An orthodox adjustment for Venezuela
n April 15, the President of Venezuela, Rafael
Caldera, announced a series of measures that imply a new direction for the countryžs
economic policies. After two and a half years of controls to the exchange, monetary
and goods markets, the new approach is bases on the liberation of market forces. The
measures are adopted in the context of a credit agreement with the International
Monetary Fund -yet to be formalized- and it is expected that it will allow for collecting
resources from other international sources, particularly multilateral entities.
The increase in gasoline prices -to date, one of the worldžs lowest-, the variation
of the exchange rate, the liberation of interest rates, the increase of sales tax (from 12%
to 16.5%) and the austerity plans regarding public expenses constitute the nucleus of
the program. In addition, there are actions of a social nature, destined to soften the
impact of the new policies on lower-income sectors. Among these, special mention
must be made of the public transportation subsidy, aimed at avoiding the violent
uprisings that preceded prior attempts to adjust gasoline prices.
The operating details of the liberation of exchange and interest rates is still
unknown. Due to the weight in our country of the Venezuelan Government in these
areas (it generates over seventy percent of currency, and controls half of bank assets),
markets are unable to function until the Authorities issue a pronouncement in this
regard. The first signs for dispelling this uncertainty are expected for Monday, April 22.
There were no announcements -as expected- of increased in utility rates, reforms in the
employee severance benefits and pension system, the creation of a contingency fund for
debt payment, nor on the liberation of the goods that still remain controlled.
In spite of the lack of accuracy of the announcements, the group of measures
constitutes a profound change in Venezuelan economic policy. Gasoline prices, which
had acquired a symbolic character in local politics, are increased from 5, 10 and 15
bolivars per liter -in accordance with the octane-level fuel- to 50, 55 and 60 bolivars,
respectively. All attempts were abandoned to effect a unorthodox adjustment, in order
to avoid recession that usually accompanies the programs by the International Monetary
Fund; instead, am inflationary shock was the choice, amid hopes that this will enable
the country to overcome, after its initial impact, the chronic price increases experienced
during the past years.
We have gone from a policy aimed at appeasing the populationžs anxiety
regarding the continuous deterioration of economic conditions, adopted by the Caldera
Administration as an response to the 1992 and 1993 political turbulence, to a attempt
at seducing foreign capital. By closely following the orthodox approaches of the
international financial entities and expediting the privatization of a few Government
companies, a revitalization is expected of investment flux, as a means to balance the
financial accounts, and as a starting point for reactivating the productive sector. In
accordance with President Caldera, "...investors are waiting in line" to enter Venezuela.
New, the task at hand would be to create the conditions required for these investors to
materialize their intention.
The liberation of exchange and interest rates, as well as the increases in taxes and
fuels, will generate a significant increase in price levels during the next months, even
in accordance with official estimates. The reaction of the population before these
measures is a crucial element for the success of the implemented policies. Up to this
date, no significant protests have occurred, and the Government has been especially
meticulous in avoiding the violent reactions that arose in 1989 after similar measures
were implemented. Particularly, the Government has used all its available public
relations abilities.
The first reactions from institutional opinion groups has been to provide support
and remain cautious, and there has been no open rejection of the measures, with choice
few exceptions. Even COPEI, a political party which has maintained a hard-line
opposition, has expressed that it will not encumber the success of the new policies. This
attitude probably reflects the populationžs need to have a sense of leadership by its
authorities, after several months of uncertainty.
Nevertheless, such reactions arose before the measures effects have been
actually felt. Therefore, we must wait and see of the hopes for decrease in inflation
toward the end of the year will suffice for the population to passively accept the
exacerbation of the price increase expected for the following months. Additionally, we
must consider the probability of a recession of the real economy and an increase in
unemployment, facts that have been neglected by most analysts.
Using the official exchange rate at December, 1995 as a reference point, and still
no knowledge of the new exchange rate, it may well be that the devaluation of the
bolivar during the last six months will exceed that experienced by Mexico as of its
December 1994 crisis, and one is hard-pressed to find arguments that may lead us to
believe that the impact will be lower.
Venezuelažs peculiarity resides in the fact that, due to its enormous natural
resources and to the external income flow generated by the petroleum industry, the
country was able to avoid, up to the present, crisis of a magnitude such as those which
preceded the implementation of orthodox adjustment programs in other Latin
American countries. This may be an advantage if seen in light of the accounting
stability expected from the adjustments. But if one examines the situation in light of the
populationžs readiness to accept hardship, it may be disadvantageous. The experience
of soaring inflation levels and steady deterioration of purchasing power may not be
passively accepted. In this regard, special attention must be given to the possible
reactions of the labor force, since strikes as a protest vehicle have been seldom used in
recent Venezuelan history, in spite of political turbulence.
Another possible weakness that may imperil the success of the announced
program in the current institutional decay and the lack of leadership that have increased
in Venezuela during the last years. This has been a determinant of the lack of extreme
negative reactions to the new policies, as well as enthusiastic adhesion -except for
international circles- that lead us to believe that there will be active supporters and
defenders of the policyžs continuity when the program begins to evidence its
yet-implicit sacrifice quota. President Calderažs prestige, which has supported
institutional stability during the last years, tends to decrease , and his current means of
support are merely circumstantial.
Based on the above, the possible success of the chosen course of action depends
on whether the promised benefits are appreciated at a near future -before the end of
1996-, after the inevitable sacrifices implied by the measures have been assimilated.
This is particularly important as regards inflation and employment. Otherwise, the new
measures will only be a new chapter in the history of trials and errors that Venezuela
has lived during the last fifteen years.
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