By Luis Salas – Sep 8, 2020
Venezuelan economist Luis Salas continues his study of Venezuela’s current economic outlook.
Pro-government economist Pascualina Curcio recently sparked a debate with a series of articles looking at possible ways to increase wages in Venezuela. In general terms, she argued that this could be achieved by redistributing wealth, specifically by reducing allowed profit margins and by progressive tax reforms. One of Curcio’s principal critics is former Foreign Commerce Minister Jesus Farias, who has argued that her position is “ferocious and absurd” given the current levels of public investment, tax breaks, and the US-led financial blockade against the country.
The following is the second part of an analysis of the issues at the centre of the debate by independent left-wing economist Luis Salas. To read part I, in which Salas examined both sides of the argument and concluded that tax reform was the ideal but too slow a policy to address the current economic emergency, click here.
Let us review the basics of Curcio’s article, in which the harrowing problem of the precariousness and income inequality of the Venezuelan majority is clearly laid out.
At the official August 7, 2020 exchange rate, the monthly legal minimum income (minimum wage plus food bonus) stood at US $2.80. The minimum wage without bonuses, as well as the state pension, were $1.40. This is the world’s lowest minimum wage, including African countries and others facing blockades. In Cuba, for example, the minimum wage is about US $15 per month.
Of course, one can argue that most Venezuelans earn above this amount, and that between one thing and another people get by. Generally speaking, this may be true, but at least three points should be made concerning this argument.
The first is that it should be demonstrated with indicators, which none of those who defend this hypothesis do. The second is that such widespread “making do” occurs in conditions with widespread if not extreme inequality, which is what usually happens in “self-regulated” markets. The third is that this position is yet another way to romanticise precariousness. This tendency has recently come into fashion among some “influencers,” many of whom do not have to endure the workplace conditions about which they write, and which they think others should accept with discipline because of the times we are living.
Nonetheless, to be very, very generous, let us suppose that an average Venezuelan family earns about US $50 a month between one thing and another. This supposition excludes, of course, the old and newly rich as well as many who are closer to the minimum income levels already mentioned.
With that being so, one can see that a US $50 monthly income is 6.6 times below the regional [average] minimum wage of US $330. It is also equivalent to $1.60 a day, three cents above the global standard for extreme poverty according to the World Bank and the well-known millennium goals.
Now, what is not so clear to me in the debate relates to the “new economic reality” in which such precariousness and inequality operate. I believe that this new economic reality leaves us no room to carry out [Curcio’s] proposal: apply tax reforms first to then reap improved revenues. It would be ideal, without a doubt, but the point is that time does not allow it.
Additionally, besides being underpaid, we have other issues that are as or more serious. Let us see.
Devalued to the max
Many may not remember it now, but on January 1, 2020, the official exchange rate was 48,709 bolivars (BsS) to US $1. By August 7 it was 288,038 BsS to US $1, which is a variation of 470.8 percent in just eight months.
Despite being used to the bizarre economic data that characterises our times, we must be aware that there is no other case of such extreme devaluation on the planet, including countries with a blockade or at war.
If we want to see it over a shorter time period, we may look to March 13 when the COVID-19 lockdown began. On that day the official exchange rate was 74,081 BsS per US $1. In other words, since then the variation is 275.3 percent. The parallel exchange rate has already surpassed 300,000 BsS to US $1 as we speak, and it will surely continue the upwards trend in the coming days. For the sake of our argument, we will stick to the official rate.
In terms of inflation, the accumulated rate for 2020 is 295.9 percent according to Venezuela’s Central Bank (BCV). This is through May, which is the last official data.
To get an idea, the second country with the highest inflation in the world after Venezuela is Argentina, which between January and June of this year had an accumulated rate of 13.6 percent according to the country’s Central Bank (BCRA). As such, we can see that Argentina’s rate is 27.7 times below ours.
As if that were not enough, everything indicates that we will close this year with a GDP contraction greater than that of 2019.
Of course, the 2019 contraction is not officially known as the government has not published it, but it is estimated to be in the order of -25 percent. The Economic Commission for Latin America and the Caribbean (CEPAL) projects a contraction of -26 percent for 2020, almost three times above the regional average and 5.3 times the global average.
In other words, not only do we have the lowest wages on the planet, the highest inflation rate and the corresponding devaluation, but we also have the most severe economic downturn. When the figures are published we will see with precision, but everything indicates that by the end of 2020 we will have an economy between a quarter and a fifth of what it was in 2012-13.
There is no recent equivalent of such a severe collapse, with the obvious exception of Libya and perhaps Syria, both devastated by mercenary wars and invasions.
The external strangulation imposed by the blockade and the sanctions is the icing on the cake, a strangulation that is reinforced by the crisis generated by COVID-19. That is, not only can we not trade or finance ourselves externally because we are blocked, but world trade itself is in a critical condition and it is not showing signs of improvement in the short term.
The best example is regarding remittances to Venezuela, which have saved more than one life and are now estimated to have contracted by more than 50 percent. This contraction is basically because several of the countries from which people sent them are among the most affected by coronavirus (United States, Chile, Ecuador, Peru, Colombia, Spain, etc.).
The same is true of so-called non-traditional exports which used to involve herculean efforts to sell. Now it is futile to consider the option, at least for some time.
Trapped in a dead-end?
It is precisely the latter, the blockade, etc., which is used by those who claim that proposals to increase wages and incomes (like Curcio’s) are populist and demagogic. They tell us, simply and plainly, that there are no reserves left.
I said in the first part of this text that in my view such an assertion was only a half-truth: there are financing problems caused by the external restriction imposed by the blockade, but the part about why we are doomed to live on the lowest wages in the world doesn’t add up.
As I partly explained, this affirmation would be true in Ecuador or some other dollarized economy because they do not have monetary sovereignty and must adjust their circulation to the dollars that come in from abroad (their central banks cannot issue dollars, only the US Federal Reserve can).
Constitutionally, Venezuela has a central bank and a currency of its own (articles 318-320 of the constitution) that people accept to use (in fact two currencies if we add the Petro cryptocurrency, with its ambiguous status), so we actually have monetary sovereignty. The state of both sovereignty and currency are severely troubled largely because of the omissions and actions of the BCV. Nonetheless, we have sovereignty and our own currency. As long as that is the case, we must defend them not so much as a matter of principle (which we also should do), but because it is the only thing that can help us in this conjuncture. That is what I’m going to try to prove.
Against shock therapy
As I said elsewhere, COVID-19 has not caused any crises in and of itself. It has merely acted as what in mathematics is called the “first derivative.” in other worlds, instead of causing a crisis, it has accelerated a pre-existing one.
On the basis of this pre-existent condition, the treatment cannot be conventional. It cannot, for example, be the fiscal austerity recipe underway. By fiscal austerity recipe I refer to the BCV’s policy of contracting the supply of bolivars as much as possible, which it does through legal mechanisms but also through restricting the population’s purchasing power. That was harmful ennough without COVID, but with it, it is more so because the flow of foreign currencies from remittances and other dollarised incomes, which to some extent disguised the crisis and compensated, is no longer here.
The small dollarised consumer bubble of late last year, which led some to preach about the glorious future of the economy by presenting still lifes as evidence, was the most obvious symptom of such “compensation.” However, COVID-19 accelerated its implosion. With the “escape valve” shut, the pressure is growing to a dizzying uptick in the parallel dollar and the official rate which follows.
Given the restricted supply (and therefore high demand), the increasingly necessary foreign bills, the transnational dollarisation and the forced withdrawal of the bolivar currency allow the economy to advance. Likewise, the circulation speed and subsequent value of existing dollars in the economy are increasing. In this situation, the BCV announcing that it will increase dollar supply to rein in exchange rates will have no great effect. It may slow down the curve for a few days or even push it back down, but we are talking about a fleeting, precarious impact. This policy is condemned to break like earlier failed attempts, only surely faster than before.
Thus, one can see that the international situation will not improve in the short term (including the fact that the blockade is not going to be lifted) and that nothing internally shows any real signs of improvement thus far, but rather the opposite. As such, a way should be sought to revive the economy if not in the path of growth, which is a more complex problem, at least on the path to breaking the paralysation and contraction which leave large majorities outside minimum living standards. Until further notice, and until someone proves it otherwise, that can only be done in the very short term (which is the only one we have) by injecting money (bolivars fundamentally) into the national economy to activate aggregate demand and, as such, stimulate the productive apparatus.
Of course, this is not the only thing that should be done, as it does not solve all our problems on its own and it will, of course, create other new problems and pressures. But, to continue abusing fashionable medical metaphors, it is like when someone arrives to an emergency room in a coma or with a heart attack. The first thing to do is to reactivate the person with insulin or CPR, otherwise there will be nothing more that can be done.
Well, the Venezuelan economy is in that state, and what we are looking at requires such an emergency maneuver.
The million dollar question: does putting more money into circulation not generate more inflation?
Let us work through this in parts.
Emitting money has become a demonised practice in recent years basically for two reasons. The first is the monetarist and neoliberal prejudice, which has become part of common sense. According to this thesis, money printing generates inflation. The second is the crypto-prophet’s propaganda, which mixes apples with oranges and sees printing and central banks as the enemies. Each side, which clings to their causes and dogmas, has managed to position the infamous “inorganic money” as the culprit of all our ills.
While we are aware that these are complex issues that cannot be solved in one sitting, let’s make the effort to clarify the basics.
The first thing to clarify is that if inorganic money means that which is issued without any backing, then it is a dogma demodé, something along the lines of the flares that were used until the 70s. In other words, saying you can’t emit money without backing it with national reserves is going back to the gold standard convention adopted in the Bretton Woods Agreements. In practice, however, this convention lasted until the 1970s, when it became clear that due to the volume of world trade, the dollar could no longer be anchored to the gold standard, as there was not enough of the latter for such a task. Faced with the disjunction involved in stagnating international trade and financial flows, the US government, pragmatic as it is, solved the problem by declaring the inconvertibility between the dollar and gold on August 15, 1971 (49 years ago). The US began, as they say, to print without backing, and other countries began to do the same following the logic of survival. It is worth pointing out that this recommendation was given by Milton Friedman (yes, the guru of neoliberalism and the author of the famous phrase “inflation is always a monetary problem of excess money”), affirming that the dollar was valued not by accumulated gold reserves, but by the backing offered by the United States government.
On the other hand, and on an even more specific level, there are hundreds of real-life examples that show that monetary emission does not necessarily cause inflation, and that there may be inflation with restricted monetary emissions. In fact, there can be multiple combinations: cases where emission generates inflation (for example what happened with the December 2019 Petro bonus emission in Venezuela, when the bonuses were exchanged to bolivars between the end of last year and the beginning of this one). But there are cases where, despite huge emissions, prices have not been affected. Let’s look at a couple of those cases during the Covid-19 pandemic.
The first is the case of the United States, whose government and Federal Reserve are breaking all monetary emission records. Since COVID-19 became a problem, the Fed and the government have injected more than US $3 trillion into the country’s economy, which is clearly the largest stimulus plan in history.
US Federal Reserve balance sheet for 2020 in millions of US dollars. (Federal Reserve Bank of St Louis)
The plan, called “Cares” includes US $250 billion for direct payments to citizens with salaries below US $75,000. Workers earning less than that amount receive US $1,200, plus an additional US $500 for each child under 17. Cares also reserves US $350 billion for small business loans, as well as another US $250 billion to extend unemployment insurance benefits.
In this graph from the Fed, one may see the size of the injection not only evidenced by the dizzying growth in enlarged liquidity (M3), but also by the steep drop in interest rates (the cost of money), which favours monetary expansion by lowering credit.
Now, according to the myth, greater monetary issuance should lead to skyrocketing inflation and prices in the United States. However, beyond specific products going up due to the limited supply caused by the quarantine (meat, for example) or pandemic speculation (masks, gel, some medicines, etc.), the price index shows a very different behaviour from the expected economic massacre which monetarists predicted. In fact, for three months (March, April and May), the US price index was negative or zero.
So striking is the case of the US’ non-compliance with the monetarist rules that even the recognised orthodox and mainstream outlet Forbes recently published an article signed by one of its leading columnists with the eloquent title Does inflation still exist? Does anyone really know?
Alberto Fernandez’s liquid asset ‘bomb’
At the start of the COVID-19 emergency in Argentina, Alberto Fernández’s Peronist government took a number of measures to deal with it. Amongst them, he was to coordinate with the Central Bank of the Argentine Republic (BCRA) to inject money into the economy for various areas and sectors, but above all aimed at tackling the pandemic.
This is the largest emission in Argentina in thirty years, which sparked a controversy of catastrophic forecasts regarding the “inevitable” inflationary impact. However, reality has not validated monetarist theory in this case as shown by the following sheet presenting the BCRA’s own emission (the so-called monetary base) and comparing its monthly variations with monthly inflation. Note that at the time of the strongest monetary injections by the government/BCRA, inflation not only did not rise, but it actually fell.
This is particularly the case in food and non-alcoholic drinks, as well as medicine, all of which had very moderate variations ranging from 1 to 2.2 percent in June, respectively. In fact, the general index is affected more by clothes and footwear (6.7 percent).
In addition, it is worth noting the fact that we are talking about the economy with the second highest inflation in the world.
What about Venezuela?
As is often the case, when it comes to talking about Venezuela things are more complex. I will analyse our case more in the next (and last) part of this series, but for the time being, I wish to leave the following remarks on the table.
It is important to notice that while in the United States and Argentina strong monetary emission not only did not generate inflation but generated price drops instead, in Venezuela inflation tends to go above emission levels. Let us look at 2019 as an example.
Last year, just as the BCV’s severe monetary constraint began operating, annual monetary liquidity growth (M2) was around 4,995 percent. That’s a lot even for the hyper-inflated Venezuelan palate. The point is that in the same year, inflation was almost twice that amount (1.9 times, to be exact). But if we look at the earlier year when inflation broke all the records and “the BCV machine was turned on” as monetarists like to say, the situation was exactly the same, in more bizarre magnitudes but with the same tendency:
In this case, inflation was 2.05 times higher than monetary emission.
In fact, in the course of our inflationary rally that started in 2013, this has been demonstrated by Curcio’s works, including Hyperinflation: An Imperialist Weapon (2018), examining not only for the Venezuelan case but other countries as well. Several years before, in 2015, in a joint work between José Gregorio Piña and myself, the same thesis was presented for Venezuela, while we toured through the relevant theoretical debate from the classics onwards.
The thing is that the monetary topic regarding wages, prices, production and consumption is much more complex than what the current monetarist consensus between the two sides claims. This would surely not be a problem if it were only a theoretical debate, but it begins to matter when the theoretical debate becomes misdiagnosed, and that has practical consequences on the economy and on the lives of people. We have suffered enough from that, and with one of these options we are going to kill the patient and there’s nothing more to do afterwards.
Featured image: A Venezuelan child looks out the window of a bus. (AP)
Luis Salas is an economist and sociologist, as well as a lecturer and researcher at the Bolivarian University of Venezuela (UBV). He has also served as the minister of productive economy and economic vice president.