unemployed. The solutions are all around us, yet those in positions of power can’t put them into practice.

Or won’t.