TRNN Debate: What’s Driving Inflation in Venezuela? (2/2)
Greg Wilpert and John Weeks continue their discussion on the causes and possible solutions to the high inflation in Venezuela
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network.
This is part two of a discussion/debate about why is inflation so high in Venezuela and what might the Venezuelan government do about it. As most people know who follow this story at all, recent current unrest in Venezuela at least is partly driven by high inflation. It’s not just a question of feeding the oppositional movement, but generally speaking, Venezuelans, and first and foremost probably the Venezuelan government, does not want inflation in the 50 percentile annualized. But so far the Venezuelan government has not found an answer to this.
So now joining us for–continue our discussion/debate–and I suggest strongly you watch part one so this all follows. But at any rate, first of all, joining us on the right you will see John Weeks is a professor emeritus 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 we are not CNN. We do not put a right-wing guest on the right, and John Weeks sure ain’t that.
Now joining us also–. I should have said John joins us from London. I may not have said that.
Joining us from New York, at least for another couple of days: Gregory Wilpert is the founder of Venezuelanalysis.com and author of Changing Venezuela by Taking Power: The History and Policies of the Chávez Government and will soon be, if he isn’t already, director of English TeleSUR, a new service being started by TeleSUR in the next few days. At least they’re starting to hire people. I don’t think they’re going to be publishing for, what, a month or two.
At any rate, where we left off–and again I suggest you watch part one–but I was asking John why he thought there’d been an increase in the money supply of, apparently, 3.2 percent in January, why there’s such high inflation. And John was going to answer a basic why question: why is inflation so high in Venezuela and a few of the other Latin American countries?
So go ahead, John.
JOHN WEEKS, PROFESSOR EMERITUS, UNIV. OF LONDON: Right. The question is: why do progressive governments tend to oversee relatively high rates of inflation compared to non-progressive governments? [crosstalk]
JAY: And you said there’s an exception there of Bolivia, which we’ll talk about later. But go ahead.
WEEKS: Yeah. Right. Bolivia’s an exception we can come back to.
Are they just a bunch of incompetent–do they not know what’s going on? No. It’s quite a straightforward process.
The progressive government uses public expenditure to help the poor and to drive the economy close to full employment. When you get near full employment, there’s a tendency for further expenditure to generate excess demand. So, for example, now in Venezuela the budget deficit, if you take the figures from the Venezuelan government, is 8.5 percent of GNP. If you take the Inter-American Development Bank figures, it’s 12.3 percent of GNP. It doesn’t matter. Both of them are high. That at full employment, or full utilization, tends to generate inflation.
Okay. Why is it? It’s because the progressive government is committed to helping people and to spending in a social way.
Okay. What can you do about it? How can you prevent this from happening? Well, obviously, there are two ways. One, you tax more. You tax the rich. But I think also equally important is the famous saying, make hay slowly. That is, I do think in Venezuela [incompr.] the government move too quickly in its social expenditure, and as a result there was a tendency to generate a deficit.
This is not a cardinal sin, and it’s one easily corrected, either through taxation or slowing down the increase in expenditure. The only reason it happened is because it is a progressive government trying to improve the plight of its people.
JAY: Okay. Explain why raising taxes–I assume you mean mostly on the wealthy that can afford to pay taxes–why would that lower inflation.
WEEKS: It’s because if you have a problem in which there’s excess aggregate demand, the way you get rid of it is you reduce spending, either through reducing the government expenditure or through taxation–taking money out of people and corporations’ profits.
Okay. The taxation should be of the rich in a progressive country. That reduces their ability to spend while you continue to maintain purchasing power for the poor and for the lower classes in general. So what taxation does is it takes expenditure out of the economy, out of the private economy, while expenditure is being put in the economy by the public sector.
JAY: But wouldn’t you have to have, I mean, really significant hike in taxes and be able to collect them to make a dent in the purchasing power? I mean, if you’re really rich and you have to up your, you know, taxes 5, 10, 15 percent, even, you’re still left with lots of money for purchasing stuff.
WEEKS: Well, it is true [incompr.] don’t you feel sorry for the rich? They must come to the end of every year and find it impossible to spend all their money and they must worry about it all year long.
JAY: Yes, poor babies.
WEEKS: Right. Yeah.
The issue there is that for the economy as a whole, there’s a certain amount of income generated. The public sector gets part of it. The private sector gets part of it.
What taxation does is it transfers income from the private sector to the public sector. And whether you’re transferring it out of savings or you’re transferring it out of expenditure, it has the same effect, because the saving, as my colleague was saying, [incompr.] take the form of capital flight, or in normal times it’ll take the form of investment, and you’re reducing that. So even though the rich are filthy rich, can’t spend all their money, the income in one way or another comes back into the expenditure stream, either through their luxury expenditure or through investment. And by raising taxes, you reduce that.
JAY: Okay. Gregory, I’m assuming you’re saying if capital flight’s one of the problems causing inflation, wouldn’t you then argue that–I don’t know why I’m making your argument, but just to get you started–there’ll be even more capital flight if you raise taxes.
GREGORY WILPERT, AUTHOR, CHANGING VENEZUELA BY TAKING POWER: Well, depends on where–at what point you can get the taxes. I mean, if you can capture it before it flees the country, certainly.
I mean, the thing is, the way the capital flight in Venezuela works is that people already–I mean, the wealthy have the money and are using it to take advantage of the fixed currency control rate, and are thereby taking dollars out of the country.
Now, of course, it’s not only the rich. One should acknowledge that it’s also a significant chunk of the middle class. Last year, $6 billion went towards their travel expenses, for example. That’s–you know, might not sound like very much, but it does represent almost 20 percent of the official exchange rate dollars that were made available.
So, anyway, if you can tax that before they exchange it, then I don’t think it’s a problem.
JAY: And I’ve heard various places that that’s a bit of a scam. Sometimes people are buying airplane tickets and actually just cashing them in. It’s a way to launder the money or get dollars without, you know–.
WILPERT: Either way, it represents capital flight. Whether they spend it on foreign travel or if they spend it on scamming the government, either way it’s dollars that leave the economy and never to come back as consumer goods or any other shape or form.
JAY: Well, what do you make, then, of–well, then, what do you make of John’s proposal one, that raising taxes would help reduce inflation, and that is one of the solutions?
WILPERT: No, I absolutely agree. As a matter of fact, the Venezuelan government has tried to deal with some of these problems not by raising taxes but by limiting profits. And, I mean, that–and with price controls. And I don’t think that really addresses the core problem of inflation and of how–of the balance of payments problems that Venezuela’s facing, especially the huge gap between the black market exchange rate and the official exchange rate. So I think definitely taxation would be the better way to go.
JAY: But, John, if the sort of game-changer was increased public expenditure, I guess that leaves me with two questions: why was inflation so high prior to Chávez, where there wasn’t anywhere near as much public expenditure? I guess start with that. My second question will be: how does raising taxes on the rich change the game changer, which was more expenditure and, you know, closer to full employment and all this sort of thing? But start with the first thing. I mean, inflation was very high pre-Chávez, before there was any of this kind of public expenditure or reaching near-full employment.
WEEKS: Well, I think–I didn’t come here prepared to–I haven’t looked at the inflation rates in the 1980s and 1990s. I can tell you, the 1980s, the reason why inflation was so high was because of debt service. There’s no question about that. And as for the 1990s, I was unaware that it was high, but I’ll take your word for it.
JAY: Well, let me–I’m going to check my numbers here. Greg, do you remember the numbers off the top of your head for the ’90s?
WILPERT: Yes. Well, we definitely were, in the average, 50 percent per year in the 1990s.
WEEKS: I would point out there that in the 1990s and the 1980s, Latin America as a whole had very high inflation, ’cause this relates to the whole debt service issue, which–I don’t think we want to wander into that area, though it’s very important. We’ll be here for several days.
Let me go back to a different issue, one of capital flight. Let’s focus on capital flight just for a moment.
I’ve done quite a bit of work on capital flight, and there are effective ways to reduce capital flight. There are effective ways to monitor it, some of which Venezuela’s government is doing, some of which it’s not. But once you got into a–.
JAY: Well, give us examples of what they are doing and what they’re not but should be.
WEEKS: Well, Greg would be better at giving examples of what they are doing. I mean, I could list some, but he’s more knowledgeable. But I would give an example of something that was done in Argentina which was very effective, and namely, when anyone wanted to take out money in excess of a certain amount (I think, in the case of Argentina, it was in excess of $10,000), they had to demonstrate that they had paid taxes on it, which I think is a very effective way of controlling capital flight.
As for airplane fares and things like that, these are relatively easy things to control, and you can require all flights to be bought through domestic travel agencies. If you don’t trust the domestic travel agencies, nationalize them all and require all flights to be bought through the government travel agency. These are all issues that can be dealt with.
Progressive governments are not helpless. They can deal with these issues. Some governments have.
JAY: Well, then let me ask Greg. It’s somewhat of a political question. Then why isn’t Venezuela taking more stringent measures to prevent capital flight if, as you say, it’s part of the problem?
WILPERT: Well, the currency control, it was supposed to be a measure of controlling capital flight. However, it got perverted because of the black market for dollars. In the beginning phase it wasn’t such a big deal, because the difference between the black market and official market for dollars was more or less a ratio of two-to-one. But now that it’s ten-to-one or even 12-to-one, it creates a tremendous incentive and to cheat it in every way, shape, or form. And that’s what–the scamming is what contributes to capital flight.
JAY: Yeah, but John’s suggesting there’s ways to deal with the scamming.
WILPERT: [crosstalk] what the government needs to do in order to solve that problem is to eliminate or reduce this gap between the black market and the official exchange rate in order to reduce the incentive for cheating.
JAY: John, is that enough? Or you’re suggesting there’s other things that could be done?
WEEKS: I agree with–on the last part, I agree with Greg completely. And the way to do that is to devalue. They must do a very substantial devaluation of the currency. And in order to protect the poor from being hurt by that, you know, import prices–a lot of food is imported–then use the government expenditure to subsidize those, or you could even ration them, as is done in not very many countries now, but in Cuba, for example. So I agree. Somehow you have to get rid of the black market exchange rate, and the best way to do that is through devaluation.
JAY: Okay. So, Greg, why is–that’s been a–before as a possibility the Venezuelan government as an option for years, and they don’t want to go there. Why don’t they want to go there?
WILPERT: Well, the devaluation question is a very tricky one, because it gets criticized both from the governments left and from the right, more or less with the same argument, that a devaluation means less purchasing power abroad, less value of the currency. And they’ve basically, you know–. And so they, both the left and the right, try to make the government look bad, and so it’s very sensitive to that question.
JAY: I mean, [incompr.] what John says is you could subsidize the consequences on the poor and workers. And, I guess, the wealthy would have to, you know, bite it. It’s almost another way of taxing the rich.
WILPERT: Right. Right. I don’t know why that option hasn’t been chosen, except, like I said, the devaluation issue is too sensitive. The only thing is that they aren’t actually–they are devaluing the currency, but in a very sneaky and gradual way, that is, by introducing new currency exchange mechanisms. As a matter of fact, just today, right now, actually, as we speak, the economics vice president, Rafael Ramírez, who’s also the president of the oil company, is making an announcement about the new exchange mechanism, which will be a floating exchange rate. And so that’s a de facto devaluation. But it’s a complementary exchange rate in parallel to the official one of six-to-one for the dollar.
JAY: So, John, back to your proposed solution. So, one, tax the wealthy. Two, float–a floating bolivar or just reducing it in a fixed way.
WEEKS: No. There–petroleum producers, almost all petroleum producers have fixed exchange rates, and there–technical reason for that, and the main one is that the petroleum prices are very unstable in the world market, and so, therefore, that would lead to an unstable exchange rate if you let it float. (I don’t like the term float.)
So what I would say is devalue to a fixed exchange rate. How much it should be I don’t know. That becomes a technical question. I’m sure there are excellent people at the Central Bank of Venezuela who could make that estimate much better than I could. And then use the expenditure to prevent that from having serious income distribution effects.
I mean, really the government has been relatively successful in protecting the incomes of the poor. While real wages fell in the early 2000s, they’ve pretty much been stable over the last ten years or so, which is quite remarkable considering all the assaults and domestically and for and against the government. So I think it is perfectly capable, in technical terms, to be able to manage the combination of a devaluation of the currency and to protect the incomes of the poor.
JAY: Okay. Well, what do you make of the argument, then, both of you–and I guess I’ll start with Greg and then John, fairly quickly–that this–the government’s argument that one of the–or, according to them, the underlying reason for inflation is economic sabotage. And I suppose that includes both the smuggling Greg was talking about and deliberate hoarding of products to force prices up. I mean, Greg, how big a piece of this is that?
WILPERT: Well, I would say, actually, that the smuggling is probably a larger factor than the hoarding, because it’s not in most people’s interests, especially when it’s food, to hoard it, because it goes bad and you basically lose the product. So you have to be extremely politically motivated to engage in that kind of an act of action, whereas the smuggling, of course, brings tremendous profits, and therefore that’s really the vast majority. As a matter of fact, I should have mentioned earlier that the government estimates between 30 to 40 percent of all goods that are supposed to be imported at the official exchange rate are either never imported or leave the country right away. And so that’s just a humungous chunk of the potential imports [crosstalk]
JAY: So, John, what would you do about that? How do you stop hoarding, but more importantly, smuggling?
WEEKS: I think that control of smuggling in the 21st century should not be that difficult. If it is at a very high level, it must be related to the wealthy, the reactionaries being able to pay off some customs people and other people involved in checking this out. It’s true Venezuela has very long and unpoliced borders, but for the most part that’s not where the big smuggling is going to occur, or even so, you could monitor that, you know, through all sorts of electronic techniques and so on. So I think that that should be a police problem that you can sort out.
JAY: So, Greg, so smuggling is largely connected to the issue of corruption within government officials, essentially.
WILPERT: Yeah, it is, but I’m not that optimistic that it can be controlled, I think, because the payoffs are so huge, even for the people who control the border because the profits are so huge. Rather, what has to be done is reduce the incentive, which is to reduce the gap between the official exchange rate and the black market exchange rate.
JAY: So it comes back to the same issue.
So, just finally, just a last word from each of you. It’s easy for us up here to say all of this. We’re not, you know, sitting in Caracas having to deal with all the fallout. But the measures you’re suggesting seem to be fairly–well, you know, kind of obvious. What’s stopping the government from taking some steps in this way? Start with you, Greg, and then John.
WILPERT: I think they’re partly ideological, which I mentioned earlier, the fear of devaluation and the critique it could receive. But some of them are also just trying to figure out in a kind of contradictory system where, like John was saying, Venezuela is a democracy with competing demands on the government, and trying to figure out what is the course of action that makes the most sense is very difficult at times to figure out. And as–but it has resulted in is a very slow decision-making process. I think the government will figure it out. It’s just been extremely slow about it.
JAY: Okay. John, I wonder if you could work into your answer, ’cause the same question: very quickly, why isn’t Bolivia offering from the same high inflation?
WEEKS: I think the main reason is that Bolivia is running a very slight fiscal surplus, actually, and the policies being followed in Bolivia, they certainly are in the interests of the poor. But they are moving much slower than President Chávez did.
JAY: Which is what you said was one of the causes of the problem in Venezuela, they went too fast.
WEEKS: And I think that of course that has consequences. It means you reduce poverty slower [incompr.] providing health care at a slower rate and so on. But it’s more sustainable. And so I think that that’s one thing that explains it. And there are other factors too, but I think that that’s what–that’s the main one.
JAY: Alright. Well, I think that’s pretty good for now. And this is obviously an issue that is very complex and we can do again and we will do again.
But for now, gentlemen, thank you both for joining us.
WILPERT: Thank you so much.
WEEKS: Thank you. It was very interesting.
JAY: And thank you for joining us on The Real News Network.
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