Malfred Gerig is a sociologist from the Central University of Venezuela who directs the Political Economy of Venezuela research program at the Caracas-based .
Â鶹´«Ã½â€™s Federico Fuentes sat down with Gerig to discuss Venezuelan president Nicolás Maduro’s economic policy response to what he terms the country’s “Long Depressionâ€. This is the second in a three-part interview. Read part 1 here.
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In your book, , you refer to three distinct periods within the Long Depression. Could you elaborate on this?
The Long Depression that started in 2013 has three major periods. The first, between 2013‒15, is what I call the “period of crisisâ€. In this period, government economic policy was characterised by inaction: the dominant idea within the government was that there was no crisis and that it could carry on doing the same thing and obtaining the same results.
Initially it even denied there was a crisis, to the point that to talk about questions of technical economic issues, macroeconomics, investment, consumption, etc at the time meant you were a “neoliberalâ€.
Instead, everything was a result of the “economic war†— a conspiracy theory involving everyone from imperialism to the local corner shop owner. There was a complete disregard for questions of basic economics.
This period saw the collapse of the currency exchange market, which generated a very important supply shock to the Venezuelan economy, given its deep dependence on imports. Most of the industrial sectors still active at the time were very dependent on imports. As a result, these sectors contracted.
So, the main characteristics of this period of crisis were a supply shock, the collapse of the exchange rate, and what I call, borrowing from Marx, the impossibility of reconverting money into capital. This was because production was unable to continue at the same scale due to these shocks to the currency market and imports.
Then we had the oil price shock in 2015. The government once again concocted a conspiracy theory that this was all part of imperialism’s strategy.
In reality, it was our partners — OPEC and Saudi Arabia — who sought to keep oil competitive with shale gas. This oil price shock generated what everybody was already expecting: a very serious debt and fiscal crisis in Venezuela.
That is when the first major disastrous economic policy decision was taken: to continue the strategy of paying foreign debt.
The government decided to halt imports in order to pay the foreign debt, using the argument that imports meant giving dollars to capitalists to enrich themselves. Sure, to a large extent that was true; but giving dollars to capitalists also means importing food, industrial inputs, etc.
As part of this strategy, the government paid US$100 billion in foreign debt. To put that figure in context, at one point Venezuela’s economy was $40 billion; that is, the government paid off an amount of foreign debt twice the size of Venezuela’s economy.
The shock that this generated on imports led to a second major supply shock, taking the country’s economic depression to a new level.
This policy also generated another deep shock to production, which pushed Venezuela into a profound humanitarian and food crisis between 2016‒17 as agro-industrial and food import sectors totally collapsed.
This was the second phase of the Long Depression: the “period of collapse†between 2016‒18. In this phase, the government tried to apply its first chaotic macroeconomic stabilisation program, based on paying foreign debt and cutting imports in order to improve conditions.
The main consequence of this program of being a “good payer†of foreign debt and import cuts was that it became intertwined with a deficit management strategy to facilitate paying foreign debt through the sale of PDVSA debt bonds via the Central Bank.
This represented a form of Quantitative Easing on steroids amid a collapsing economy. It led to one of the worst periods of hyperinflation in Latin America’s history.
This triggered a new phase in the crisis, as GDP [gross domestic product] began falling by double digits. As with similar experiences in history, this hyperinflation was caused by the debt crisis and political-institutional collapse.
With the government still pursuing a strategy of cutting imports to pay debt, Venezuelan households were burdened with the debt payments and their wealth collapsed due to hyperinflation.
This is the third phase, the “period of hyperinflationâ€, where hyperinflation became a social phenomenon of such harrowing dimensions that people basically forgot all the other economic problems. Hyperinflation absolutely changed society.
This is also the period in which the government began, in mid-2018, to implement the orthodox-monetarist program it still maintains.
We cannot even really call it an adjustment program; it is a stabilisation program designed to reduce inflation without taking into account the serious impacts the program would have on economic activity and society.
The program’s main pillar was a draconian cut to public spending, which in 2018 was about 48.4% of GDP, while revenue amounted to 17.4% of GDP, leading to a fiscal deficit of 31%. Under this new program, spending was first reduced by 27 percentage points in 2019, then reduced again to about 10% of GDP in 2020.
This orthodox-monetarist policy also included other pillars, in particular a financial squeeze that sent Venezuelan society back to the financial Stone Age by implementing a legal reserve requirement on banks that at one point reached 93% of reserves.
The aim was to cut off secondary sources of money creation. This meant that the level of household credit in 2019 was only 2.2% of GDP.
Amid hyperinflation, households could not even use credit cards to take advantage of negative real interest rates to buy the goods they needed. Companies that wanted to invest or continue producing had to use their own capital as they could not get bank loans.
There was also a very serious wage squeeze, as adjustment programs of this nature require a shock on consumption and demand.
This was largely achieved through a wage squeeze, especially in the public sector, which covers administrative staff and civil servants but also pensioners as Venezuela has a public pension system. Pensioners today receive the legal minimum wage, which has hit rock bottom: about $2.30 a month.
Destroying wages was a means for solving the government’s fiscal problems on the expenditure side rather than the income side, while also destroying demand amid collapsing supply.
Changes were also implemented to the currency exchange market, leading to a unification of exchange rates.
The Maduro government had continued with differential exchange rates for about six years. This meant that if you converted the minimum wage at the official exchange rate, it was equivalent to about $11,000 a month — a complete fantasy.
No one knows if people were buying dollars at the official rate, but if they were — which is almost certainly the case — it is not hard to see how this created extravagant conditions for mass looting.
From 2018 onwards, the currency exchange market was liberalised. A regime of inter-bank trading desks and successive micro-devaluations were implemented, leading to a gradual dollarisation of society.
As dollarisation rose, society had a currency it could now use as a means for exchange, for storing value and as an accounting unit. The bolivar today only functions as a means of exchange, it no longer serves the other two functions that all other currencies have.
Prices are marked in dollars because that is the currency that functions as the unit for accounting for all economic activities: for the family when calculating its weekly or monthly expenses; for a large company, etc.
Aspects of this program provided some economic breathing space, but only because the economy had shrunk to such a small scale.
By the time this macroeconomic stabilisation program was applied, the economy was much easier to manage. The government could stabilise without any large external financing program, precisely because the economy was so extremely small.
Were there alternative policies that could have been implemented?
There are always alternatives, especially to such a catastrophic policy in terms of impacts on production and society. The government’s policy was basically to activate what Karl Polanyi called “the Satanic Mill†and seek economic stabilisation through social destruction.
In fact, when we seek comparisons to Maduro’s macroeconomic stabilisation program, we see that it most closely resembles the first stabilisation programs implemented in Latin America — in Chile, Uruguay, Argentina — rather than the less orthodox programs implemented in Bolivia or Brazil’s Plan Real.
In other words, Maduro’s program is not only more orthodox than the orthodoxy of today but even that of the ’90s.
So, indeed, other things could have been done. The most important of these was understanding that the level of destruction wrecked on the Venezuelan economy had reached such a level that solutions required supply-side economic policies; that is, economic policies that drastically increased investment, generated employment, raised wages, etc.
There were also many alternatives in terms of protecting society from what the government was seeking to do. Instead, society was left to fend for itself because, by that time, all the social assistance programs implemented during the Chávez period and the first years of the Maduro government had been totally dismantled.
When the avalanche of social dislocation began, society had nothing with which to protect itself.