Venezuela's Government Flirts with Market Economics

The Venezuelan government published a seemingly obscure statute last week, which they've called "Foreign Exchange Agreement No. 27." Casual observers might be tempted to think this is just another set of arcane rules governing Venezuela's tangled web of currency and exchange controls.

Casual observers, however, would be wrong. This is the first real attempt by Venezuelan authorities to turn away from heavy-handed policy toward some sort of market-like mechanism. The new rules set in place a currency exchange system that is remarkably open when compared to Venezuela's prevailing system. It has the potential to significantly reduce Venezuela's economic mess.

Ever since protests erupted a month ago, the media has focused on its root causes. High on the list is Venezuela's soaring inflation, which, coupled with widespread scarcity of basic staples such as toilet paper, has made life miserable for most. (In the photo above, a father and daughter look on as hundreds of Venezuelans stand in line to buy basic foodstuffs at a local grocery store.)

Venezuela's problems stem, at least in part, from currency exchange controls put in place more than ten years ago by the late Hugo Chávez. The government severely restricts who can buy the dollars it earns from oil exports, and which it chooses to sell at an artificially low price. The end result is that bargain dollars end up in politicians' offshore bank accounts or in the country's burgeoning black market instead of being used to import basic staples. Add in severe price controls that discourage increases in domestic supply, and you have an economic perfect storm.

With the black market dollar fetching several times more than the official rate, many economists had suggested some combination of devaluation and liberalization of the market was in order. Few of them expected the government to actually embrace these ideas.

Yet that is what it appears to have done. The new statute sets up a new currency exchange mechanism, the unappealingly titled "SICAD II," named after a scheme introduced a few months ago.

SICAD II places few restrictions on currency buyers. As opposed to existing schemes, where the participants are hand-picked based on their closeness to the government, the new system imposes few restrictions on who can participate in the new system. Although the government initially said they would sell $30 million per day in the new system, far less than demand, recent statements suggest this amount could go up.

One of the significant features of the new system is that Venezuelan debt can be bought and sold both internally as well as overseas. This goes a long way toward liberalizing severely restricted capital flows, providing an escape valve for investors with holdings trapped in local currency. The statute also allows exporters to hold a significant portion of their earnings in foreign currency, instead of requiring them to sell their profits to the government at a cheap price, as current rules mandate.

The new system is also much more transparent. The Central Bank will, supposedly, allow transaction prices to be set by market forces, and will publish the average exchange rate every day. There are pledges that transactions will be finalized within 48 hours, a stark contrast to the current delay-plagued system.

In a sign of how different the tone of the six-page law is, the word "market" appears eight times, the word "demand" five times, while the world "fatherland" does not appear at all -- surely a first for chavista legislation.

Initial reaction has been mixed to positive. While some local economists have praised the overture, they are cautious as to its effects. They warn that it is, in effect, a devaluation of the currency, and that without fiscal discipline, voracious government spending will simply translate into capital flight, and the new market-based dollar may well go through the roof.

Foreign entities were more bullish about the change. In a research note, Bank of America Merrill Lynch praised the statute for limiting the discretionary actions of the government, highlighting the apparent commitment of many of the government's economic officers to interfere as little as possible. Barclay's was equally upbeat, saying the new system could "potentially" lead to an eventual recovery of the country's economy.

There are still many details to be worked out, and the move could surely backfire if other measures are not put in place. Moreover, a sharp devaluation or a prolonged contraction of the economy could convince policy makers that this is a mistake, and they could scrap the whole idea altogether. Nevertheless, this is the first sign of rational economic thinking from the Venezuelan government in years, and it comes not a moment too soon.

Juan Nagel is the Venezuela blogger for Transitions, editor of Caracas Chronicles, and author of Blogging the Revolution. Read the rest of his posts here.

John Moore/Getty Images


Can Venezuela's Opposition Find Salvation in the Supernatural?

The violence in Venezuela continues to escalate. Three fatalities on Wednesday have now raised the total death count to 25, with over 300 injuries. Yet after six weeks of massive street rallies around the country, the reality for protesters is that there is no clear end in sight. To date, President Nicolás Maduro's regime shows no inclination of capitulating. There have been no high-level defections from the ruling United Socialist Party, neighboring countries have largely refrained from interfering, and the armed forces have remained loyal. With oil prices rising on the back of Ukrainian uncertainties, and renewed investment from China flowing in, the government seems to have gained enough breathing room to hold off economic collapse for a while longer. The mood among the opposition is becoming correspondingly grim. 

As a result, some of the regime's most fervent opponents are pinning their hopes on help from otherworldly sources.

For many, the focus of their yearnings is Reinaldo dos Santos, a Miami-based, Brazilian-born astrologer with well over a million Twitter followers, who styles himself "The Prophet of the Americas" and claims to have predicted Chávez's 2013 death back in 2004. More recently, he has been predicting the imminent fall of President Maduro. He backs his claim with an astrological argument based on the notion that 2014 is the year of the "wood horse" in the Chinese horoscope. In 2002, the protests that triggered an abortive coup that briefly unseated Chávez took place during a year of the "water horse." According to Santos, the water doused the flames of citizen protest on that occasion, but wood is supposed to make them burn even brighter.

On Feb. 25, dos Santos explicitly predicted that Maduro would fall in five days if only the protesters held firm. Once the deadline had come and gone, he clarified the prophecy: not five days, but rather five events must come to pass prior to Maduro's downfall (two of which have already happened.)

Some Venezuelans were disappointed with the prophet's most recent showing. "That man [dos Santos] has turned out to be nothing but a fifth-tier jungle witch doctor," says Dalila Sosa, a Caracas-based business manager. "I doubt he could call out the numbers in a bingo game without getting them wrong." Yet while Ms. Sosa may be bearish regarding dos Santos' psychic chops, she also makes a point of telling me that times are very hard. People need to believe in something, she notes.

Luckily, there remains a veritable buffet of prognosticating magicians, or brujos, to choose from. They include Mhoni Vidente of Mexico, whose tarot card readings last month portended a year-long civil war in Venezuela that the opposition would eventually win. The prediction went viral on social media, and has now been shared nearly 400,000 times. For those Venezuelans seeking a more homegrown flavor, local astrologer Adriana Azzi has even teamed up with dos Santos on Twitter to share their common view that the looming return of Saturn portends great dangers for President Maduro.

It's precisely this sort of thing that recently prompted Venezuelan journalist Rafael Osío Cabrices to flatly declare that the country "is going mad."

And yet for Venezuelans too rational, or too devout in their Catholicism, to place stock in the brujos -- there's always the possibility of a miraculous earthquake (like the one that precipitated the end of Simon Bolivar's First Venezuelan Republic in 1812). As tensions continue to rise, feverish public speculation about the imminent possibility of an earthquake reached such heights that the Venezuelan Foundation for Seismic Research (FUNVISIS), was moved to release a rare public statement last week explaining that "rumors of a looming earthquake currently circulating through social media lack any scientific validity." They go on to say that "predicting earthquakes is not even possible."

Not to be discouraged, some have instead sought out more subtle signs of supernatural support. Last week, when Cuban leader Raúl Castro, a close ally of the Maduro regime, arrived in Venezuela to attend festivities commemorating the one-year anniversary of Hugo Chávez's death, the Cuban flag mysteriously fell from its post during the welcoming ceremony. Many Venezuelans were quick to seize upon this diplomatic glitch as a divine signal of support for the opposition.

And so the search continues for some kind of deus ex machina to save the country from its current quagmire: an inept, increasingly authoritarian regime, that seems to remain largely unassailable. (In the photo above, Venezuelan protesters stumble through a cloud of tear gas.)

Until recently, it was the ruling party itself that seemed to have the mystical market cornered. From the Santeria priests, or babalawos, that "nearly cured" Chavez's cancer through magical means, to Maduro's claim of having received spectral goodwill visits from his predecessor in the form of a small songbird, the ruling party's reliance on mysticism was often a focal point for opposition ridicule.

And yet today it is the Venezuelan opposition that is increasingly desperate for miracles, and such supernatural elements are transcending the fringe to become an ever-greater part of the internal conversation. Uncertainty is facilitating the rise of individuals who gain fame by fomenting chaos and false hope, cynically praying on the beleaguered desperation of an exhausted people.

Daniel Lansberg-Rodríguez is a fellow at the Comparative Constitutions Project and is a weekly columnist for the Venezuelan daily newspaper El Universal. His Twitter handle is @Dlansberg.