Alejandro Sucre
Venezuela clamors for economic revolution
ublic opinion has innocently fallen for the belief that the
urgency of the payments corresponding to the external public debt installments, the
magnitude of the fiscal deficit and the paralysis of the economy, obliges Venezuela to return
to the 1989 reforms and reach an agreement with the IMF in order to obtain new resources
that may alleviate the liberation of the exchange, credit and goods markets, under strict rules
of tax discipline. Furthermore, many talented professional Venezuelans have fallen for the
economic trap laid by the main promoter of IMF proposals in Venezuela, economist Miguel
Rodríguez, who claims that the 1989 reforms were beneficial and that the factors that
contributed to their demise were the boycott from the National Congress, AD, other
opposition parties and the rebellious military. Nowadays, few Venezuelans realize that the
return of economic controls and ultra-interventionist policies implemented by President
Caldera, in conjunction with the coup attempts, street uprisings and the trial and ultimate
discredit of ex-President Pérez, were all generated by the serious mistakes of the economic
team that carried out the 1989 reforms, and which are repeated today by Ministers Matos
Azócar and Petkoff.
Revisiting the events that lead to the collapse of the 1989 reforms, to be repeated in
1996
The pro-IMF economic team of ex-President Pérez was able to gloss over the
macroeconomic amounts for a while, and create a sense of progress; yet they actually erected
a sprawling edifice with foundations made of clay. Although it may be true that these
economists, who now aspire to return to power in Venezuela, replaced international reserves
in 1990; it is also true that this was achieved by increasing the Governmentþs eternal debt
with multilateral entities (even initiating PDVSAþs indebtedness policy), reprogramming
debts, devaluating the bolivar in 196% and ignoring the CBVþs obligations in outstanding
credit letters. The 1989 economic team had no qualms in causing serious losses to the local
private sector nor to increase the countryþs debt, since it was solely occupied by agreeing
its fiscal accounts and paying old debts through new debts, without reducing expenses or
increasing income.
It is also true that this economic team decreased the fiscal deficit on a temporary
basis; however, this was achieved using the cash generated by the bolivarþs devaluation,
considered as new tax income.
The 1989 devaluation of the bolivar in 196% was an adjustment that applied solely
to the average Venezuelan citizen and private companies (similarly to Matos Azócarþs
devaluation from Bs. 170 to Bs. 465), since same were in the obligation of paying more
bolivars for each dollar. However, the adjustment of the private sector solely had
implications for the public sector, since the Government recorded income form the sale of
its most expensive petroleum dollars (from Bs. 14.5 to Bs. 42,95 per US$) as new fiscal
income, while simultaneously using this income to increase fiscal expense, instead of
maintaining it at the pre-devaluation rate in order to stabilize the economy by means of
lasting but evenly distributed sacrifices for all Venezuelans (public and private sectors). This
usage of bolivars generated by the devaluation to cover the fiscal deficit by the 1989
economic reform team produced an enormous and haphazard creation of inorganic money
which failed to stimulate goods and services production. This difference between the new
amount of money in the economy (liquidity increased in 258%) and the stagnation of goods
and services production (GIP decreased to -8,6%) generated a mammoth inflationary
pressure that caused the loss of the initial adjustment and became daily bolivar devaluations
(disguised under the sophisticated denomination of crawling peg), and drowned the local
productive sector in a permanent crisis. In this manner, the 1989 reformers did not attack
the root of the problem regarding the disorderly growth of monetary liquidity, which
they had created, since they were unwilling to accept sacrifices or reduce public
sector expenses. On the contrary, they began to apply patch monetary policies for curb
unleashed inflation. This story is being repeated in 1996.
The Central Bank of Venezuela decided to issue zero coupon bonds in order to
control the economyþs monetary overgrowth, but the Government continued to increase
fiscal expense, financed through chronic devaluations, thus transforming the zero coupon
policy into an insufficient and addictive policy. The application of a restrictive zero coupon
monetary policy in conjunction with an expansive fiscal policy was an explosive combination
of measures, equivalent to stepping on the gas and the brakes at the same time in a
uncontrollable vehicle. In other words, although the restrictive monetary policy briefly
curbed inflation by absorbing the economyþs excess liquidity, the increasing tax expense
continued to inject inorganic money into the economy, and forced the CBV to issue
ever-increasing volumes of zero coupon bonds for avoiding soaring prices. This compulsory
issuance of zero coupon bonds, in turn, obliged the CBV to pay higher interest with the
purpose of attracting the aforementioned higher levels of inorganic money. These issuance
of zero coupon bonds reached such uncanny levels that the CBV held over 30% of public
bonds, thus encumbering the normal circulation of ban credits in private productive activity,
and creating an enormous liability for the country. Additionally, the private productive
sector which competed with CBV for banking credits was forced to do into high-interest debt
in order to cover losses from credit letters and new raw material costs generated by the
devaluation. This competition between the private productive sector and the CBV for
attracting banking credits generated a situation in which interest rates exploded to 82% per
annum (40 points over inflation levels are considered unpayable), and finally produced the
collapse of the countryþs productive and banking sectors.
By means of actual interest rates at 82% and the bankruptcy of the local productive
sector, the profit-centered economic reform team forced commercial banks that received
foreign investment and the monetary liquidity generated by fiscal expense to stagnate their
funds in CBV, since there was a notorious lack of solvent companies, able to pay the interest
rates in effect at the time. In order to understand the seriousness of the increase
experienced by interest rates during those years, much defended by the now-aspiring
Presidential candidate, Miguel Rodríguez, who insisted that same were necessary for
preserving international reserves, we may imagine the implications of equivalent interest
rate increases in European countries, or others such as the US and Japan. With interest
rates at 45% (exceeding inflation in 40 points), we can be sure that Miguel Rodríguez and
his team of economists would have been able to bankrupt giants such as Exxon, Toyota,
Mitsubishi, Procter & Gamble, Mercedes Benz and any other large companies and banks
that stood in their way. This deterioration of the Venezuelan productive apparatus will
become even more pronounced due to same reasons, and to Matos Azócarþs and Petkoffþs
IMF program.
Adding fuel to the fire
As though income form devaluation did not suffice for reducing the fiscal deficit, the
1989 economic team, backed by the IMF, also pressured the population with increased in
utilities rates, gasoline prices and those of all Government-provided goods, in addition to
new and costly taxes to business assets. In the manner, the 1989 technocrat team
demonstrated its total misunderstanding of the fact that, in economic reforms, the order of
the factors can alter the result, and that in an economy where the Government maintains
absolute control and monopolizes almost 70% of the countryþs main natural and productive
resources, fiscal deficits cannot be covered with higher taxes without an expense
reduction.
We can imagine what would occur if, based on the half-truths championed by these
improvised technocrats (public services prices and rates must cover their costs in order to
avoid populism), the Cuban economy began its reforms imposing increases in public services,
taxes and gas, neglecting to first provide people with agricultural land, hotels and other
resources currently monopolized by the Cuban Government to ensure that its citizens
generate higher income for paying new taxes. The question that should be posed to Miguel
Rodríguez & company (and now to Matos Azócar and Petkoff) is how will the
population obtain the money required for financing the fiscal deficit, if the Government
controls almost all important companies and monopolizes the countryþs productive
resources. Here, we may point out the fact that the obstructive measures by Congress and
Ad to the 1989 reforms benefited the reform team, since it relieved the social discomfort
generated by the unfair economic package.
To complete the drama that now seems to have been forgotten by some Venezuelans,
we must recall that the privatizations carried out during this period were made for fiscal
purposes. That is, choice few public companies were privatized, and subsequently were sold
as private monopolies for increasing their sales price and Government income that would
be administrated by the reformers. Never was there mention that the average citizen would
receive direct benefit from these privatizations. The profit received from these
privatizations by Venezuelans, impoverished after years of Government-controlled economy,
were exaggerated increases in prices of services and goods imposed by the new privatized
monopolies, while the Government was lavishly rewarded from the overpricing of these
monopoly privatizations, since it maintained sizable share equity in these new monopolies.
These 1989 and 1996 economic teams never understood the actual social meaning of
privatizations. In a country such as Venezuela, with its monarchic heritage, where the
Government owns the main sources of income, the population, stripped of the productive
media for centuries, would not be able to bid and participate in the auction of public
companies. The privatizations implemented by the 1989 reforms could only legitimize
profound social inequality accumulated throughout our history. The change from a
Government-controlled economy to a citizen-focuses economy in Venezuela generates social
upheaval comparable to that of the Nineteenth Century, during the abolition of slavery.
In those times, a vicious circle had been created, where slaves lacked the money to pay their
owners and obtain liberty, and slave-owners could go bankrupt if they liberated their slaves
without receiving compensation. Additionally, slaves lacked the resources and education
-obviously, as a result of their slavery- that would enable them to pay debts over a term for
obtaining their liberty, and find well-remunerated work. Unjust systems and laws (such as
those that maintain a monopoly of a countryþs riches in hands of the Government and
politicians) are not solved by means of miracle cures, or instantly, as supposed by the
privatizations proposed in 1989 and 1996. Solely through measures such as citizen
capitalization funds (successfully implemented in several ex-communist countries, as well as
Peru and Bolivia) the direct distribution to the population of dividends from the petroleum
industry opening (avoiding Government use of these resources to cover its expenses) the
decrease of public expense through delivering schools and hospitals to their teachers and
medical corps, in exchange for employee severance benefits, and the payment in kind of
FOGADE assets to Government creditors, would have been the most appropriate course
of action for allowing the population to access the countryþs resources without the
traditional encumbrances and political favoritism imposed by a voracious Government.
Let us not allow that the anxiety of change lead us to repeat the errors of the
past.
Based on the above premises, we may state that the economic reforms proposed in
1989 by ex-President Pérez were a great opportunity sorely missed by the economists in
charge of their implementation. Likewise, in view of the current dilemma, it is quite utopian
to think that Venezuelans will believe that patch-up measures such as President Calderaþs
economic controls, or neogovernment-focused reforms such as those initiated in 1989, will
allow the country to solve its deep social and economic disbalances. Also untrue is the
argument that forces Venezuela to negotiate new debts with the IMF in 1996 in order to
face the perennial payments of our past-overdue external debt and the exchange liberation.
With petroleum income at US$ 16,000 per annum, Bs. 1,000,000,000,000 in new taxes and
billions of dollars in inappropriately used Government-owned assets, the focus of all this
pressure is the Government itself, who desires to maintain its economic power over the
population, even at the price of sacrificing this very population with increased debts and
taxes. New debts and higher taxes, needed to solve the crisis affecting the current
Government, without decreasing public expense, will cause the much-yearned exchange
liberation to be unsustainable, since it will engender inflation, imports will increase by virtue
of the subsidy implied by loans for IMF payment balances, companies will continue to close
down due to increasing costs and the decrease in demand, and capital flight will be
stimulated, generating new interest increases, as occurred during the reforms initiated in
1989 .
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