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Socialist Project • E-Bulletin No. 1195
December 5, 2015

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The Roots of the Current Situation in Venezuela

Gregory Wilpert

The current economic, political, and social situation in Venezuela is very complicated, which makes it somewhat difficult for outsiders to make sense of. On the one hand there are many people who defend the Bolivarian revolution, pointing to the successes it has had in reducing poverty and inequality and in increasing citizen participation and self-governance. On the other hand, there is a chorus of critics, not just from the usual suspects on the political right, but often from the left, who criticize the Maduro government's economic management of the country, corruption, the high inflation rate and shortages, and the trial of a high profile opposition politician, who the government accuses of fomenting violence. How did Venezuela get here? What happened since Hugo Chavez's death? Did the project derail, get stuck, hit a speed bump, or crash altogether? In order to answer this question, I will first analyze the origins of the current economic situation.

I don't feel like living in fear.

Banner: “I don't feel like living in fear.”

The Bolivarian revolution in Venezuela is no doubt undergoing one if its toughest periods at this time. With inflation reaching an unprecedented 160-200 per cent for 2015, nearly constant long lines at subsidized supermarkets, and sporadic shortages of many consumer goods, the entire population – whether Chavista, opposition sympathizers, or “ni-ni” (neither one side nor the other) – is frustrated with the situation. While the Maduro government says that the problems are the result of an economic war that is being waged against the government, the opposition argues that it is government economic mismanagement that is to blame. The truth, as usual, is more complicated.

Struggle for Economic Power

The roots of today's economic problems can be found in Chavez's efforts already in 2001, to fundamentally reorganize Venezuela's economy and polity. That is, back then Chavez proved to the country's old elite that he would not be their pawn and do their bidding as so many presidents before Chavez had done. Instead, in late 2001 he introduced land reform and oil industry reform legislation that touched on the elite's two most important sources of economic power. In reaction to this move, the opposition launched the April 2002 coup attempt and the December 2002 oil industry shutdown. These efforts at political and economic destabilization provoked a massive bout of capital flight in early 2003. At first, the government tried to counter the capital flight by intervening in the currency market, using its dollars to purchase the bolivar, in order to keep its price stable. However, this caused the central government to lose dollar currency reserves precipitously and so it abruptly changed gears and introduced a fixed exchange rate in March of 2003.

Ever since then, the currency has been fixed and adjusted very rarely. Only those who meet government conditions to buy dollars with bolivars are allowed to do so. The conditions for gaining access to the official exchange rate include international travel, supporting a son or daughter with their studies abroad, or – most importantly – importing essential goods into Venezuela, among several other types of uses. Of course, almost immediately a black market for dollars sprung up, with an exchange rate that was very different from the official one. At first the official exchange rate was 2.15 bolivars per dollar, while the black market rate quickly reached double or triple that rate.

For a long time, from 2004 to 2008, the Venezuelan economy did quite well, growing at a very rapid rate of, on average, 10 per cent per year. This was in part possible because the price of oil was quite high (and climbing), which meant that the government could accommodate most requests for dollars at the official exchange rate. Also, the government's policies of capturing a far larger proportion of the dollars that the country earned and then reinvesting that money in social programs, education, and in efforts to diversify the economy also made a difference.

However, in mid-2008 the global financial crisis struck and drove the price of oil down from $140 (U.S.) per barrel in mid 2008, to less than $40 (U.S.) per barrel in early 2009. Suddenly the government could no longer cover all of the imports with its oil industry earnings and so in June 2010 the government introduced a new exchange mechanism, SITME, which sold dollar-denominated bonds that could be bought in bolivars at an exchange rate that was double that of the previous rate. The combination of SITME and the borrowing to cover the budget deficit meant that total foreign debt increased rapidly in the period from 2006 to 2014, from 10% of GDP to 25% of GDP. Nominal external debt (private and public) went from $41.8-billion (U.S.) in 2006 to $134.5-billion (U.S.) in 2014, a 320 per cent increase in eight years. The percentage of GDP is indicated on the basis of GDP PPP. The debt to GDP ratio is fairly low compared to the rest of Latin America.

Another measure that the government took during this time was to restrict access to dollars at the official exchange rate. That is, the conditions under which Venezuelans could access dollars were significantly tightened. Fewer dollars were available for travel, for study abroad, and for a more restricted list of imports. The consequence of this action was that the black market exchange rate shot up during this period, going from about 8 bolivars per dollar in 2011, and to 16 in 2012.

Also, since fewer goods could be imported at the official exchange rate, more and more importers began to use the black market to import goods, thus driving up inflation. Even if they used the official exchange rate, rather than undercutting importers who had to pay for goods at the black market rate, people knew that they could make a killing by pricing goods at the far higher black market rate and thus did so. In short, inflation began to heat up too, going from a fairly moderate (for Venezuela) 13.7 per cent in 2006, to 31.4 per cent in 2008 and holding at 20-21 per cent, on average, between 2010 and 2012.

Borrowing in order to pay for the low official exchange rate had another side effect, which is that it increased the volume of bolivars in circulation, relative to the country's foreign reserves. The M2 money supply figure (which includes circulating cash and bank savings) increased by a factor of 28 (2,800 per cent) between the end of 2006 and the end of 2014, while foreign reserves dropped by more than 50 per cent during the same time, from around $30-billion to $15-billion (U.S.), according to the Venezuelan Central Bank. Although there is some debate among economists about the importance of this ratio for the exchange rate, it is undeniable that in a context of high inflation, where many ordinary Venezuelans and most businesses seek to buy dollars in order to protect their savings from devaluing, a low demand for bolivars and a low supply of dollars will mean a declining black market exchange rate between dollars and bolivars.

Post Chavez Elections

All of these trends became accentuated when President Chavez died of cancer on March 5, 2013 and new elections were held a little later, in April, resulting in Nicolas Maduro's election by a 1.5 per cent point margin of victory. The wave of violence following the election, which opposition candidate Henrique Capriles Radonsky encouraged when he called on people to demonstrate “with all of their rage,” in which 14 people died, only made the perception of political and economic instability worse [Ed.: for example, see Bullet No. 986]. Further destabilization attempts, the violent street blockades known as “guarimbas,” between March and June 2014, and which resulted in another 43 dead and over 100 wounded, further exacerbated the economic problems.

That is, the destabilization created further pressure on the black market exchange rate, which, in turn, meant that there was a growing gap between the official and the black market exchange rates that could be exploited for massive profit-making. Anyone who had the opportunity to take advantage of this gap faced enormous temptations to do so.

While the official exchange rate was fixed at 6.3 bolivars per dollar since early 2013, the black market rate had reached three times that, at 18 per dollar. In other words, someone who traveled to the U.S., for example, could buy up to $4,000 (U.S.) at the official rate (paying 25,200 bolivars). If they did not use this cash up or if they purchased equivalent goods abroad, they could trade that at the black market back into bolivars for a 300 per cent profit, earning 75,000 bolivars.

A vicious cycle thus began in early 2014, where an ever-widening gap between the official and unofficial exchange rates created ever-greater incentives to profit from that gap, thereby further widening that same gap. The black market exchange rate thus began to increase exponentially in the course of 2014 and 2015, reaching 100 bolivars per dollar in late 2014 and 800 bolivars per dollar by late 2015, creating a 125:1 ratio between the black market and the official exchange rates. Massive profits of up to 12,500 per cent were thus possible.

As a result, more and more people became involved in efforts to acquire dollars at the official rate, mostly by purchasing subsidized goods in Venezuela and (re-)exporting them across the border for an enormous profit (people known as bachaqueros). Of course, major companies are involved in this process too, claiming that they need to import essential goods, and then either not importing these or re-exporting them to acquire dollars. In mid-2014 president Maduro estimated that up to 40 per cent of all goods imported into Venezuela (at the official exchange rate) were smuggled right back out again.

A logical consequence of all of this was that more and more goods became scarce at the price-controlled prices and in massive inflation for unregulated goods. That is, already early in Chavez's second term in office, in 2006, the government had begun to introduce price controls for most essential goods, in order to counter the retailers’ tendency to price things based on the black market exchange rate instead of the official rate. Over the years, the government gradually expanded the number of goods that the price controls covered, which, if adhered to, also meant that more and more products were priced far below what these could be sold for in neighboring countries, thereby adding these products to those that could generate massive profits by re-exporting them.

Solutions?

The big question that everyone asks – both within Venezuela and outside – is, if the low fixed exchange rate is leading to so many economic problems, why has the government not raised the rate? There are two main explanations for this. First, raising the official exchange rate so that it is more in tune with the black market exchange rate and with the prices in neighboring countries would mean raising prices for products imported at the official exchange rate, thereby further stoking an inflation rate that is already far too high. And unless wages are raised correspondingly, changing the exchange rate would also mean a corresponding decrease in incomes and thus an increase in the poverty rate.

Second, changing the official exchange rate would represent an admission of defeat in the context of what the government is calling an economic war against Venezuela. While an exchange rate adjustment or devaluation will probably have to happen sooner or later, it is out of the question that such a move (and the implied concession) would be made before the December 6 National Assembly elections. Note, there is some debate within Venezuela as to whether it makes more sense to call a change in the exchange rate an “adjustment” (the government's preferred term) or a “devaluation.” I prefer to call it an adjustment because technically the currency has already lost a tremendous amount of its value due to inflation, so, in effect, a lowering of the exchange rate is more of adjustment to the reality that inflation has already devalued the currency – this is especially true if you consider that very few people have access to the official exchange rates, thus making the black market rate more real for most people than the official ones.

In other words, the current situation in Venezuela is a result, first, of the exchange rate control that was meant to defend the currency against the destabilization attempts of 2002, which themselves were the result of the Chávez's government's attack on capitalist class interests. Second, an already relatively fragile exchange rate control became worse in the wake of the oil price declines of 2008 and again in 2014, which made it increasingly difficult for the government to meet the demand for dollars without going further into debt. Third, the opposition's new destabilization efforts against the Maduro government the day after Maduro's election in April 2013 and again in early 2014, turned the existing economic volatility into a vicious cycle of inflation, shortages, black market devaluation, and renewed inflation. The situation is thus quite difficult for the government and very frustrating for the population.

Key Factors in Venezuela as Elections Approach

Despite the extremely difficult economic situation in the lead-up to the Dec. 6 National Assembly elections in Venezuela, the Maduro government and the Bolivarian revolution currently do have a few things that make the situation not quite as bleak as one might otherwise think. I will present this domestic context, first, in terms of the government's most recent actions and policies, second, in terms of the progressive social movements in Venezuela and, third, in terms of the opposition's situation and actions.

There is little doubt that the economic and social situation in Venezuela is very difficult at the moment, with the highest inflation rate since the time Hugo Chavez was elected president on December 6, 1998, constant shortages of (price-controlled) basic food goods, and a high crime rate. Recognizing this difficult situation, which the government says is the result of an “economic war” against the government, President Nicolas Maduro has been instituting a number of policies designed to address the problem areas of his administration.

Perhaps the most intensive effort in this regard has been devoted to the “Great Housing Mission,” which since its launch in 2011 constructed nearly 850,000 homes by November 2015 and is supposed to reach one million by the end of 2015. Already this means that the government has managed to construct an average of about 200,000 new homes per year since the mission's launch, which represents a more than three-fold increase over the 2000-2011 annual average of public homes constructed. Given that the average Venezuelan household has five members, this means that more or less five million Venezuelans will benefit from the housing program by the end of the year – a not insignificant number if you consider that this represents one sixth of Venezuela's total population of 30 million.

The second major effort to counter the difficult circumstances was a new series of policies to control inflation, which he presented in October of this year. In the course of his two-and-a-half-year presidency, President Maduro already introduced a variety of changes to his economic policy in order to get inflation and shortages under control. Back in February, for example, Maduro announced a series of measures that were supposed to make one of the higher official exchange rates more accessible to the general public and that would make the black market currency exchange more legal. However, neither of these policies had much of an impact on the problems of inflation and shortages.

As a result, the government announced in October that a maximum legal profit would be introduced. One of the great problems of the current economic situation is that some vendors manage to make exorbitant profits by either purchasing goods at an extremely low price-controlled price and then re-sell them for many times that cost. Or, they import goods using one of the lower official exchange rate mechanisms, which makes the import extremely cheap for them, but then sell the goods anyway at a price that reflects a price calculated by the black market exchange rate, thereby also making an exorbitant profit. The new economic measures thus examine the real prices of practically everything sold in Venezuela, and set a profit limit at 30 per cent of the original cost.

Although these new measures were accompanied by steep penalties for violators of the new profit maximums, so far it seems that the measure is not being adhered to. Inflation is still far above tolerable levels (of over 160 to 200 per cent for 2015) and, if some anecdotal reports are generalizable, vendors are resorting to black markets even more, depriving supermarkets of even more products. One likely reason that these new measures have not had much of an effect (yet?) is that overseeing the prices and profits of all products and vendors in Venezuela is a task that is impossible for the Venezuelan government to fulfill. In short, this second policy area is still not having a positive impact on the economic situation.

The third major policy effort for 2015 has been in the area of crime fighting, with a new program named, “Operation Liberation and Protection of the People” (OLP), which was launched in July of this year. In some ways this program represents a militarization of crime fighting, as it involves large-scale raids on high crime neighborhoods, using not only the police force, but also the National Guard. The government clearly felt such a military tactic was becoming necessary, not only because of the influx of Colombian paramilitary organized crime, but also because the crime rate more generally has increased in the past year (partly because of the Colombian paramilitary presence). Given the high crime rate and that previous measures to lower it did not work, most Venezuelans seem to approve of the OLP program. Whether it will make inroads into lowering the crime rate, though, is still too early to tell.

Aside from these three main areas of housing, economic policy, and crime fighting, the government is also continuing – at the same level as before – all of the Chavez government's social programs, known as missions, such as in the areas of education, subsidized food, community health care, and the expansion of social security benefits, among other programs. It is no doubt the combination of all of these programs that has maintained much of the government's popularity despite the severe economic crisis that the country is currently going through.

Popular Movements and Organizations

One of the greatest strengths of the Bolivarian revolution is the involvement of popular movements and organizations. Although Venezuela never had particularly strong mass movements, relative to other countries in Latin America, such as Bolivia, the Chavez government did emerge out of progressive movements (see George Ciccariello-Maher's excellent social history of Venezuela: We Created Chavez). These movements, by and large, are still supporting the government, despite the many criticisms that they have of the government as a result of the current difficult economic situation.

During Chavez's presidency these movements were strengthened as a result of the government's policies to broaden and open spaces for their participation in government social programs, community media, and via the communal councils and the communes (which are groupings of communal councils). Certainly, there has been some degree of interference by the government, but these have resisted such efforts, leading to a fair amount of tension and mutual suspicion between the government and community groups. Still, despite these tensions, both sides are very clear that they need each other's support and that undermining or breaking ranks at this time would only contribute to an opposition victory, which would be bad for both sides.

An innovative new campaign has recently sprung up, known as “Every Heartbeat Counts,” which is in some ways typical of the government-social movement relationship. It represents a coming together of over 20 anti-capitalist community groups, many of them cultural. On the one hand the campaign is clearly a campaign to support the pro-government candidates running for National Assembly, but it is nonetheless independent of the government and seeks to push it further to the left by supporting the strengthening of communal councils and communes in Venezuela. It is difficult to say whether this campaign will make a difference in this election, but the critical support that they give to the government could make a difference in electoral circuits that are very tight. But more than that, the campaign is also an example of the creativity and energy that still exists just below the surface of Venezuelan politics, in the communities and the social movements, despite the frustration and even anger that many people have for the government.

The Opposition

Meanwhile, on the other side of the political divide, the opposition seems to be as internally divided and weaker than ever, despite their surge in the polls. In some ways this is a strange situation, given that the government is without a doubt at its second-weakest point of the entire 17 years of the Bolivarian revolution (Chavez was first elected on December 6, 1998 – exactly 17 years prior to the December 6 National Assembly election of 2015) – the weakest point was the period of the coup attempt and the oil industry shutdown in 2002. One would think that such an opportunity for the opposition would serve to rally it and unify it in the effort to overthrow a government that they have hated for so long.

However, the opposition remains deeply divided between those who are convinced that the only way to get back into power is via an overthrow of the government by any means necessary versus those who would prefer a more constitutional path to regaining power. Also, the lack of a clear opposition program makes them look like the only thing they want is to depose the Bolivarian revolution, but have no idea what they want beyond that. Part of the problem here is that during his presidency Chavez succeeded in completely discrediting the neoliberal discourse to such an extent that practically no one in the opposition dares to bring neoliberalism up as an opposition program (unlike Argentina, where Macri was able to run and win on a neoliberal platform). It is the combination of a lack of political program and internal divisions over strategy that has made it almost impossible for the opposition to profit from the government's current vulnerability to the extent that it otherwise might.

Looking Toward 6D

As usual, given the vast majority of the media coverage on Venezuela, there is a concerted effort to make it look like the December 6 election will be marred by fraud. This is an image that the Venezuelan opposition is actively promoting with the unabashed help from international media, the U.S. government, and the Organization of American States (its bureaucracy in Washington DC, not most of its member states). However, anyone who has bothered to take a close look at the Venezuelan electoral system, can quickly see that it is perhaps one of the (if not the) most fraud-proof electoral systems in the world. It is thus no surprise that President Carter once said, “As a matter of fact, of the 92 elections that we've monitored, I would say the election process in Venezuela is the best in the world."

The danger inherent in the December 6 election is thus not fraud, but the opposition's reaction to the result. If it is a result that they do not like, they will almost certainly claim that there was fraud and launch into another violent destabilization campaign, just as they did following the April 2013 presidential election, which left 11 dead, and during the February-May 2014 street blockades known as “Guarimbas,” which killed 43 people and wounded hundreds of others.

The actual National Assembly result is very difficult to predict because it all depends on how well individual candidates do on the level of their electoral districts, of which there are 87 throughout the country. The governing PSUV had held an effective primary election to nominate the candidates last June, many of which are quite young and about half of whom are women. Also, the recent policies in the areas of housing and crime fighting have created plusses for the government among the population. Finally, the fact that most social movements are sticking with the government helps too.

On the other hand, the severe economic situation of inflation and shortages has also created an enormous amount of frustration amongst the chavista base, nearly outweighing the elements in favor of the government. The fact that there is an international campaign against the government, which the United States is leading and which the governments of Argentina and Colombia support, along with OAS Secretary General Almagro, probably won't have much of an impact on the election itself, but will on the aftermath and the efforts to delegitimize the election, should the opposition not get the result it is hoping for. •

Gregory Wilpert is a long-time activist and organizer, mostly around Latin America solidarity, and a co-founder of venezuelanalysis.com. This article first appeared on the teleSUR English website.

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