Thursday, March 31, 2016

Venezuelan Socialists in Denial...

from Ozy
Venezuela has one of the most dysfunctional economies in the world. It has an abundance of inflation (currently 185 percent) and a surplus of exchange rates (two, besides the black-market rate) — and a dire scarcity of necessities like rice, eggs and diapers. The local economy relies almost entirely on oil, whose price has nose-dived, and the government is married to a model of socialism that has long since ceased to exist.

This is the dysfunction the very functional Luis Vicente Leon — Twitter star, government critic and one of Venezuela’s most respected voices on the economy — confronts daily. Over cold, sweet ice tea (and sugar is not easy to find!) Leon sat down with us to discuss the origins of Venezuela’s economic crisis, the hard remedies required to turn the situation around and the risks that linger in the interim. We rightly assumed that, as an economics professor at two local universities, a regular contributor to six national publications and president of Datanalisis, a company that produces financial-market intelligence, he wouldn’t be short on explanations. What follows has been edited and condensed.

OZY: How did the economic situation in Venezuela get so bad?

Luis Vicente Leon: The crisis in Venezuela is a mix of a lot of things, but the most important manifestations are scarcity and inflation. During the Chavez era, the government thought the private sector was putting them at risk, so they adopted a primitive strategy of interventionism and began interfering in companies and expropriating part of the economy. They controlled prices, which made the cost of production higher than the revenue companies could earn, and they overvalued our local currency to stimulate cheap imports. In 2008, the government was responsible for 8 percent of total imports. Today, they import 50 percent.

Before, people didn’t realize there was a crisis because the government had money and could import things with dollars. But as oil prices plummeted — oil revenue has declined from $100 billion in 2014 to a projected $24 billion this year — the government defaulted internally on commercial debts, and suppliers abroad stopped providing goods. Local production, meanwhile, is nonexistent, and all government companies are a disaster.

We have shortages of whatever the government has expropriated — sugar, milk, coffee, cement, iron, etc.

OZY: Is socialism to blame?

L.V.L.: Modern socialism recognizes the necessity of the private sector and the need to make agreements with producers. You don’t close the country to the rest of the world or control exchange rates. The problem is not socialism. It’s the government’s implementation, which is absolutely irrational, and trying to go back to primitive socialism.

OZY: What can be done to fix the situation?

L.V.L.: The government needs to recover confidence in the economy and recognize its mistakes; without confidence, people won’t participate in the marketplace. People don’t want to put their money in a jail, and right now Venezuela is a jail. The government is essentially telling investors, “Bring your dollars, but you won’t be able to bring them home. Bring your dollars and I’m going to control prices and you’re going to lose money in order to help the country.” No investor is going to go for that.

It’s also not enough to say we’re going to change. To change, you must change everything — including the model and maybe even the government. You need to open the market, open exchange rates — allow it to go up, devaluate and recover its real value — and you need to negotiate with the private sector to reprivatize the economy even though prices will increase. At the same time, the government must create a mechanism to subsidize poor people directly to allow them to surf the crisis.

But none of this is possible without money, whether from oil revenue or assistance from international lenders such as the IMF, International Development Bank or China. But nobody will provide financial help without confidence.

OZY: Does (Venezuelan President Nicolas) Maduro ever call you for advice?

L.V.L.: The government has asked me in the past but not now because they think I’ve become very critical. But I’ve always been like that; it’s just that now there are bigger problems to criticize. But I have to recognize that as much as the government also criticizes me — Maduro singled me out in his last nationally televised broadcast — they’re nice to me. I’m not an enemy.

OZY: You’re in the business of predictions. What’s on the horizon for this tumultuous country?

L.V.L.: There are two scenarios. The first is anomie: The country becomes more primitive but the people accept it. The government continues to provide cheap essentials to maintain the poor people and allows the middle and high class to create a dual economy where you can use your own dollars to bring in goods and live with it by paying a lot of money. Consumption will be less. People will live with less. This is not popular but is very important and has a huge probability.

The second possibility entails a radicalization in society before presidential elections in 2019 and a social explosion that leads to agreements between the military sector, some members of the government and some opposition members to kick Maduro out.

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