Venezuela's Solution

How Venezuela can get out of its economic and political crisis.

BY LATINVEX EDITORS

This week, Ford joined Toyota and General Motors in announcing a suspension of its work in Venezuela. And last week, Venezuela's largest private company, Empresas Polar, announced it was stopping  production of pasta. Meanwhile, foreign airlines are now owed a whopping $3.9 billion by Venezuela’s government.

The reason? For the past 11 years, the government has restricted access to dollars, which both local and foreign companies need to buy goods and services abroad.

Clearly, Venezuela needs to lift those restrictions immediately.  It also needs to stop having three different exchange rates. Bank of America predicts that is what will happen next year, although it may entail a devaluation of as much as 86 percent, according to Bloomberg.

Venezuela also needs to immediately lift all price controls. Instead of helping to keep prices low, price controls typically have the opposite effect and are key drivers of inflation. Venezuela has had price controls the past 12 years. During that time inflation has consistently reached double-digits and typically been the highest in Latin America (when not alternating with Argentina, which also imposed price controls). In the 10-year period between 2004 – the first full year of price controls – and 2013, Venezuela’s average annual inflation reached 24.4 percent, according to a Latinvex analysis of data from the International Monetary Fund (IMF).  During the same period, the average rate in Latin America was 6.3 percent. And that included the rate in Venezuela.

Last year alone, Venezuela reached a 40.7 percent inflation rate. This year? The IMF estimates that  Venezuela will see an inflation rate of 50.7 percent. That will be an 18-year high, according to a Latinvex analysis of IMF data. It will also be the world’s highest for the second year in a row.  Iran, which will likely see the second-highest inflation, will see consumer prices grow by less than half of that, or 23 percent, the IMF estimates.

However, it gets worse. If the current policies remain in place, Venezuela will likely see a whopping 133.4 percent inflation in 2016, the IMF estimates.

The new Fair Price Law, which was implemented in January, sets limits on company profits and establishes prison terms for those charged with hoarding or over-charging.  But instead of reducing inflation, it is just driving prices up while making shortages worse.

Price controls, coupled with the currency restrictions for imports, have led to such a basic item as toilet paper becoming scarce in a country that has the world’s largest oil reserves and last year received $27.8 billion from crude sales to the United States. “Shortages are inevitable when socialist governments interfere with free markets through price and other controls,” Otto Reich, a former US Ambassador to Venezuela, wrote in The Wall Street Journal last year.

Meanwhile, setting a limit on how much a company can make in profits appears to be one of the last nails in the coffin for companies operating in Venezuela. Obviously that law should be repealed immediately.

Venezuela also needs to privatize the companies and assets that were expropriated under the 14-year rule of the late president Hugo Chavez. Chavez expropriated more than 1,600 companies from 2002 to 2012, according to the Venezuelan Confederation of Industries (Conindustria). They included companies involved in a broad range of sectors, including telecommunications, energy, steel, insurance, banking, sugar and even hotels, supermarkets and shopping malls. Econoalitica estimated in July 2010 that the cost of expropriations until then had reached $23 billion. The many victims of Chavez’ expropriation binge include US food giant Cargill, French retailer Groupe Casino, Mexican food producer Gruma, US oil services company Helmerich  & Payne, US glass maker Owens-Illinois, Irish pulp giant Smurfit Kappa Group and Argentine steelmaker Tenaris. 

Venezuela also needs to liberalize the once-booming mining sector, which was closed to foreign investment in August 2011. Mining performs significantly better with private – especially international – mining companies rather than local, state companies.

Last, but not least: State oil company PDVSA needs to return to its pre-Chavez roots of efficiency and autonomy. That means rehiring as many of the 18,000 employees that were fired after a 2002-3 strike to protest the growing political meddling taking place at the company and sacking the thousands of unqualified employees that were hired only because of their loyalty to Chavez. Just as important: PDVSA needs to be able to use its revenues and profits to invest in the company – not government coffers – and avoid the decay in equipment (and resulting fatal accidents) and production decline of the Chavez-Maduro governments.

POLITICAL REFORMS AND ACTIONS

On the political front, Venezuela also needs immediate reforms and actions.

First, the government needs to stop its persecution of opposition politicians, protesters and media.

That means the immediate release of opposition leader Leopoldo Lopez (jailed since February 18 on politically charged accusations of inciting violence) and opposition mayor Daniel Ceballos of San Cristobal (jailed on March 19). It also means re-instating María Corina Machado as legislator (she was expelled by the pro-government national assembly president in March because she had criticized the government as a guest speaker of Panama at the OAS).

The government also needs to immediately lift its restrictions on peaceful demonstrations, which it imposed April 24 (through the government-controlled Supreme Court) and which clearly aims to stop the 3-month protests from students.

Venezuela also needs to stop the harassment of independent and opposition media, both through politically-motivated legal actions and by restricting newsprint access.

El Universal, one of Venezuela’s two top newspapers, this week has had to publish 16 pages a day, down from its regular 24 pages, due to newsprint shortages. It has had paper sitting in a Venezuelan port since January, but needs dollars to release it from bond and blames government delays in allowing it to exchange the local currency for dollars, AP reports.

Then there’s the issue of crime. Venezuela has Latin America’s worst security, according to the Latin Crime Index from Latinvex. It looks at six key factors that measure crime, including homicides, kidnappings, assaults, robberies (with force), thefts (without force) and car thefts. Venezuela now has Latin America’s highest homicide rate, ahead of Honduras, which previously held that dubious honor.

It has been truly amazing to see how coordinated and forceful the Venezuelan government has been in squashing opposition protests. Yet, the same government has completely failed in providing any coordinated program to squash the rampant crime hurting Venezuelans every day. Venezuela needs to immediately implement an effective anti-crime policy based on the success of neighboring Colombia under previous president Alvaro Uribe and let it be led by qualified police officers, not the current leaders that have only been appointed due to their loyalty to Chavez.

Based on his dogmatic-erratic behavior, President Nicolas Maduro will probably not follow any of our advice. But hopefully his successor will, even if it means running into opposition from hard-core Chavistas and those with vested interests in today’s system. Only by implementing these changes will Venezuela be able to get out of its misery of economic freefall.

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