Abstract
During the administration of President Chavez, Venezuela registered some celebrated and encouraging socio-economic achievements, however; in the macroeconomic realm the country underperformed compared with other countries in Latin America of a similar size. The country, for instance, did not manage to avoid recurrent external crisis, suffered from unprecedented net transfers of financial resources abroad and, despite the oil windfall, has not accumulated a strong level of defensive international reserves. Moreover, inflation has been rampant and output growth has been very volatile and, on average, poor. This study provides a descriptive account and analysis of Venezuela’s macroeconomic performance and policy experience during the administration of President Chavez and his handpicked successor, Nicolas Maduro (1999–2014). It focuses on the major policy and institutional changes, and on the problems and imbalances of the economy to find out and explore the conundrum of Venezuela’s economic underachievement. We evaluate Venezuela’s exchange rate and monetary policy and the key commitments of the Central Bank to society. In general the study suggests that macroeconomic mismanagement and a failed institutional structure of governance are essential to understand some key imbalances. It seems to be the case that the root cause of this macroeconomic mismanagement and poor governance of Venezuela lies in prevailing political and economic incentives.
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Notes
With the rapid increase of oil prices since year 2000 and up to 2012, Venezuela’s international terms of trade improved by about 300% over the period, while the improvement for Latin America as a whole was close to 38%. Though the international financial and economic crisis generated a major shock and deterioration in the term of trade in 2009, the term of trade recovered rapidly even in the case of Venezuela.
The time span of inflation has been unparalleled: inflation has exceeded 10% per annum every year since 1979 following a very irregular or volatile pattern.
The Constitution of 1999 strengthened the power of the Executive by extending the presidential term from 5 to 6 years, providing the possibility of re-election for one more period, and strengthening the power of the president over the Armed Forces. There was increased centralization with less autonomy for regional and municipal powers, PDVSA and the Central Bank.
The new hydrocarbon law included higher fiscal taxation and royalty rates, reserved all medium and light crude upstream development for PDVSA, and allowed the oil-state company to own at least 51% of all present and future concessions.
It is important to point out that the system of frequent small devaluations attached to the prevailing crawling-band regime was seen by the Chavez’s administration, and especially by the minister Jorge Giordani, as excessively inflationary. Indeed, nominal exchange rate stability was seen as a fundamental nominal anchor against inflation.
Frenkel (2004) has correctly pointed out, that Latin American countries that in the last 30 years have focused their exchange rate policy primarily on controlling inflation, have created unsustainable current account and external debt trends that have led to crisis followed by maxi-devaluations.
In addition, given the impossibility of investing in the foreign exchange market and the sluggishness of credit operations, banking institutions invested quite heavily in government securities.
As a matter of fact, the economy began to recover as the world price of petroleum climbed from US$29 per barrel in August 2003 to US$41 per barrel in August 2004.
Chavez made this announcement at the January 2005 World Social Forum in Porto Alegre.
The most prominent examples of expropriations include the 2007 takeover of telecom company CANTV and electricity company EDC.
Del Bufalo (2005) points out that in an oil-led development model since oil exports are not sensitive to the variations in the exchange rate, a fixed parity covering a moderate real appreciation was thought to be beneficial for the import of capital goods and an efficient way to protect personal real income. Moreover, Garcia Larralde (2001) has advanced the thesis that currency overvaluation in Venezuela is very often sustained by oil booms.
Corrales and Penfold (2011) argue that a state that depends so heavily on one sector faces diminished incentives to stimulate the growth of other sectors when the main sector is booming.
The National Budget approved only 5 months before estimated an average oil price of US$/bl. 60.
Since 2003, this government agency has been in charge of allocating FX to the private sector for imports, debt service, remittances, and purchases abroad at the fixed official exchange rate.
In the run-up to the presidential election, President Chavez made low-income and social housing a priority, launching a plan to build three million homes by 2018. During the first quarter of 2012, the construction sector expanded by a whopping 29.9% compared with the same three months of 2011. Chavez stepped up house-building in the run-up to the election.
On the question of why government authorities have systematically preferred a quantitative adjustment of imports to exchange rate devaluation, it would be convenient to point out that devaluation is perceived as a policy that penalizes everybody, while the rationing system of imports established certain priorities and preferences.
The Decree with status of Law on Fair Costs and Prices was published in July 2011 and went into effect 90 business days later. Though wide prices controls had existed since 2003, the objective of this Law was to establish a National Superintendence that would establish the standards for the National Registry of Prices of Goods and Services, and would have overall responsibility to regulate, supervise, control, and monitor prices.
For many years, the government has used foreign exchange restrictions for the purpose of increasing bank liquidity and closing the financing gap of the public sector.
The tools used to sterilize inflows, mainly short term bills issued by the central bank and transaction in the repo market, are themselves forms of money, and the more extensively they are employed, the more liquid they become and hence more ‘money-like.
The first case corresponds to what is known as a fiscal dominant regime. The endogeneity of monetary aggregates to the behavior of external shocks fits with what Ocampo (2013) calls a situation of ‘balance of payments dominance’.
Of course some form of indexation will appear in other government revenues, but it turns out to be impossible to make the entire tax collection fully inflation proof.
The company was also used to underwrite the government’s foreign policy initiatives and under the aegis of its Petrocaribe program, Venezuela sells or barters oil to Caribbean, Central and South American countries offering subsidized finance.
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Acknowledgements
The author would like to thank Ricardo Ffrench-Davis, Roberto Frenkel, Mario Damill, José Antonio Ocampo, and participants in the workshop on Central Banking at CEDES in Buenos Aires for comments on an earlier draft. Eduardo Ortiz Felipe, Marcos Morales and two anonymous referees provided helpful comments.
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Vera, L. Venezuela 1999–2014: Macro-Policy, Oil Governance and Economic Performance. Comp Econ Stud 57, 539–568 (2015). https://doi.org/10.1057/ces.2015.13
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DOI: https://doi.org/10.1057/ces.2015.13