The Guardian Unlimited, May 6, 2010
With Venezuela’s economy having contracted last year (as did the vast majority of economies in the Western Hemisphere), the economy suffering from electricity shortages, and the value of domestic currency having recently fallen sharply in the parallel market, stories of Venezuela’s economic ruin are again making headlines.
The Washington Post, in a news article that reads more like an editorial, reports that Venezuela is “gripped by an economic crisis,” and that “years of state interventions in the economy are taking a brutal toll on private business.”
There is one important fact that is almost never mentioned in news articles about Venezuela, because it does not fit in with the narrative of a country that has spent wildly throughout the boom years, and will soon, like Greece, face its day of reckoning. That is the government’s debt level: currently about 20 percent of GDP. In other words, even as it was tripling real social spending per person, increasing access to health care and education, and loaning or giving billions of dollars to other Latin American countries, Venezuela was reducing its debt burden during the oil price run-up. Venezuela’s public debt fell from 47.5 percent of GDP in 2003 to 13.8 percent in 2008. In 2009, as the economy shrank, public debt picked up to 19.9 percent of GDP. Even if we include the debt of the state oil company, PDVSA, Venezuela’s public debt is 26 percent of GDP. The foreign part of this debt is less than half of the total.
Compare this to Greece, where public debt is 115 percent of GDP and currently projected to rise to 149 percent in 2013. (The European Union average is about 79 percent.)
Given the Venezuelan government’s very low public and foreign debt, the idea the country is facing an “economic crisis” is simply wrong. With oil at about $80 a barrel, Venezuela is running a sizeable current account surplus, and has a healthy level of reserves. Furthermore, the government can borrow internationally as necessary – last month China agreed to loan Venezuela $20 billion in an advance payment for future oil deliveries.
Nonetheless, the country still faces significant economic challenges, some of which have been worsened by mistaken macroeconomic policy choices. The economy shrank by 3.3 percent last year. The international press has trouble understanding this, but the problem was that the government’s fiscal policy was too conservative – cutting spending as the economy slipped into recession. This was a mistake, but hopefully the government will reverse this quickly with its planned expansion of public investment this year, including $6 billion for electricity generation.
The government’s biggest long-term economic mistake has been the maintenance of a fixed, overvalued exchange rate. Although the government devalued the currency in January, from 2.15 to 4.3 to the dollar for most official foreign exchange transactions, the currency is still overvalued. The parallel or black market rate is at more than seven to the dollar.
An overvalued currency – by making imports artificially cheap and the country’s exports more expensive – hurts Venezuela’s non-oil tradable goods’ sectors and prevents the economy from diversifying away from oil. Worse still, the country’s high inflation rate (28 percent over the last year, and averaging 21 percent annually over the last seven years) makes the currency more overvalued in real terms each year. (The press has misunderstood this problem, too – the inflation itself is too high, but the main damage it does to the economy is not from the price increases themselves but from causing an increasing overvaluation of the real exchange rate.)
But Venezuela is not in the situation of Greece – or even Portugal, Ireland, or Spain. Or Latvia or Estonia. The first four countries are stuck with an overvalued currency – for them, the euro – and implementing pro-cyclical fiscal policies (e.g. deficit reduction) that are deepening their recessions and/or slowing their recovery. They do not have any control over monetary policy, which rests with the European Central Bank. The latter two countries are in a similar situation for as long as they keep their currencies pegged to the euro, and have lost output 6 to 8 times that of Venezuela over the last two years.
By contrast, Venezuela controls its own foreign exchange, monetary and fiscal policies. It can use expansionary fiscal and monetary policy to stimulate the economy, and also exchange rate policy – by letting the currency float. A managed, or “dirty” float – in which the government does not set a target exchange rate but intervenes when necessary to preserve exchange rate stability – would suit the Venezuelan economy much better than the current fixed rate. The government could manage the exchange rate at a competitive level, and not have to waste so many dollars, as it does currently, trying to narrow the gap between the parallel and the official rate. Although there were (as usual, exaggerated) predictions that inflation would skyrocket with the most recent devaluation, it did not – possibly because most foreign exchange transactions take place through the parallel market anyway.
Venezuela is well situated to resolve its current macroeconomic problems and pursue a robust economic expansion, as it had from 2003-2008. The country is not facing a crisis, but rather a policy choice.