Support radically independent journalism.
President Maduro is introducing a series of deep economic reforms, to put an end to hyperinflation and to re-start the economy. But this can only happen if faith is restored in the currency and if US financial sanctions come to an end, says CEPR’s Mark Weisbrot
GREG WILPERT: It’s The Real News Network. I’m Greg Wilpert, coming to you from Baltimore.
The government of President Nicolas Maduro of Venezuela introduced a series of new economic measures on Monday. The measures are meant to halt Venezuela’s hyperinflation of over 100 percent per month, and to restart its depressed economy. Venezuela has been suffering from massive inflation, consumer goods shortages, and shrinking economic activity ever since 2013 approximately, when oil prices dropped and President Chavez died of cancer. Further economic shocks hit Venezuela when the U.S. imposed harsh financial sanctions on Venezuela mid-last year. President Maduro outlined the details of the new economic measures last Friday. One of the main measures includes the introduction of a new currency, and the fixing of that currency to the value of Venezuela’s oil basket in the form of the blockchain currency known as the Petro. Let’s take a look at some of the main points Maduro made.
NICOLAS MADURO: We are going to establish a single floating exchange rate that is anchored to the Petro. It will fluctuate with the economic mechanism of the Petro; the mechanism that fixes the price of the dollar with the new anchor system of the Petro and its fluctuation. So I have decided to establish a new minimum wage based on an anchor to the Petro. I have fixed the minimum wage, pensions, and the basis for all salary tables in the country on the Petro; 1800 Bolivars; approximately one 180 dollars USD on official currency rate, is what workers on the minimum wage will earn.
GREG WILPERT: Joining me now from Washington, D.C. is Mark Weisbrot, the codirector of the Center for Economic and Policy Research. Mark is also the author of the book Failed: What the Experts Got Wrong About the Global Economy. Thanks for joining us again, Mark.
MARK WEISBROT: Thanks, Greg. Thanks for having me.
GREG WILPERT: So as we saw in the clip of Maduro’s speech, these economic measures include a new currency, and tying it to the Petro; a new minimum wage that is 30 times higher than the current one; and new fixed prices and a variety of taxes. Let’s take some of these issues one by one. What do you make of the new currency and its connection to the Petro? What impact do you expect this measure to have on Venezuela, and would it halt the hyperinflation that is currently going on?
MARK WEISBROT: Well, to get rid of the hyperinflation they would need a whole system of changes that do something similar to countries with hyperinflation. For example, in Bolivia they had hyperinflation near this level, and they got rid of it in 10 days. And they did it through an exchange rate-based stabilization, where you do fix the new currency, in their case, to the dollar. And then you take a number of other measures that restore the credibility of the- or create credibility, I should say- of the new currency so that people, so that prices stop rising at the rate- or accelerating, even, the inflation is accelerating now. So that stops.
But to do that in a situation of hyperinflation, you have to really restore credibility to the currency. I mean, hyperinflation is really a situation where people lose faith in the currency. They don’t expect it to be worth anywhere near its current value if they hold it for a couple of weeks or a month. And that has to change. So from this system it’s not clear how that will change, because for one thing, the Petro by itself is not really a currency that people are going to have. So it’s not- in other words, you haven’t created some kind of convertibility system like you had in Argentina and Brazil for their hyperinflations, when they got rid of those in the ’90s.
So I think it could be, for example, to give it the most favorable interpretation, you could say, well, they’re just creating this currency and linking it to the Petro in order to establish this as a measure, a unit of account. They did that in Brazil before they, when they created the Plano Real in 1994, when they stabilized, did an exchange rate-based stabilization.
So that, in that sense, that doesn’t, that could be useful. But they’re going to have to come up with something that really does convince people that this is the end of the money printing to cover the budget deficit, for example. And that this is actually going to stick.
GREG WILPERT: Well, that’s, those are two measures that I think are- I mena, the end to the money printing is one of the things that Maduro did talk about on Friday. So sounds like that might be one of the things that they’re going to stop, combined with some targeted tax increases.
But one thing I’m wondering about that seems to be unclear is whether there will be one or two exchange rates in this new system. That is, on the one hand he says there will be a single fluctuating exchange rate as we just saw in the clip earlier. But on the other hand, the government- I saw a government presentation recently where they say that they will continue with a so-called decom rate; that is, where the government will still continue to supply foreign currencies for certain things, presumably for certainly badly needed imports. But at the same time there will be exchange houses. And sounds like there will be two different exchange rates for the decom rate and for the, the exchange rate houses, where private dollars or private foreign currency will be offered. And if that’s the case, doesn’t that mean that there will be two exchange rates, because there’ll be different supply and demand levels in each one of these? And wouldn’t that still provoke a situation where people might be tempted to game the system, those who have access to a more, have a favorite access to the decom, a more favorable rate, might try to turn around and sell it on the other exchange rate, and therefore make it more difficult to overcome some of these problems, which have been riddled with corruption and with all kinds of other problems with people trying to game the existing system of various exchange rates?
MARK WEISBROT: He couldn’t have really meant that, because he’s talking about being anchored to the Petro. But on the other hand, the Petro is not a real currency that people will have access to, as far as I can tell. So I think that’s just completely unclear. Again, I have to emphasize that, you know, hyperinflation like this is a self-fulfilling process.
If people do not believe that the currency is going to be stable, relatively stable, it could have some inflation. But you know, if they don’t believe that the currency is going to have its value in a few weeks or a month, then they won’t want to hold it. And then the hyperinflation will continue to accelerate, as it is now. So they’re going to need more than what they announced.
I mean, it is noteworthy. This is the first time that the government has ever acknowledged that printing of money is something that would have to end in order to get rid of the hyperinflation. They’d never seen that or acknowledged that or announced that as a problem before. Now of course, money printing doesn’t always cause inflation. You know, there are circumstances like the Federal Reserve, you know, printed trillions of dollars, created trillions of dollars of money since the Great Recession and didn’t cause any inflation. But in the case that, in the situation of Venezuela, that’s fueling inflation and fueling hyperinflation, and the money printing to cover the deficit spending has been increasing all this time. And so that’s the situation that they’re in. And that has to stop in order to establish a stable price system and get rid of the hyperinflation. And of course, that’s what’s necessary for the economy to recover.
I want to say one thing also, because it’s ignored by almost all of the media, and that is that even if the government were to come up with a complete best possible plan for stabilization from hyperinflation here, the Trump financial embargo would still make it very, very difficult or impossible to implement that. And that’s because, you know, they wouldn’t be able to restructure the debt. They wouldn’t be able to borrow to just get some reserves, increase their reserves. They wouldn’t be able to necessarily increase oil production.
And so the financial embargo is a very serious thing. It didn’t create the hyperinflation, but it did- it was designed to make it as impossible as they could to recover from the hyperinflation, and to, for the economy to recover. I mean, that’s an open strategy. The Trump administration, as you know, is trying to overthrow this government, and they’ve not hidden that at all. They’ve called for a military coup. They threatened military action from the United States. And the strategy for them is to make sure the economy can’t recover, so that if the suffering increases, people will rise up against the government. And that’s a, that’s a serious obstacle. But again, the government still has a ways to go before it produces a credible plan to get rid of the hyperinflation.
GREG WILPERT: I actually wanted to get to that issue of the impact of the sanctions. But before we return to that, perhaps looking at it again, I also want to talk about the issue of how the government plans to protect people’s incomes after all this is being considered. Many news outlets are billing this as a devaluation of the currency, although de facto I think it’s not really, because everybody is using the black market exchange rate, anyway. But in other words, one of the main concerns is also protecting Venezuelans’ incomes. And so the government is increasing the minimum wage by a factor of 30, which is probably unheard of, and then saying that it will subsidize the private sector wages for the next three months. What do you make of this measure? Do you think it’s financially feasible? And what impact do you think it will have?
MARK WEISBROT: Well, they could, in fact, increase the public sector wage that much if they, for example, if they were to get rid of the gasoline subsidy. That’s round $7 billion this year. And the wage increase is something around $6 billion. So yeah, that would be possible. But again, you have to get all the numbers, and look at how much they’re going to increase revenue, and how much they’re going to reduce spending. And that has to add up. But no, a big wage increase, a big real wage increase would be possible in a stabilization program. And if you had a stabilization program that worked, there’s no reason at this point that you couldn’t have a significant increase, a very large increase in wages, not just in the public sector. Because you would, the economy would begin to recover. That’s been the case in exchange rate stabilization programs since, you know, there’s only been seven or eight hyperinflations since World War II. And in the cases where you have this kind of exchange rate base stabilization, which the government hasn’t gotten to yet, but which we’re talking about here, you could, you would expect the economy to at first, at least, immediately begin to recover, and so living standards would increase. It wouldn’t be like, you know, an IMF structural adjustment program, where people’s living standards actually fall with the introduction of the program.
GREG WILPERT: So finally, I just want to return again to the issue of U.S. financial sanctions, which are apparently hampering, also, the government’s efforts to implement an effective reform and to overcome its economic crisis. What do you think would happen if those sanctions were to be lifted? I mean, what kind of an impact would we be able to expect from that? After all, there are some campaigns among activist groups right now to put a halt to those financial sanctions that the Trump administration has imposed.
MARK WEISBROT: Well, most immediately I think it would increase- the government would have more revenue immediately, and they would be able to reduce the shortages of medicines. So that would save some lives, the most immediate impact. I think in terms of the economic recovery, they were very close to a debt restructuring agreement with their creditors not that long ago. Maybe it was a year and a half ago. That would also free up funding for any changes they wanted to make.
So yeah, the, the end of the financial embargo- which is a very serious, serious embargo. I mean, the U.S. hasn’t had anything like this in this hemisphere since the sanctions against- it hasn’t implemented anything like this since the sanctions against Nicaragua in 1985, which also actually did destroy the economy and produced the hyperinflation in that case, in the context of the war. And so this is a very serious thing. It would open up a lot more possibilities if the sanctions were lifted.
GREG WILPERT: OK. Well, we’re going to leave it there for now. But of course we’re going to return once we have a better idea as to what impact these economic reform measures are having. I was speaking to Mark Weisbrot, codirector of the Center for Economic and Policy Research. Thanks again, Mark, for joining us today.
MARK WEISBROT: Thank you, Gregory.
GREG WILPERT: And thank you for joining The Real News Network.