Inflation has returned to Venezuela with a vengeance. And with it, the first major cracks in president Hugo Chavez’s vision for 21st-century socialism
Its economy continues to grow at one of the fastest paces in the region. Wages are on the rise and, on official estimates, poverty levels continue to drop steadily. In key respects, Venezuela’s 21st-century socialism is alive and well.
Except support for the leftist government has fallen to its lowest level since 2003, according to a February poll, reflecting damage from a stinging referendum defeat for president Hugo Chavez. Government support has dropped to 34% from 43% at the end of last year.
Chavez has promised to tackle high crime and shortages of some basic foods – the non-ideological concerns of the average Venezuelan. But the new poll, by respected polling company Datos, suggests he is struggling to convince traditional supporters that his government can resolve those day-to-day issues, along with high inflation.
Consumer prices have spiralled at double digit rates over the past few years – at 22.7% in 2007, the highest rate in Latin America – while food shortages have been dire, with even basics such as flour, sugar and milk absent from store shelves. Inflation in the first two months of the year was 5.2%.
The president, in a rare admission that his policies might have missed the mark, fingered inflation as a culprit. “Inflation is still too high, and this is one area where I accept that we have failed ... but this is one of the most difficult scourges to eradicate, and its roots are structural,” Chavez said during his weekly programme, Alo Presidente, in January.
In an interview with Emerging Markets, Jesus Farias, chief economic adviser to Venezuela’s National Assembly, argues that inflation is a structural problem: simply too much money chasing too few goods. But he contends that the government is nevertheless on the right track with its policies: efforts will take time to show results, given the amount of oil revenues flowing into the country and the fact that local producers are simply unable – or unwilling – to meet demands.
“We are moving in the right direction, but we are dealing with a private sector that has not made any substantial investments in three decades and is unable to meet the needs of a public that has more money,” he says.
Critics, says Farias, tend to zero in on inflation without taking into account other factors, such as the major increase in the minimum wage by more than $100 per month so far this decade, or the reduction in poverty, which has dropped to around 30%. “This means that an additional 4 million Venezuelans are no longer living in poverty, which has an impact throughout the economy.”
No agreement
Yet inflation matters – and topples governments too. While there is broad agreement that inflation and food shortages are structural problems, views on the underlying causes are by no means consensual.
“President Chavez did not invent inflation, price controls or nationalization; he is just continuing the structural problems and making them worse,” says Hugo Faria, an economics professor at the Institute for Business Administration Studies. “In a nutshell, Venezuela’s problem is too much socialism and too much mercantilism, which the government complains about but stimulates.”
In an effort to stem record-high inflation, Venezuela launched a new currency – the “strong bolivar” – in January, by slicing three zeroes off the bolivar. The new money was introduced without problems, but its effects on inflation remain to be seen.
Non-government economists and the private sector remain sceptical. Robert Bottome, who edits the economic analysis newsletter VenEconomia, says strengthening the currency will fail to have an impact because the government has not implemented other measures that are needed to tame inflation. “An inflation programme needs to be accompanied by fiscal and monetary measures, as well as policies that stimulate production. None of this has happened. It is ridiculous to think that eliminating zeroes will stop inflation,” he says.
Says Faria: “The bolivar fuerte is not going to tame inflation; it may have a minor impact but it is really only window dressing. We need to eliminate exchange rate controls and price controls. I would suggest monetary freedom, letting people hold the currency they want, whether it is bolivars, dollars or euros.”
Imbalances in the exchange rate regime also threaten the new currency. The key problem is the gap between the official and the “parallel” exchange rate for the dollar, which recently exceeded triple the official rate of 2.1bolivars. But even talking about or publishing the parallel rate is illegal: a new version of the Illicit Exchange Control Law, introduced late January, includes fines for anyone who publishes the parallel exchange rate or is quoted mentioning it.
Other notable attempts to control inflation have fallen flat. One of the government’s principal measures – as revealed to Emerging Markets by Venezuela’s former finance minister Rodrigo Cabezas last year – was to scale back the sales tax with a view to ditching it entirely. The rationale was that this would bring prices down, but the effects proved ephemeral.
A new series of measures has since been introduced to stamp out the price spiral, including an increase in banking interest rates to stimulate savings, higher credit card rates to slow consumerism and a drop in the rates on loans for the manufacturing, tourism and agriculture sectors to stimulate production.
Farias says that political steps could also help: “Make public spending more efficient, execute projects faster and reduce bureaucracy and corruption,” he says. But the economist singles out speculation as “the main reason why there are shortages and inflation”.
Sticking point
For many analysts, price controls are the key sticking point. Faria argues that the economy will not improve for the average Venezuelan until the government tackles them alongside the currency parity established in February 2003. The administration has also tried to deal with shortages with Venezuelan Food Production and Distribution, which sells the products at government-regulated prices, but this has not worked.
Administration officials, starting with Chavez himself, maintain that the country’s business sector is behind the shortages, purposely sabotaging the economy as part of a plan to undermine the government. Farias says this has been an obvious problem since the strike by the state oil company, PDVSA, at the start of the decade. That strike lasted for months and crippled the economy.
The government adviser also points out that there are 5,000 fewer food-producing companies in Venezuela today than there were at the start of the decade. “We have implemented policies to stimulate investment, but we cannot force the productive sector to invest and increase output. If they do not respond, we have other options, such as small and micro producers who are interested in increasing their output,” he says.
In the meantime, the administration began imposing restrictions on food exports in late February, starting with around 80 goods, to deal with shortages. In mid-March, Congress approved a new $2 billion package to address shortages, including $500 million for agricultural development. Another chunk is earmarked for the construction of more than 2,000 farmers’ markets throughout the country in the coming 10 months.
Chavez also announced a major plan to increase imports as well as a new infusion of money into the agriculture sector, through the Food Sovereignty Plan. The state oil company PDVSA also has a new division, PDVal, to import, produce and distribute food. PDVal’s initial outlay was $150 million, which was used to buy basic foodstuff from Argentina and Brazil.
Another entity getting PDVSA money is the National Development Fund (Fonden), organized in 2005 to receive “excess” oil revenue. The fund was close to $10 billion in 2007. Fonden money is not factored into the country’s foreign reserve totals, which were $33 billion at the start of March.
One of the newest moves came in mid-March, when the government nationalized a chain of slaughterhouses to increase the supply of meat. Chavez said the slaughterhouses have 70% of the industry’s installed capacity. He also announced that the state would be acquiring a dairy company that produces approximately one-third of the country’s milk.
“These slaughterhouses were being under-used, and the technology is obsolete. We cannot meet demand under these conditions, so that government must act. The government has a responsibility and an obligation to its citizens to meet needs,” says Farias.
Despite all the efforts, the government recognizes that inflationary pressures will remain strong because of the spiralling price of oil, which means more cash flowing into the economy. “We have important oil dollars being injected into the economy, so demand is growing quickly,” says Farias.