Why is Inflation So High in Venezuela?
Gregory Wilpert (2/2): Attempting to build socialism surrounded by a global capitalist economy and being reliant on oil revenues, Venezuela is struggling to find a solution to capital flight and exchange rate problems
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Baltimore. And we’re continuing our interview with Gregory Wilpert about the situation in Venezuela.
Gregory joins us in the studio. He’s the founder of Venezuelanalysis.com. He’s the author of Changing Venezuela by Taking Power: The History and Policies of the Chávez Government. His wife is the Venezuelan consul general in New York. And he’s about to become the head of English TeleSUR, which will be based in Ecuador. So you’ll be heading down to Quito soon.
GREGORY WILPERT, FOUNDER, VENEZUELANALYSIS.COM: Yes.
JAY: And we discussed all of that in part one, at the beginning of part one of the interview. So if you want to, I’d suggest maybe you watch part one, which is a little bit more about the politics and the political situation of Venezuela. This part’s going to be more about the economic situation.
So in terms of the protests and such, whether they’re taking advantage of the situation or whatever, there is a real economic problem. So, first of all, describe where things are at right now in terms of inflation, cost of living, and some of the other issues related to that.
WILPERT: Well, the inflation figures for January just came out, and it was measured at 3.3 percent, which is still very high. If it were at an annualized rate, it would come to over almost 40 percent. So that’s an extraordinarily high rate of inflation. Last year, for 2013, it was 56 percent.
And shortages in Venezuela are actually also quite dramatic, and they went up, actually, in between November and January. That is, previously, the Central Bank measures shortages as a percentage of how many of the basic goods cannot be bought in any given store. And they–previously it was around 20 percent. In, I think, December, January, it was around 28 percent. So things have gotten kind of bad in that sense.
JAY: And there’s just no way that workers’ wages would be keeping up with this.
WILPERT: They do, actually.
JAY: Are they pegged to inflation?
WILPERT: Many times, yes; not always, but in many cases they are pegged to inflation. And then there’s the informal labor market, which also essentially pegs their income also to inflation, because they can charge whatever prices they want in the street, you know, the street venders and so on.
JAY: But, for example, do government jobs automatically rise in relation to inflation?
WILPERT: Not always, but in most cases they do, yes. And if it weren’t, Venezuela would become the most unequal country in Latin America, as a matter of fact, because it is pegged to inflation–not automatically, as I said, but usually as a result of negotiations.
JAY: And, in fact, the recent numbers were, in fact, Venezuela is one of the most equal countries in Latin America.
WILPERT: Exactly. Exactly. And that’s because, you know, especially also the minimum wage is practically pegged to inflation. It’s not–again, it’s the president’s decision, but as a practice, they always adjust it by at least as much as inflation was in the previous period.
JAY: So still, as you say, there’s not enough foodstuff available. There’s shortages.
WILPERT: Well, I wouldn’t say–there’s a distinction, I think, one has to make between shortages and not enough food. Venezuelans still eat incredibly well. I mean, if you look at, you know, the amount of calories that Venezuelans consume between–you know, when Chávez first came into office in 1998, it was around 2,000 calories per person per day. Now it’s closer to 3,000 calories. I mean, so they’re eating a lot more and a lot better than they did. So just because, you know, you can’t find, let’s say, butter one day or milk one day, it doesn’t mean you’re going to eat less that day. So you have to make a distinction. It’s not like people are going hungry in Venezuela. That’s certainly not the case.
But it is a frustrating experience. If you do want to–I mean, recently an opposition blogger made the comment that she couldn’t bake a cake. Okay. Perhaps you can’t have cake that day. But you can have some cookies, perhaps. So that’s not really the issue. The issue is really the frustration level that goes with these shortages and the long lines. That’s really the main problem or the main reason that people go out on the streets.
JAY: But there must also be sections of people that do not have their incomes pegged to inflation, whether they’re retired or they’re in workplaces that simply they don’t have those kinds of agreements. So if your wages are being deflated by 56 percent, that’s a lot, or 40-something percent.
WILPERT: Yeah, there are certainly sectors where it isn’t. But it’s really a minority sector in Venezuelan society.
JAY: So why is there such a problem? I mean, and Venezuela has, I think, now the worst inflation in Latin America.
WILPERT: Yes. Well, even in the world, actually. And it has its historical reasons, and it has reasons that are specific to the Bolivarian Revolution. The historic reasons is that Venezuela actually has had a problem with inflation already ever since the early 1980s. As a matter of fact, in the 1990s, inflation averaged back then already 50 percent per year. So, actually, during the Chávez government, they got it down to 22 percent on average per year, with the exception of the past year. So it has been a problem.
And the reason for that really has to do with what’s called the Dutch disease, that Venezuela receives an influx of petrodollars that basically come into the economy and raise the level of wages and raise the level of prices in a way that heats up inflation. And so that’s really a persistent problem that a petrol-based economy normally suffers from.
The big question is: how do you deal with that? And there’s a number of ways that the government has tried to deal with it. And one of them is to–also, one of the problems has to deal with the fact that Venezuela is trying to establish a transition towards a socialist economy, which develops its own kind of problems, given that Venezuela exists in a global capitalist market economy. What that means is that there’s a lot of capital flight. And it is this capital flight that the government has tried to control, and has thereby also tried to control inflation. And so it’s rather complicated. But, I mean, that’s really at the heart of it.
JAY: But some of the other countries that have, perhaps, not as much as a resource-based economy like Bolivia–but certainly natural gas in Bolivia is, I guess, their main source of revenue, I would think, other than coca, and their inflation’s very low. Ecuador, oil and natural gas, and do not have the same runaway inflation problem. Why is it such a problem in Venezuela and not in those countries?
WILPERT: I think the reason for why in Venezuela it’s a problem has to do again with the historical difference between or the difference between Venezuela and Bolivia, which is that Venezuela has taken a more radical approach towards the economy. That is, when Chávez first tried to institute many of the reforms that he instituted, it provoked a coup attempt, and it was this coup attempt that in turn provoked a massive capital flight. And it is this capital flight that the government tried to get under control through a currency control.
JAY: Just to be clear to everybody, capital flight meaning people with money sending it to Florida or wherever.
WILPERT: Right. And the government at that time was faced with a choice: either try to intervene in the currency market and lose its hard currency–that is, its dollars, dollar reserves–or let the currency basically go to hell, that is, become completely devalued, because all of the money was being taken out of the country, and thereby the currency was dropping like a stone.
JAY: So used foreign reserves to buy bolívars, which would stabilize it, except you’re using up your foreign reserves.
WILPERT: Exactly. That’s what they were doing until they established a currency control in 2003. And this currency control has been in existence since that time, till the present period, for the past ten years.
JAY: Explain it clearly what the control was, and then why didn’t it work.
WILPERT: Well, the control was basically that you could only exchange money through the government under certain preestablished, approved rules, that is, only for certain types of purchases, like if you’re traveling or if you want to import certain goods that are needed within the country, or if you need to pay off foreign debts, or something like that. There was a whole list of things for which you could request dollars.
JAY: So if you want to buy American dollars, you have to come within that criteria or you’re not allowed to buy American dollars through the banks.
JAY: So instead you go to the black market.
WILPERT: Exactly. So there was a black market from the start already, but the black market in the beginning wasn’t that much different from the official exchange rate. It might have been 50 percent more expensive to buy dollars on the black market than it would have been through the government. So, in other words, if you didn’t have the reasons for buying dollars that you needed, you could go to the black market, which was illegal, but it was something that everybody knew how to do or most people know how to do, and therefore it was almost impossible to prevent.
But the real problem was that over time inflation continued to essentially devalue the currency within the country. But the exchange rate wasn’t really–wasn’t–rarely adjusted to the outside world. So, in other words, the currency became overvalued. And that meant that the gap between the exchange rate–the official exchange rate and the black market exchange rate became ever wider.
And when you have a widening gap between two different exchange rates, people start to take advantage of that through what’s known as arbitrage. That is, they buy the currency, the dollars, at a very low price, and then turn around and sell it on the black market for a very high price and make a hefty profit.
In the beginning it wasn’t really worth it, because you could, you know, buy it–you know, for two bolívars you could buy a dollar and then sell it again for three. So you’d have a 50 percent profit margin. But considering the complications involved and the limitations, it wasn’t always worth it. But as that gap got larger–and now it is a factor of ten-to-one, that is, you can buy a dollar for, let’s say six bolívars and sell it for 60–that is a tremendous temptation. So anybody, for example, who gets bolívars to–.
JAY: Sell it for 60 to the official bank.
WILPERT: No, no. You sell it on the black market to whoever wants dollars on the black market.
JAY: Where do you buy it from?
WILPERT: You buy it from the government.
JAY: Right, the government, ’cause government is saying the bolívar is really worth that much more than the black market says it’s worth.
WILPERT: Exactly. Exactly.
WILPERT: But that, of course, requires that you have access. And who has access to those official exchange rate dollars? Well, basically people mostly from the middle class who can say they need it for travel, that they, you know, have a plane ticket, or people who say that they’re going to import something. And so then those two sectors, really, they’re really the main beneficiaries of the official exchange rate. Most of them don’t actually use it for travel. They just–they might travel and then quickly sell the dollars that they got–I mean, that is, get the dollars that they got and return to the country and sell them within Venezuela at a 1,000 percent profit margin. Or the people who import, let’s say, some essential good, let’s say, you know, cornmeal or whatever or milk, turn around and export that same milk to Colombia and sell it there and get the dollars again and sell the dollars within Venezuela at a factor-of-ten profit margin. So that’s when it becomes a real problem, and that’s what’s currently happening. And it also explains the shortages. People are importing things that get smuggled out of the country right away because it’s so much more lucrative to sell them outside of the country than within the country.
JAY: So you get a lot of dollars chasing too few goods.
WILPERT: Well, not dollars. A lot of bolívars.
JAY: A lot of bolívars. Well, a lot of bolívars chasing too few goods.
WILPERT: Yes, essentially.
JAY: So what is the government going to do about it? What are the proposals on the table?
WILPERT: That’s the thing. I mean, the government has been relatively, I would say, slow in reacting to this problem. That is, more and more they’ve realized that this is a serious problem. As a matter of fact, Maduro recently announced that up to 30 to 40 percent of the products that are imported with goods, dollars that were obtained through the official exchange rate mechanism, up to 30 to 40 percent of those dollars actually–or imports, actually, get exported through smuggling right away. So it’s a complete–.
JAY: Thirty to forty percent.
WILPERT: Yes. So it’s an enormous number. And we’re talking tens of billions of dollars that are basically being wasted on this currency control right now. And so the government has realized this cannot continue.
And, as a matter of fact, just yesterday–and this got completely lost in the news, actually–is–with the protests–the vice president for economic affairs, which is also the president of the oil industry, Rafael Ramírez, made a very important announcement that they were going to allow basically an open free-floating currency market again in Venezuela–that is, there are going to be two exchange rates. One is going to be still the official exchange rate under those certain circumstances,–
JAY: Which is fixed.
WILPERT: –which is fixed, and in order to keep inflation down. That is, if you’re going to import something, it’s going to be relatively cheap to sell it in Venezuela.
However, there’s also going to be a parallel exchange rate that would essentially be floating, although the government will intervene in that market.
JAY: Has anyone done this before anywhere?
WILPERT: To have two exchange rates? Yeah. Well, it has existed in Venezuela before, actually. And it has–I mean, the Cuban government also has something similar, in a sense, although not a floating exchange rate, but it has also a varying–dual exchange rates. So that–certainly there is precedent for that.
The problem is it doesn’t really eliminate the problem of what I mentioned before of the arbitrage. If the gap is too large, it creates this tremendous incentives for smuggling and for trying to beat the system in one way or another.
JAY: So what is the solution?
WILPERT: Well, there’s several arguments. I mean, on the one hand, the government doesn’t really want to give in completely to the capital markets and say, we’re going to let the currency float.
WILPERT: Because they’re afraid of the capital flight. So they want to–and also of inflation. They’re afraid that it will heat up inflation even more. So that’s why they’re resistant to completely letting it float. But that’s what many people argues would be the solution, to let it float, or at least not completely to let it float within certain bandwidth [crosstalk]
JAY: But the capital flight, again, this is people taking their money out of the country. You need–to really have any serious capital flight, you need to be able to convert it to dollars, ’cause you’re not going to run with bolívars.
WILPERT: Of course.
JAY: So if they make it very difficult to convert, then how much capital flight can there be?
WILPERT: It’s not–the thing is, you cannot control capital, the conversion, because what you could do is very easily just–.
JAY: Oh, ’cause they can do it on the black market.
WILPERT: Yeah, on the black market, exactly. And the black market–people always have this idea that there would be international bank transfers, but that’s not even necessary. You can just have a friend transfer money from one account to another, and then you transfer it from your account to somebody else’s account. And that’s kind of–even though it’s not a direct transaction that crosses borders, it still does have an effect on the black market value of the currency.
JAY: So go back, then. Why not–then what’s the argument against the floating rate, then?
WILPERT: Well, the government’s argument mainly is that, yeah, it would heat up inflation too much, essentially because, you know, if the currency becomes too devalued, imports become much more expensive. That’s one major problem. The other problem is, yeah, the value of the currency is also something they want to maintain in order for Venezuelans to buy–to travel abroad and to buy things abroad.
JAY: I mean, is part of the problem that Venezuela’s still too much of an oil economy that’s too dependent on imports for too many things?
JAY: If more of this was produced in Venezuela, it’d be far less of an issue.
WILPERT: Yes, absolutely. I mean, that’s the heart of the problem.
But on the other hand, the government is trying to wean itself away from oil dependency by investing its oil revenues within the Venezuelan economy and other sectors. But that’s not really working, because these sectors are nowhere near as profitable and productive as the oil sector. And therefore it’s just a–it’s almost like a vicious cycle, really, that they can’t seem to get out of, at least not using the oil money.
JAY: Okay. We’ll unravel this more again later. It’s complicated, but clearer than it was 15 minutes ago. Thanks for joining us.
WILPERT: Thank you.
JAY: And thank you for joining us on The Real News Network.
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