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Maduro vs the economy

Rumors about President Hugo Chávez's health continue unabated. Most are bad for the president, who has not been seen or heard from in more than a month. If they are true, Venezuela is headed for a presidential election that will largely be affected by the peculiar ways of its economy.

Judging by recent economic figures, one would be forgiven for thinking that Nicolás Maduro, Chávez's heir, should have nothing to worry about. Venezuela grew at more than 5 percent in 2012. Oil prices, by far the economy's mainstay, remain high, and the government increased investment in public housing, which has stimulated the construction industry.

In spite of this, the IMF has forecast GDP growth to decrease sharply this year (though the government disagrees). Inflation remains stubbornly high, and based on December's figure of 3.5 percent -- the highest monthly inflation rate in two years -- it could be accelerating.

Most of these problems can be traced to Venezuela's enormous public deficit. In an effort to ensure his re-election, the Chávez administration opened the spending floodgates last year, and the fiscal deficit reached somewhere between 9 and 15 percent of GDP. (A large portion of Venezuela's public spending is secret discretionary spending, so estimates vary.)

A lot of the money goes to subsidies. Chavez gives away gasoline for practically nothing, at a cost of billions of dollars each year. Public payrolls have swelled to an estimated 2.5 million people (again, opacity), close to 20 percent of the work force. Thousands of houses are built and given away. But this is only a partial reading of the fiscal reality.

One thing that sets Venezuela apart from other countries is that the government, by virtue of its monopoly over the oil sector, is practically the sole supplier of foreign currency in the country. Since 2003, Venezuela has had a fixed rate, currently set at 4.3 Bolivar Fuertes in exchange for 1U.S. dollar. However, the price in the black market is BsF. 17 per dollar -- and climbing.

Instead of selling its petrodollars at the market exchange rate, the government sells them for far less. Venezuela's currency exchange system is an enormous subsidy for those who can get access to official dollars -- the wealthy, the powerful, travelers, and the well-connected.

Aside from being regressive, the other perverse effect of this policy is that it stimulates imports (since most importers theoretically have access to the subsidized government rate). Much in Venezuela is imported, and this has only gotten worse thanks to Chávez's relentless attacks on private property. Not surprisingly, private investment is practically nonexistent. Oil wealth comes in, and immediately leaves again in the form of imports. Despite the boom in oil prices, this leaves the country with little domestic production  to improve the prosperity of ordinary Venezuelans. There are few options for Maduro in the months ahead. One is to continue spending to help his election chances. Already, the Chinese have suggested they are willing to continue lending to Venezuela at extraordinarily high interest rates in exchange for future oil deliveries - as well as purchases of Chinese household appliances as vote-getting tools.

The other alternative would be to devalue, i.e. taxing importers. This would immediately exacerbate the slowing momentum in the economy, as importers would be forced to pass on the increase to consumers in the form of higher prices. The purchasing power of Venezuelans in their ability to spend USD on imported goods would also fall.

Most Venezuelan economists simply assume the government has no choice but to devalue, and many are predicting this in the short term. But without any real grasp on the shape of public finances as well as lenders' willingness to provide financing, it is not clear that the day of reckoning is around the corner. True, official dollars are scarce, which would suggest devaluation is in the works. However, this could also suggest that the government is biding its time, waiting to open its coffers when the election is announced.

In a country where few things are certain, one thing is clear: chavismo will do anything it takes to win an election. If that means postponing painful decisions until after the ballots have been counted, so be it. This will be bad for the economy but good for his chances of holding on to power.

Photo by RAUL ARBOLEDA/AFP/Getty Images

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Democracy Lab Weekly Brief, January 14, 2013

In a no-holds-barred response to last week's DemLab article by Rick Rowden, Charles Robertson and Michael Moran explain why they're convinced that Africa's economic rise is real.

Robert Looney tells the surprising tale of Nicaraguan President Daniel Ortega's conversion to capitalism -- and the political risks he confronts as a result.

Robyn Meredith reports on the challenges that face China as it tries to make the high-stakes shift to an economy driven by domestic consumption rather than exports.

In the latest of our continuing series of collaborations with Princeton's Innovations for Successful Societies, Michael Schraff recounts the formidable challenges surmounted by Liberia as it organized its first post-civil war election.

Jonathan Pincus argues that Indonesia's boom will be short-lived if it doesn't start investing in its people.

And Neha Paliwal contends that India's problem is with people, not just women.

And now for this week's recommended reads:

In the Egyptian Independent, Hafsa Halawa gives a first-person account of the government crackdown on civil society groups.

Writing for Slate, Lawrence Weschler makes the case for why Bahrain's activist Al-Khawaja family should be nominated for the Nobel Prize. In The Atlantic, Larry Diamond accuses the Obama administration of betraying Bahrain's would-be democrats. (You can read Democracy Lab's interview with Maryam Al-Khawaja, one of FP's 2012 Global Thinkers, here.)

On NPR's All Things Considered, Anthony Kuhn wonders whether the West may have been too hasty in removing sanctions on Burma, given the country's continuing war on Kachin insurgents.

The Brookings Institution lays out the top priorities for Africa in 2013.

The new issue of The Journal of Democracy reports on the prospects for democracy in China, how to fight corruption through collective action, and the fate of the Arab Spring.

The Quilliam Foundation offers a detailed look at Jabhat al-Nusra, the leading jihadi group among the Syrian rebels.

The United States Institute of Peace presents a report that examines how young Afghans see their country's future.

Writing in Jadaliyya, Samar Al-Balushi offers a skeptical take on the International Criminal Court.

Finally, be sure to check out the remarkable documentary Tropicalia, which describes the boom in Brazilian pop music during the 1960s military dictatorship -- an intriguing exploration of the tensions between authoritarianism and creativity. 

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Photo by BANARAS KHAN/AFP/Getty Images