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The Caudillo’s Gambit
Last Saturday, the Caudillo (strongman leader) of Venezuela decided to devalue its currency, the Bolivar. Last devalued in 2005, Chavez had resisted the move during the last couple of years even as the Bolivar came under increasing pressures, due first to the fall in the price of the country’s largest export, petroleum, and secondly on Chavez’ insistence on proceeding full steam ahead with the governmental interventions that undergirded his Bolivarian (Socialist) Revolution. His actions to deal with the contradictions generated are an object lesson for those in our country that may be nostalgic for a return of our attempt to create a co-operative socialist utopia.
By pegging the official exchange rate at 2.15 bolivars to the dollar in 2005, Chavez had encouraged a surge in imported goods such as cars, electrical and electronic items and consumer goods. Imports surged 98 percent from 2005 to 2008 to $47.6 billion. When the flow of dollars into the national coffers plunged with the drop in oil prices, in a manner reminiscent of our past experience, Chavez tried to stem the outflow of greenbacks by limiting the amount of foreign currency purchased at the official rate through the Central Bank.
This move was immediately countered by the overnight establishment of a black-market for dollars where it traded at some 61% over the official rate. By pushing ordinary people and businesses into the unofficial market, Chavez was in effect precipitating an implicit devaluation. Prices spiked accordingly with inflation reaching 39% in 2008 and 25% in 2009 – the highest in Latin America.
Matters were not helped as the Caudillo continued to aggressively pursue his dream of his Bolivarian Socialist Revolution for the 21st century. The populist policies of massive subsidies on food and other social programmes for the poor, the redistribution of wealth, the nationalisations and expansion of government-run enterprises, the foreign largess to build his international image continued apace.
It should not be surprising to us that cronyism, corruption and mismanagement have become endemic, and combined with the sapping massive inflation have created great dissatisfaction even among his fervent supporters. The latter group has been also very hard hit by power outages, a consequence of the regime’s mismanagement of Venezuela’s hydroelectric generation system.
With this as a background, Chavez introduced a two tiered devaluation of the Bolivar. For what will be defined as “essential imports” – certain foodstuff and medicine, for instance, the official rate will be 2.6 Bolivars to the dollar and for the “non-essential” products, 4.3. The restrictions of currency purchases continue. Not surprisingly, there has been a massive rush to the stores by Venezuelans of all social strata to try to beat the inevitable rise in prices in the near future.
Chavez, called “el Commandente” by his partisans, but evidently wearing his economic hat, is insisting that there should be no rise in prices and has deployed the National Guard, an ill-organised, unprofessional military arm of his regime, to insure that none occurs. He has also threatened to seize businesses that disobey his edict. One wonders who will run these confiscated businesses.
It is widely assumed that Chavez had devalued the currency with legislative elections coming up in September. The doubling of the official rate of exchange should be accompanied by a commensurate increase of dollars received for his oil exports. This should give him plenty of leeway to indulge in additional populist programmes to encourage his supporters to give him their votes.
However, we believe that like our past leaders, Chavez may be misreading the psychology of his traditional poorer supporter. They have become used to a higher standard of living where many of the imported items that have doubled in prices are now seen as necessities and not luxuries.
The power supply is a case in point. When there were no connections, the poor accepted the lack of electricity as their “lot”, but once they were on the grid it was very much resented when outages became the new norm.
And this is what all autocrats, well intentioned or not, have to remember. Once the masses have seen the lights of development you cannot keep them down on the farm of backwardness.
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