Monkey Cage

Why would a president wreck the

economy before an election?
By Dorothy Kronick December 4, 2015

After15yearsdominatedbycrushingelectoraldefeats,theVenezuelanoppositionissettowinthepopularvoteinthisSundayscongressionalelections.Thecausesofthisreversal
areobvious:widespreadfoodshortages,highinflation,risingpovertyinshort,theworstrecessioninVenezuelaonrecord.
Whatslessobviousiswhy,afteralongandlucrativeoilboom,Venezuelafindsitselfsodeepincrisis.Certainly,theoilbustispartlyresponsible.Since2012,Venezuelasoilexport
earningshavefallenbymorethanhalf,from$94billionto$41billionthelargestthreeyeardropinVenezuelasoilproducinghistory.
Butthatisntthewholestory.Acrisisofthismagnitudewasavoidable,andnotjustavoidableinthefarfetched,ifVenezuelawereNorway,iftheoilwindfallhadbeenbetter
managedallalongsense.PresidentNicolsMadurocouldhaveheadedoffmuchofthecrisiseightortwelveortwentyfourmonthsago,evenasthedownturnbegan,withthe
congressionalelectioninsight.
Sowhydidnthe?
Toseewhy,considertheneededpolicychange.Venezuelahaslongsubsidizedimportsbyallowingimporterstobuydollarsonthecheap.Thismeantthat,foryears,Venezuelan
importerscouldpurchase$10fromthegovernmentforabout$7worthofBolivars(theVenezuelancurrency).Theimportersthenhadtospendtheirbargainbasement$10on
foreigngoods,bringthegoodstoVenezuela,andsellthemtoVenezuelanconsumersfor,say,$9themaximumpriceallowedbythegovernment.Thiswasprobablynotthemost
efficientwayforthegovernmenttohand$2toimportingfirmsand$1toconsumers.ButunderformerVenezuelanpresidentHugoChvez,thesystemwasatleastminimally
functional.
UnderMaduro,ChvezssuccessorandthecurrentpresidentofVenezuela,thatminimalfunctionalitybrokedown.Insteadofselling$10for$7,Madurosgovernmentnowsells$10
foraboutadimesworthofBolivarsandthencapstheretailpriceofa$10importatfifteencents.Thisgivesanimportertwooptions.Ifshefollowstherules,shespendsadime
foraproductshecansellfor15cents.Great.Ifshecheats,shespendsadimetobuy$10,neverimportsanythingandkeepsthe$9.90.Sure,somepeoplecheatedundertheold
system:thatsameimportercouldhavebought$10for$7andneverimportedanything,pocketingthe$3profitinsteadofthe$2shedmakebyfollowingtherules.Butcheatingis
costlyand,asitturnsout,manymoreimporterswillbreaktherulesforanextra9,850percentprofitthanforanextra14percent.EconomistFranciscoRodrguezestimatesthat,of
approximately$40billiondollarsMadurosoldtoimportersoverthepastyear,only$20billiontranslatedintogoodssolddomestically.Therestwasstolen.

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Theseextremepriceandcurrencyexchangecontrolscontributenotonlytoshortagesbutalsotorunawayinflation.Betweentheoilpricefreefallandtheimportsubsidy,Maduros
governmentfounditselfrunningoutofmoney.Todealwiththis,itprintedmore.Printingmoneyhelpedforawhile.Butatsomepoint,printingmoneypushesuppricesfasterthan
itbooststhegovernmentsspendingpower.Thisrarelyhappensnormally,ifthegovernmentprintsadollar,pricesgoupbylessthanadollar,andthatsgoodforthegovernment
budget.TheMadurogovernment,incontrast,hasprintedmoneysofastthatrealgovernmentspendinghasactuallybeendecliningformostof2015.
TheVenezuelanpublicsensesthatMadurosprogramofimportsubsidiesandpricecontrolsisntworking.Inarecentpoll,only13percentofrespondentssaidthattheimport
subsidybenefitssociety,andthemajority(57percent)saidtheydbeaswellofforbetteroffifthegovernmentweretodoublepricesandeliminateshortages.HugoChvez
understoodthis,too,whichiswhyhewasalwayscarefultolimitthegapbetweencontrolledpricesandmarketprices.Madurospartywouldalmostcertainlyhavewonmoreseatsin
thisSundayselectionifhehadfollowedChvezslead.Instead,Madurobrokewithelcomandanteagainsttherulingpartyselectoralinterests.
ExpertsonVenezuelanpoliticssometimeschalkthisuptoignorance,citingabreakdownofrationalityandmagicalthinking.Butfollowingthemoneypointselsewhere:tothe
businesspeople,militaryofficers,andotherimportersmakingbillionsbybuying$10foradime.ThesepowerfuleliteshaveabigstakeinMadurosdysfunctionalexchangeand
pricecontrols.
Onemightaskwhythearbitragelobbywoulddoubledownonapolicythatleadstoalossatthepollssurelytheyunderstoodthatanoppositionvictorywouldlikelyshutdownthe
arbitrageparty.Mayberentsweresoastronomicaloverthelastcoupleofyearsthattheywereworthmorethanmoderategainsoveralongerperiod.Maybethearbitrageursfaceda
coordinationproblemtogethertheywouldhavepreferredamoresensiblepolicy,butnosinglerentistawantedtoadvocateforchangeonherown.Ormaybetheydidntthink
anythingtheycoulddowouldsavethegovernmentsmajorityintheNationalAssemblyonceoilpricestanked,inwhichcasetheirbeststrategywastogetwhilethegettingwasgood.

Inanycase,thearbitragelobbysgainswillbeMaduroslossthisSunday.

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