By Luis Salas – Aug 26, 2020
Venezuelan economist Luis Salas takes a look at Venezuela’s economic outlook in light of the COVID-19 pandemic.
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 reforms to the regressive tax system. 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 an analysis of the issues at the centre of the debate by independent left-wing economist Luis Salas.
If we stick to the results of the debate sparked by Pasqualina Curcio’s recent articles concerning wages, the conclusion that must be reached is that we are screwed. In one of the best case scenarios, which is the one raised by her, if people’s wages and incomes are to be raised, we must hope firstly for progressive tax reform, secondly that everything in it works well, and then, and only then, wages may be increased.
In the case of those who attack her proposal, the conclusion is even bleaker: it is not even worth waiting. Not only, they say, because the economic war and the blockade have destroyed the country’s capacity to produce wealth, but also because the blockade and the war will persist as long as the Chavista government exists. As such, it must be assumed that as long as there is a Chavista government there will be blockades and economic warfare, and therefore no chance of people recovering decent wages and pensions.
The critics of Curcio’s position certainly don’t say it exactly that way, but it is very strange that the spokespeople of a party which aspires to remain in power and, in fact, faces a parliamentary election in the upcoming months, expose such an unpopular idea. But despite all the anti-Curcio rhetoric, that is what is inevitably concluded.
It’s similar to when some say that wages, which were equivalent to US $400 a month at the end of 2012, were, until recently, able to be paid because oil prices were over US $100. Beyond the fact that the numbers don’t add up (the annual average oil price for the entire Chavez era was US $53 a barrel, sometimes dipping under US $20), the point is that based on that criteria, one cannot understand how the rest of Latin America manages to pay minimum wages which average US $330. This includes several countries with GDPs lower than Venezuela’s, which are less industrialised and do not have even a drop of oil, such as Guatemala, where the monthly minimum wage is equivalent to US $380.
From the outset, it is worth saying that in my opinion things should be as Curcio proposes. Ideally, higher wages should be paid through a more equitable distribution of wealth, which, in the absence of reforming property relations (i.e. a revolution), is achieved through taxation, as is the classic case of the Nordic countries. The problem is knowing if we are in a position to do so, and, no less importantly, if we have time to wait for it given what is coming around the corner.
In short, in the face of the current situation, my impression is that while the position of the anti-Curcio camp commits the sin of orthodox monetarism that not even the most fanatical opposition ideologues advocate (perhaps with the sole exception of [neoliberal] zealots such as [economists Angel] Garcia Banchs or José Guerra), Curcio’s proposal commits the sin of being timid.
Without the short term, there is no long-term
When I say timid, I do not mean that the proposal is not brave. It is, and very much so. It seems, however, not to be situated within the context that we are living through, or only partially at least.
In my view, her proposal needs to be brought into the current situation which is that we do not have the time to wait for the conditions to do what should ideally be done.
The context we are talking about is not just that of monthly minimum wages below US $4 and pensions below US $2 or of growing inequality, all of which is already dramatic enough. It is a context where we are in the midst of the most severe contraction seen in at least the last hundred years of our history.
The Economic Commission for Latin America and the Caribbean (CEPAL) estimates our GDP will contract by 26 percent this year compared to 2019. That’s almost three times the 9.1 percent contraction expected across the region and is exactly twice as much as in Peru, the second worst contraction in South America (13 percent). It is also 5.3 times worse than the contraction of the entire global economy (4.9 percent). If we work through the numbers since 2014, which was the first year of the current regressive loop that by the end of this 2020 will total seven years of economic free fall, we can see that we currently have an economy about one-third the size of what it was in 2012-2013, the last years when growth was registered.
Thirty years of annual GDP variation in percentage in Venezuela. (Central Bank of Venezuela/CEPAL/IMF / Luis Salas)
Also looking at daily COVID-19 cases, we can observe that August has seen an accelerated phase of around 1000 cases per day, and things seemingly more difficult for September. We’re practically there already, and if you ask me, we already are in fact, with only the delay of the daily official reports failing to reflect it.
With this scenario, extreme pressure will be placed on our delicate healthcare system, meaning that we could see situations similar to those seen recently in [Venezuela’s second largest city and major COVID-19 hotspot] Maracaibo on a national scale, or at least in the Caracas capital region, not to mention other sectors.
This also means that (1) children, adolescents and young people will remain at home as there will not be conditions to return to face-to-face schooling next year, and (2) whether one likes it or not, the lockdown will soon have to be tightened (truly so, not as it is right now), which means further restricting labour activities.
Last but not least, while the political confrontation is momentarily suspended, tensions are most likely to be stoked as two electoral processes (the parliamentary election in our country and the presidential race in the United States) approach.
A sector of the opposition has already stated that they will not participate in the vote, which is already attracting public attention. Concerning the US presidential election, there is not much that can be said that is not already known: Venezuela is always a focus for the US government and never for the better. Even earlier this month, Elliott Abrams, the White House’s special envoy for Venezuela, said that the Trump administration is working hard to keep President Maduro “from surviving this year.”
Everything about Curcio’s proposal is fine, except for the detail that if it works it will do so in the medium or long term, a timeframe which most of the country simply does not have, and in this sense there are more expeditious things that can be done which are fully justified by the emergency. If we are, as it is said, living through a new reality, which applies to everything, economic policy cannot be the exception. Among other things, certain ideas or prejudices that do nothing must be abandoned in order to move forward.
Can a state be bankrupt?
The first idea which should be cast aside in economic policy in line with the new reality is that the Venezuelan state cannot pay better wages because it is bankrupt. To say that a state has no resources to finance its expenses is simply meaningless.
At this juncture, to claim that the Venezuelan state cannot pay better wages to its workers and pensioners because the blockade has cut off foreign currency income is only a half-truth. It is true that the blockade (to which we must now add the global crisis) cuts off foreign currency sources. But this is not a valid reason to pay the wages and pensions that are being paid.
It is not valid for two reasons. The first and most obvious is that in Venezuela, until further notice, wages are paid in bolivars, not in foreign currency. Transactional dollarisation may have come a long way, but the bolivar continues to circulate, people continue to accept it, and, as I said, most are still paid either totally or mostly in bolivars.
On the other hand, though closely related to the above, states with monetary sovereignty can do something when they are in a bind that the rest of us cannot: print their own money. That is the very simple reason why, and by definition, states never go bankrupt. The same idea explains why, across the globe, states become the lenders of last resort when there are crises, ultimately bailing out everyone. Let me explain.
In the case of a family who for some reason loses or sees its income radically decrease, it is certainly advisable to review its expenses, cutting back or eliminating those that are not essential in order to afford those that are. Suppose that family had hired someone to clean. If you no longer have enough income, and to the extent that that is not an essential expense, you will no longer be able to keep paying them, unless that person agrees to work for free or cut their salary. This is what in the old days was called tightening the belt. Ideally and what everyone aspires to, is that such an adjustment is temporary, so that when one finds better employment or income, one can recover. In any case, whatever happens, the reasoning and the solution are perfectly logical: if the revenue falls, the expenses must conform to the new budgetary reality.
Now, if that tight fiscal situation hits a state that does not even have the possibility of financing itself by taking out a loan (as is the case with ours due to the blockade) but which has monetary sovereignty to the extent that it has its own currency and a central bank (as is ours, we have not one but two sovereign currencies and the Central Bank of Venezuela), assume that bankruptcy is not an option. That state will always be able to apply a monetary policy, which among other things includes the possibility of issuing more bills.
The current global pandemic situation is the best example of this. It is estimated that in the midst of this “great lockdown” central banks around the world have issued roughly the equivalent of 10 percent of the world’s GDP in “un-backed” money in order to finance businesses and households, as well as their own states’ operations (healthcare systems, education, security, etc.). It is even a practice promoted by the IMF, which recommends monetising that issuance in the sense of turning it into unilateral transfers or subsidies and not into debt. Of course, it’s the opposite of what the IMF said up until February, but before February there was no pandemic and world trade was not paralysed.
In the case of Venezuela, not only has that not happened, but the opposite is true. The Venezuelan state has not one but two sovereign currencies and a central bank. It can always be said that there are the Homeland Card bonuses, but in substance, and in the best case scenario, the amounts of the directly allocated bonuses (totaling several bonuses for members of the same family) amounts to about US $15 per month. That is almost nothing taking into account current prices.
Of course, as it should be obvious at this stage, the point is to get away from the idea that the Venezuelan state cannot pay better wages because it is broke as it has no income sources. We should also forget about the idea that it cannot issue money if it does not have the “backing” for it in reserves. This is the famous issue of “inorganic” money, the hallmark of localised monetarism, which underlies the substance of this interesting discussion (justifiably, it is worth saying) due to the fear of inflation.
Featured image: A line for acquiring food, Caracas. (Escritos desde la cuarentena)
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.