Ricardo Hausmann
Ricardo Hausmann, a former minister
of planning of Venezuela and former Chief Economist of the
Inter-American Development Bank, is Professor of the Practice of
Economic Development at Harvard University, where he is also Director of
the Center for International Development. He is Chair of the World
Eco… read more
CARACAS
– Two years ago, public protests erupted in both Kyiv and Caracas.
Whereas Ukraine’s Revolution of Dignity quickly took power, political
change in Venezuela followed a much slower path. But Venezuela’s
parliamentary election on December 6, which gave the opposition a two-thirds majority, is moving political developments into the fast lane.
Although President Nicolás Maduro accepted defeat
on election night, his government has promised to disregard any laws
that the National Assembly enacts, and has appointed an alternative
Assembly of the Communes not envisaged in the constitution. Moreover, he
used the National Assembly’s lame-duck session to pack the Supreme
Court and has called on supporters to prevent the newly elected Assembly
from being seated on January 5. Like Ukraine two years ago, Venezuela
is heading toward a constitutional crisis.
But
there is an older and more ominous parallel between Venezuela and
Ukraine: the Soviet Union’s man-made famine of 1933. Stalin’s decision
in 1932 to force independent farmers – the kulaks – into large
collectivized farms caused 3.3 million Ukrainians and ethnic Poles to starve to death the following year.
The
catastrophe was unleashed when Stalin, convinced that the kulaks were
hiding grain from the Soviet state, requisitioned the seed grain,
believing that this would force the kulaks to use the hidden grain as
seed. But there was no hidden grain – and thus no seed to plant the 1933
crop. Stalin blamed the ensuing collapse in food production on
conspiracies by the dead and dying.
Instead
of dealing with the unfolding catastrophe, Stalin increased grain
requisitions, despite dismal production levels – a move that led to mass
starvation. Information was hidden from the public, preventing remedial
action. Even offers of international humanitarian assistance,
especially by Poland, were rejected.
A
famine in a country as fertile as Ukraine was hard to imagine before it
happened. And it is hard to imagine a similar catastrophe in a country
with the world’s largest oil reserves. But, heading into 2016, Venezuela faces precisely such a scenario.
There
are four fundamental ingredients of such man-made disasters: repression
of the market, suppression of information, systematic persecution of
dissent, and attribution of blame for the disaster to the victims (which
justifies radicalizing the policies that led to the problem in the
first place). Sadly, Ukraine is not the only example: The human toll in
China of Mao Zedong’s Great Leap Forward of 1958-1961 was even greater,
causing an estimated 15-45 million deaths.
As
in Ukraine and China, Venezuela’s government has been trying to
collectivize production. After Hugo Chávez was re-elected in 2006, he
decided to accelerate the “revolution” and nationalized banks, telecoms,
cement, steel, supermarkets, hundreds of other firms, and millions of
hectares of land. And, as in Ukraine and China, the affected firms’
output quickly collapsed.
Beyond
outright expropriation, the government implemented a system that
attacked the market’s natural ability to self-organize the economy. The
market is no panacea, and it can work only with a state that operates
properly, but it is a powerful stabilizing force. Market prices provide
information about what is in short supply. Profits create incentives to
respond to the information contained in prices. And capital markets
allocate resources in pursuit of profits. Markets may fail, and policies
can improve on outcomes; but Chávez and Maduro, like Stalin and Mao,
attacked the market mechanism itself.
In
Venezuela, a generalized system of price and foreign-exchange controls
is causing havoc. Foreign exchange is allocated administratively at a
price that is about 130 times cheaper than the market rate. Not even drug trafficking is as profitable as this arbitrage opportunity, with obvious consequences.
A
formula for “just” prices keeps all prices artificially low (setting
higher prices buys violators a ticket to prison), causing shortages,
rationing, and queues that consume many hours of most Venezuelans’ days.
Shortages of critical items have already cost many lives, not to
mention the devastating effects on production. And, despite price
controls, inflation is above 200%, because the central bank monetizes a
fiscal deficit of more than 20% of GDP.
The
rising oil prices that accompanied the adoption of these policies
initially muted their impact, as imports could make up for the fall in
output. In 1998, when Chávez was first elected, oil was languishing at
$8 per barrel; in 2012, prices averaged $104.
But,
rather than using the windfall to build a financial cushion for a rainy
day, Chávez chose to use high oil prices as collateral to borrow
massively, quadrupling the public external debt. This allowed him to
spend in 2012 as if the price of oil were $197 per barrel. But now, with
Venezuelan crude below $30 dollars and the country cut off from
international capital markets, imports are declining to a fraction of
their 2012 level. The previous destruction of productive capacity has
come home to roost.
Without
the market mechanism, the adjustment is taking place with too little
information and too many perverse incentives, making its impact on
production and welfare even more devastating. The coming year will see a
further drastic cut in imports. Not only are oil prices even lower, but
imports in 2014-2015 were financed in part by running down reserves and
other assets, and by authorizing private imports but not paying for
them, de facto expropriating the working capital – the seed grain – of private companies.
The
implications of this madness are ominous. To prevent a humanitarian
catastrophe, swift action needs to be taken: restoration of the market
mechanism; exchange-rate unification (as President Mauricio Macri just
implemented in Argentina); an alternative system of social transfers to
substitute for rationing; fiscal retrenchment; orderly foreign-debt
restructuring; and massive financial support from the international
community.
Maduro
is not trying to do any of this; instead, he is devoting his energy and
creativity to maintaining power, by fair means or foul. But time is
running out. Unless Maduro changes, the new National Assembly – where
the opposition’s two-thirds majority enables it to amend the
constitution – will have to change him.
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