TRNN Debate: What’s Driving Inflation in Venezuela? (1/2)

Greg Wilpert and John Weeks discuss the causes and possible solutions to the high inflation in Venezuela

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

A few weeks ago, we aired an interview with Gregory Wilpert about inflation in Venezuela. We talked about why Greg thought there was inflation and what should be done about it.

We got a fair number of emails disagreeing with Greg, and one of those emails came from John Weeks, who’s a regular guest on The Real News. He agreed with some of Greg’s thesis, but not all of it, and suggested another reason why inflation might be so rampant in Venezuela.

There are various competing theories about all of this, but there seems to be few major ones, the major ones being why there is so much inflation. And the main arguments go like this. First of all, too much aggregate demand. Second, problems with the exchange rates. Third, economic sabotage and hoarding. Fourth, central bank liquidity–too much money being created, too much money supply.

Reuters reports that bankers and business owners are complaining it costs too much and is too difficult to get dollars to buy items for import to Venezuela. The government is saying, as I suggested, that it’s an actual conspiracy, deliberate hoarding to create shortages, which is driving up prices.

So we’re going to talk about all of this with Mr. Weeks and Mr. Wilpert.

And now joining us from London is John Weeks. John is a professor emeritus at the University of London and author of the new book The Economics of the 1%: How Mainstream Economics Serves the Rich, Obscures Reality and Distorts Policy.

And also joining us, from New York at the moment, although he’s heading for Venezuela, I think, in a matter of days, is Gregory Wilpert. He’s the founder of Venezuelanalysis.com, author of the book Changing Venezuela by Taking Power: The History and Policies of the Chávez Government. And he’s about to become or by the time you see this he will have become the new director of TeleSUR English.

Thank you both for joining us.

JOHN WEEKS, PROFESSOR EMERITUS, UNIV. OF LONDON: Thank you for having me.

JAY: So, Greg, can you kick us off? Give us your basic argument why you think there’s something like 56 percent annualized inflation? At least that’s what it was in 2013. This year it seems almost as bad; maybe it’s somewhere in the 40s. One way or the other, the inflation rate is very high, and higher than many other Latin American countries, and is considered by most one of the underlying causes or reasons for the social unrest that’s going on in Venezuela now. So kick us off. Why is inflation so high in Venezuela?

GREGORY WILPERT, AUTHOR, CHANGING VENEZUELA BY TAKING POWER: Well, of the different explanations that you offered in your introduction, I would have actually said something in a short version: all of the above. But let me break it down very quickly. I mean, I think there are two main issues in the Venezuelan economy. One is more structural and the other is circumstantial.

You know, the structural element is that Venezuela is an oil-producing economy. And what this has meant is that it receives lots of petrodollars flooding the economy, which tend to raise prices in general, because this money comes into the economy and, basically, raises the money supply in the country and tends to make everything, as a result, more expensive. So that’s one element that contributes to inflation. That’s the structural element.

And then there is a circumstantial element. I mean, the structural one has been around ever since Venezuela became an oil-producing country. And different governments have dealt with this problem in different ways, sometimes successfully, sometimes unsuccessfully. The circumstantial elements, there are really three.

There’s–first one is that the government of Hugo Chávez decided to pursue a socialist path. And what that meant, basically, was that–.

JAY: Greg, can I interrupt you for one sec? Before we move on to just one–the other points, I just want to ask you: why do other oil economies not have the same problem? For example, Saudi Arabia, I think, last month had a annualized rate of something like 2.9 percent, I mean, very low inflation.

WILPERT: I think there’s a variety of explanations for why other oil-producing countries have low inflation, one of them being that instead of taking the oil money into their country, they keep it outside in sovereign wealth funds. And that’s a very important measure that many oil-producing countries use. As a matter of fact, the sovereign wealth funds of Norway and Saudi Arabia are some of the largest funds in the world. So that makes a huge difference.

Another difference, of course, would be if you simply import everything that you need and therefore adjust the number of goods to the amount of demand within the country and therefore create some stability. For various reasons, Venezuela wants to industrialize, and therefore it places restrictions to some extent on imports. And that then, you know, if you don’t have a corresponding domestic increase in production, that will also produce inflation, because you have more money chasing fewer goods.

JAY: Okay. John, you can help. Well, let me quickly, before you move on, John, do you want to get in on this part of the argument before Greg moves to his next stage?

WEEKS: Well, there are some parts I agree with, but I don’t think inflation is caused by excess money supply. I think the–the money–. Well, you’ve got to be careful not to use [crosstalk]

JAY: Well, hold–we’re talking right now just–. Hang on, John. John, just on this question of whether it has to do with oil and being an oil economy. We’ll move into these other issues later. But do you have something you want to say about that, because Venezuela relies on all this oil money, that that’s kind of necessarily inflationary?

WEEKS: I think also oil-exporting countries tend to have low inflation because they usually have a strong balance of payments position, and as a result they tend to have stable exchange rates. That tends to lead to a stable price level.

JAY: Okay. So move on, Greg, and then, John, you’ll get a chance to make a more comprehensive argument.

WILPERT: Well, then the circumstantial elements, I think, are three. There’s–first of all, the Chávez government’s pursued a socialism, which produced a reaction in the country’s upper class and old elite to pursue a path of political destabilization, which led to the 2002 coup attempt against Chávez, and which also led to massive capital flight. And the capital flight basically lowered the value of the currency, and that further contributed to inflation in Venezuela, because the imports that Venezuela was relying on started to get more expensive.

Venezuela tried to control this situation with a currency exchange control, which it introduced in March 2003, and that stabilized the situation for a while. As a matter of fact, inflation dropped down to a fairly low and stable level, and you had a period of very strong economic growth from 2004 to 2008.

The second element, though, was the 2008 global economic crisis, which for Venezuela hit in the form of a drop in the price of oil, which meant that fewer dollars were available for imports and for the currency control. And so Venezuela started to borrow money instead of paying for it, for the imports, with its foreign currency reserves. And so that increased, actually, also contributed towards–because people could buy dollars, borrow dollars with bolivars (that was part of the currency control), that further increased the money supply. So that’s the second element, the global economic crisis.

And then the third element, which hit, really, in last year, early last year, was Chávez’s death. And this is where the element of further political stabilization comes in, where–that’s why I said earlier that it was all of the above, in the sense that this is–that we do know that many of the private companies in Venezuela have engaged in practices of hoarding and overpricing their products and actually cheating the government by importing stuff and then smuggling it right back out of the country in order to take advantage of the favorable exchange rate and taking advantage of the big difference that has been created between the official exchange rate and the black market exchange rate.

JAY: Just quickly, how does that work? How does someone bring something in and send it out again and make money?

WILPERT: Well, you apply for dollars at the official exchange rate. Let’s say you buy $1 with six bolivars, claiming that you’re going to import $1 worth of goods. And maybe you import them, maybe you don’t; but if you do import them, that $1 worth, then instead of selling that $1 worth in Venezuela for six bolivars, you either sell it for a lot more or you export it again, smuggling it out of the country and selling it for the $1 that you originally bought it for and then exchanging the $1 in the black market for 60 or 70 bolivars within Venezuela. And so you made a tenfold profit, turning 6 bolivars into 60 or 70 bolivars.

JAY: Now, there was a report in–I think it’s Reuters, but I saw some report that I think in February the government cut half the dollars that were available on the exchange markets, and then last month–or have actually reduced it to zero. Does this make any sense? Do you agree with those numbers? And if so, why are they cutting down the number of dollars available on the exchange rate?

WILPERT: No, there’s some confusion going on. That was just a temporary thing. It had to do, really, with administrative and technical problems in the whole new exchange mechanism that they had created. Actually, more dollars are being provided right now, and I think that’s stabilizing the situation. Also, in the black market, the price of the dollar has gone down slightly. And so that’s actually–that was a little bit of confusion as to–.

JAY: So, I just want to make sure I have this right, Greg. So in terms of the fundamental but not only cause of inflation, you’re saying the driving force is capital flight, that is, rich people taking dollars and getting them to Florida or wherever, but getting them out of the country, and two, deliberate attempts to destabilize the economy. Do I have that right?

WILPERT: Yes, although [incompr.] to qualify the issue of capital flight in terms of how that is done. And it’s really the mechanism of buying the dollars at the official exchange rate and then either not using for imports or smuggling those imports right back out of the country.

JAY: Alright. John, what’s your take in terms of what you agree or don’t agree with Greg? And what do you think is the driving force? I’m assuming you probably agree with the all-the-above theory as well. I guess what we’re arguing about is what’s the driving force.

WEEKS: Yeah, I think that’s true. I mean, the first point I would make is that Venezuela is a progressive government transforming the economy, and it’s a democracy. And so, as a result, you have a government that has to deal with different interests. This is not a dictatorship. This is not a one-party state. This is a democratic country which is trying to pursue progressive policies.

Now, when that happens, external forces and internal forces, reactionary forces, are going to try to destabilize you. You have to be prepared for that. Okay.

Then you have to look at it and say, what can you do about it? Okay.

With that introduction, I’ll say this is my take on it. One, the problem is not the money supply. That is, inflation generates increases in money, not the other way around. That’s the first point I would make.

What causes the inflation, then? Continuous, sustained excess demand. What that means is a expenditure potential which is larger than the supply available in the economy. There are only two ways for the economy to adjust to that. In that sense, inflation is a disequilibrium or imbalance. There are only two ways that that balance can be corrected–or eliminated, not corrected, and one is prices go up, which eliminates the excess demand through reducing people’s purchasing power, or through imports. Okay. You have excess demand; you solve them through imports.

Now, progressive governments tend to oversee inflation.

JAY: Okay. Hold on for–John, John, break that down for a sec. Why would imports lower inflation?

WEEKS: Well, if the inflation is a result of purchasing power exceeding the supply of commodities that are available domestically, then that problem is resolved, can be resolved through importing more. Okay. So instead of prices going up for wheat or for automobiles or whatever it happens to be, a basic or a luxury, instead of prices going up, you import them to fill the demand gap.

JAY: Right.

WEEKS: Okay. If the government then begins to develop a imbalance in–that is, it is importing at a rate which is not sustainable, if it is in that situation, then it begins to restrain imports and inflation becomes the only way to resolve this disequilibrium between aggregate demand and supply of commodities.

JAY: You mean prices keep going up.

WEEKS: Right.

Okay, now, what do you do about it?

JAY: Okay. Hang on. Hang on. Hang on. Before you go there, Greg, what do you make of that as the cause of inflation? How does that compare with what you’ve been saying?

WILPERT: Well, I think that it all sounds–makes perfect sense to me. I mean, the only thing, I guess, is about the increasing money supply. Of course, the increasing money supply has been going to most of the country’s population through the social programs, and therefore it has been increasing demand.

Now, of course, the question is: where does this increasing money supply or what is the effect of that? It could be going into savings, in which case it wouldn’t be increasing inflation, but in Venezuela it goes towards spending. And part of the reason it goes to spending is because there’s already kind of a cycle of inflation generated where people feel like they can keep the wealth as–keep the value of their money better if they spend it, rather than if they keep it in the bank, because–.

JAY: John, why is the money supply going up so quickly? I mean, does this have anything to do with that they’re paying–they don’t want to use some of the foreign reserves, they being the Venezuelan government, to pay for the social programs, because they want to keep the dollars, so they’re, you know, in a sense printing more bolivars to pay for it?

WEEKS: What I think, Paul, is this. I think that increases in the money supply are the result of spending. That is, that is to say, the money supply is endogenous, if I can use that word. The money supply is the result of expenditure. It is not the cause of expenditure.

But I think there’s a bigger question here.

JAY: No, but back up. Whose expenditure? ‘Cause, I mean, what I’m–.

WEEKS: Well, it’s the government’s expenditure.

JAY: Yeah, exactly. So what I’m saying: instead of them using foreign reserves or taxing people to pay–increasing taxes to pay for these social programs, they’re increasing the money supply to pay for the program.

WEEKS: Yes. Now, I would like to make a general point about that, because if you look at Argentina, it is suffering from relatively high inflation also–not as high as Venezuela, but it’s suffering relatively high inflation. And a country where I was just working with the central bank, in Africa, Zambia, same thing. These are progressive governments. Bolivia is the exception. We can come to that if you want to.

Okay. Why does this happen? This is not happening in Colombia. It’s not happening, you know, in these reactionary places. So why does it happen in progressive countries?

JAY: Okay. John, John, John, this is what we call a cliffhanger.

You’re going to have to come back for part two to find out the answer to that why, because this episode is getting around the time we think it should get to on the web.

So join us for part two, which you will see tomorrow, and John will answer the question why is it so high in Venezuela and a few of these other countries, but especially what to do about it. So please join us for the next segment of our discussion/debate about why is inflation so high in Venezuela and what to do about it on The Real News Network.

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