Imagining a post-Chavez economy

Say "macroeconomic adjustment" and Venezuelans immediately think back to 1989. That year, an IMF-inspired shock therapy program pushed through by President Carlos Andrés Pérez set-off serious rioting throughout the country, costing hundreds of lives and undermining governability for years to come. The memory of the traumatic events that followed sharp devaluation, fuel subsidy cuts and the end of price controls still colors policy discussions today.

As this fall's presidential election draws near, Venezuela's opposition is thinking through its macroeconomic approach to transition. At first blush, the parallels are jarring. Just as in 1988, the country faces a fixed, severely overvalued exchange rate, a structural budget deficit fed by a sprawling, loss-making state-owned enterprise sector, rigid price controls, and ruinous gasoline subsidies. It's enough to give any Venezuelan macro-economist the heebie-jeebies. So is the country is on the verge of another massively disruptive adjustment experience?

Not at all, for two reasons: the economic fundamentals of 2012 are nothing like those of1988, and the opposition's presidential candidate this year, Henrique Capriles, is nothing like Carlos Andrés Pérez.

Barring an unexpected collapse in oil prices, Venezuela will face next year's adjustment from a far stronger position than it enjoyed twenty-three years ago. It's one thing for an oil exporter to undertake structural adjustment with oil trading at $16.60 a barrel (as it did back then), and quite another to do it with a barrel selling for $110 today, with masses of petrodollars flowing into state coffers daily. While the incoming government in 1989 found the cupboard almost completely bare, Venezuela's net foreign asset position is now estimated at $72 billion. And Venezuelan economist Miguel Angel Santos stresses another key difference between then and now: private sector firms had been accumulating dollar-denominated debt fast in the years leading up to 1989, which amplified the impact of adjustment on the real economy. In recent years, by contrast, Venezuelan private firms have been deleveraging abroad.

Starting conditions are different, then, but so is the approach of adjustment advocates. Opposition Unity candidate Henrique Capriles rejects shock therapy and is committed to a gradual approach that could make 2012's experience -- dare one say it? -- nearly painless.

Here's how:

The first order of business will be unwinding Chávez's foreign exchange controls, fixed at a massively over-valued 4.30 bolivars per dollar, a rate available only for priority imports of food, medicine, and public procurement goods, all under tight bureaucratic supervision. In practice, the supply of dollars at this lower rate has been contracting for years, pushing more and more importers into higher rate (or openly illegal) ways of obtaining hard currency.

One way to cut this Gordian knot would be to combine a more transparent and prudent approach to public spending with a switch from the current pegged (i.e. fixed) exchange rate to what economists call a "crawling peg. This would allow the government to gradually devalue the bolivar on the official market. At the same time, though, the government would make it legal for those without priority needs to buy foreign currency on a second, more open market, to allow market forces some scope to settle the bolivar's value.

This "dual exchange rate strategy" is Alejandro Grisanti's preferred approach. The Barclays Capital economist and key advisor to opposition candidate Henrique Capriles foresees an initial spike in the parallel market rate, as some of the demand for foreign exchange that has built up over the last decade is met. If this initial spike threatens to cause serious economic dislocation as Venezuelans' resort to panic-buying, however, the new government could compromise, putting a floor on how far the free-market bolivar could fall. The downside, of course, is that it would, at least at first, leave part of the pent-up demand for dollars unmet.

Eventually, one would expect the free rate to stabilize, rising slowly in response to market forces. Indeed, this parallel market rate would likely face the same pressures towards appreciation that now face so many countries that depend on commodity exports (in this case, oil) to earn foreign exchange. The likely tendency, in the medium term, would be towards convergence between the depreciating official rate and an appreciating free market rate. In time, the two would meet, spelling the end for exchange controls -- imaginably in the not-too-distant future.

This wouldn't necessarily mean an end of government intervention in the currency market, however. "In a country where the government supplies 95 percent of the dollars in the currency market," Grisanti says, "there's no such thing as a clean float."

The challenge -- again, assuming oil prices hold up -- would rather be the opposite: ensuring the competitiveness of the exchange rate by keeping a portion of petrodollars outside the bolivar economy. For Grisanti, that old bugbear of petro-exporters -- Dutch Disease -- is a much bigger threat to Venezuela's economy in the medium term than the sharp, adjustment-induced devaluation Venezuelans fear so much.

This is not, it should be stressed, a consensus view. Economist Omar Zambrano sees appreciation as an inevitable outcome of normal exchange market operations in a natural resource rich Latin American economy, whether it's Venezuela or Chile or Peru. In his view, appreciation need not prevent the growth of other export-oriented industries, provided the business climate was improved through deregulation.

Zambrano focuses instead on the political attractions of currency appreciation. By transferring purchasing power directly into consumers' pockets, an appreciated currency could be a powerful force for maintaining political stability in what is sure to be a politically dicey transition. Moreover, Venezuela's tradable goods sector, which would normally rise up to oppose such a policy, has been so decimated by 13 years of Bolivarian socialism that what little remains of it could hardly mount a strong political challenge to such a policy.

For a Capriles administration coming into power with a strong focus on job creation, allowing runaway appreciation to ensure short-term governability would look short-sighted. By gradually -- but preferably quickly -- phasing out currency controls and then seeking to balance exchange rate competitiveness with an effort to bring inflation under control through fiscal discipline, an incoming Capriles government could begin to clear the mass of economic imbalances of the Chávez era in an orderly manner.

If anything, the lessons of 1989 have been over-learned, building a strong bias against exchange-rate reforms into Venezuela's policy debate. But 2012 is not 1988, and together with favorable external circumstances (triple-digit oil prices), Capriles's commitment to gradualism should be able to accomplish adjustment without the costly dislocations that accompanied an earlier vintage of reform.


Democracy Lab

The strange priorities of Ugandan leaders

The Ugandan president's office has announced that it is requesting 92 billion Ugandan shillings [$39m] in additional funding to run its activities. This comes just five months after State House already asked for a supplementary budget of 66.6bn [$28.3m]. This is, to put it mildly, outrageous.

The request comes just weeks after the government announced that it is refusing to increase spending (except for the security sector). The government had offered to increase teachers' salaries by only 15 percent, an offer rejected by the teachers, who were demanding a 100 per cent raise.

Here's more from The Daily Monitor piece:

If approved, the State House budget will balloon to more than Shs158.6 billion [$67.3m] -- more than twice the 2011/12 Budget for Mulago National Referral Hospital. This money would meet the Shs75 billion [$31.8m] required to answer teachers' demands for a 100 per cent salary increment.

(The photo above shows Mulago National Referral Hospital, Uganda's largest.)

Meanwhile, the northern part of the country is being ravaged by a strange disease referred to as "nodding disease." Of the 7 billion shillings [$2.9m] requested by the Ministry of Health to address the outbreak, the government only released a miserly 100m [$42,436]. The ministry's supplementary budget for tackling the outbreak is being delayed amid reports of bureaucratic infighting.

This bizarre disease is named after the strange seizures that it causes. The seizures can be triggered by the smell of food. According to the U.S-based Centers for Disease Control, little is known about what causes the disease or how it spreads.

The Daily Monitor article quotes Dr. Scott Dowell, CDC lead investigator, in an interview with the Center for Global Health policy, United States:

The children definitely die with it -- it's not rapidly progressive, but it seems to take hold of them. The nodding is in fact a type of seizure which causes damage on the brain.

Ugandan photojournalist Edward Echwalu wrote a poignant article on the disease, profiling Nancy Lamwaka, a twelve-year-old girl. Her father has to tie her to a tree during the day so she does not wander around and harm herself. At one point she fell into a fire:

Her father's heart bleeds daily as he goes through the traumatizing routine of tying his own daughter to a tree like an animal. He says only his two pigs receive such treatment.

"It hurts me so much to tie my own daughter on a tree because in our tradition, it's a taboo and unheard-of. But because I want to save her life, I am forced to. I don't want her to go loose and die in a fire, or walk and get lost in the bushes, or even drown in the nearby swamps," he says.

Under the tree, she struggles to move towards the direction of the shade as the sun begins to shine hard. She stumbles but moments later, recovers her waning energy and follows the shadow. All along Lamwaka is quiet, looking drowsily at her siblings seated a few meters away. She has not said a word or made a sound since she woke up. You could sense she wants to say something; perhaps invite her two siblings to play with her, but she just looks on, her eyes heavy and mouth effortlessly open, only occasionally shutting to close out preying flies.

Echwalu's article and photos give the disease a face, showing how it affects the family and community.

Legislators from northern Ugandan are understandably upset by what they see as the blatant squandering of state resources in the face of an epidemic. The Daily Monitor quotes the chairman of the Acholi Parliamentary Group chairman, Reagan Okumu:

If it is true that Shs92 billion is going to State House when our people are suffering with nodding disease without any serious response, may God have mercy on us....

To my colleagues in Parliament, if you approve this money the people of northern Uganda will never forgive you. It does not matter whether State House has already spent the money or not, this money shouldn't be approved before getting money for the children who are suffering with the nodding disease....

While the different ministries bicker over resources, the state of the afflicted only gets worse.