A few months ago, a debate took place between Ricardo Hausmann and Francisco Rodriguez about Venezuela’s economic problems. It has only been on the internet for a few weeks. They both oppose Chavismo, the left wing movement led by Hugo Chavez who first took office in 1999. The movement has been led by President Nicolas Maduro since Chavez died in 2013. It was an informative debate which, given the Venezuelan opposition’s tactics and priorities, took place in English at an elite university in the USA (Spanish subtitles available).

Hausmann made quite a splash in September of 2014 when he co-authored a piece entitled “Should Venezuela Default?” It provoked a barrage of international news articles and commentary that claimed Venezuela was on the brink of defaulting on its foreign debt. The default hype started before oil prices unexpectedly dropped by half. Venezuela relies on oil exports for 95 percent of its foreign exchange. That no default took place despite the plunge in oil prices illustrates how ridiculous the default claims always were, not that the corporate press will learn any lessons from it. It is much to Francisco Rodriguez’s credit, and a big boost to his credibility, that he dismissed the default hype in September when it began.

Revealingly, that article by Hausmann and the even word “default” were not mentioned until the last few minutes of an hour and a half long debate. When it finally came up, Hausmann did not argue that Venezuela could not pay its foreign debt. Instead he said that it was “morally disturbing” that the government would “default” on “commitments” to its people in order to pay bondholders. Francisco Rodriguez succinctly demolished the notion that there is any “moral dilemma” facing the government.

Venezuela has tens of billions of dollars of assets abroad (he “conservatively” estimates it has combined liquid reverses and assets worth $76 billion). If it defaulted on foreign debt, Venezuela would risk having its assets abroad seized, having oil shipments to customers seized, and having payments for those shipments seized. It would also risk having customers for oil demand lower prices to offset the risk of having shipments seized. Rodriguez criticized Hausmann for not making any attempt to answer the question posed in the title of the piece “Should Venezuela default?” No, the costs to Venezuelans would vastly outweigh the benefits. [1]

Spreading misinformation and panic drives up borrowing costs and could encourage fringe elements of the military to use it as a pretext for a coup attempt. That was probably the objective of Hausmann piece and the media’s enthusiastic promotion of it. [2] Several years ago, he bent over backward trying to “prove” that the opposition’s landslide defeat in a 2004 recall referendum against Hugo Chavez was the result of fraud. These are things that Rodriguez did not mention in his, nevertheless devastating, rebuttal of Hausmann.

During the debate, Hausmann said that Venezuelan opposition is mercilessly “persecuted”. The Venezuelan government, he says, does not care about achieving any kind of “consensus” with the opposition because “they have prisons”. Hausmann began the debate by expressing solidarity with Leopoldo Lopez, who participated in a military coup in 2002 that briefly ousted Hugo Chavez. Part of the opposition remains “golpista” (in favor of a coup). Prominent opposition leaders like Leopoldo Lopez, current Miranda governor Henrique Capriles and Maria Corina Machado were all solidly behind the coup which briefly installed a dictatorship. Reuters recently did an important expose on some of the shadowy golpista elements of the opposition, but did not mention that opposition leaders who are still prominent today backed the 2002 coup.

Rodriguez implicitly disagreed with Hausmann’s characterization of Venezuela. Rodriguez is very confident (way over-confident as I’d argue) that the opposition will win this years’ parliamentary elections. He also thinks it will probably oust Maduro in a recall referendum. In fact, Rodriguez seems concerned that the opposition will soon have to solve Venezuela’s economic problems or quickly lose power: “Let’s fix relative prices” he said, referring to the exchange rate system, “Let’s go for the part of the problem that gives us the greatest return because we are talking about years in which it will be very difficult to form consensus around decisions.”

Consensus is very important to Rodriguez because he, unlike Hausmann, accepts that at least half of Venezuelans have voted Chavista for the past 15 years. I believe Rodriguez is sincere in saying “I think it is impossible to build Venezuela without that half”.

Golpista elements of the opposition are more than willing to brutally repress and discard that half as they did during the 2002 coup. The word “coup” was never spoken during this debate. However, Rodriguez may well recall how quickly the 2002 coup was defeated by a massive popular uprising among the poor. If Rodriguez is addressing an opposition assumption that an electoral victory (or another coup) will allow it to easily reset the clock to 1989, the year of the Caracazo massacre, then his remark is astute.

In another implicit rejection of Hausmann, Rodriguez argues that fear of public opinion has prevented the Maduro government from “fixing relative prices”.

An overvalued currency, Rodriguez estimates, costs Venezuela about 10% of GDP by massively diverting dollars assigned for imports into illegal capital flight and currency speculation. The government therefore rations dollars and many businesses either go without them or get them at exorbitant rates on the black market. That drives inflation and shortages - and inflation also drives currency speculation as it encourages Venezuelans to dump local currency in exchange for dollars. Subsidized gasoline, Rodriguez says, costs the government additional 7% of GDP. [3] He says the government must stop trying to do “redistributionist policy” through the use of an overvalued currency and through the very indiscriminate subsidy of cheap gasoline for all Venezuelans.

But devaluation and gasoline price increases are not measures for which Venezuelans (or people anywhere) generally clamor - quite the contrary. If the government fails to balance these measures with targeted and well administered subsidies for the poor, as Rodriguez also suggests, then there will be a huge political price to pay. It’s not hard to see why the government would balk at the political risk inherent to these suggestions even though some economists on the Left have a very similar analysis.

Rodriguez said that “even if you characterize Venezuela as a dictatorship, dictatorships don’t generally survive this type of economic crisis”. Unemployment was never mentioned during the debate. Despite the pain caused by very high inflation, unemployment in Venezuela has, even by IMF estimates, remained low. Seventy percent inflation is not something any credible economist would dismiss. However, Venezuela’s current recession is nowhere close to being its worst (as measured by lost output). The worst recession was caused by the opposition’s 2002 coup and subsequent “oil strike” which also caused unemployment to reach 18%.

If the US government would stop unconditionally backing golpistas then the international press (and some well-funded NGOs) would follow suit. Venezuela would finally have a right wing opposition that isn’t looking to seize power through violence. The “consensus” Rodriguez would like to see, or at least much more constructive dialog, might be possible.

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[1] It is not always the case that defaulting on foreign debt is a bad idea. Argentina’s default of December 2001 is perhaps the classic example of a default where the benefits greatly outweighed the costs.

[2] Reuters reported “Fears of a possible default had heightened, with bond yields spiking, after the publication of an article by two pro-opposition economists in the last month that suggested an orderly default could ultimately help the OPEC country's slumping economy.”

[3] This estimate is uncertain because it depends on the exchange used to calculate it, but the government could certainly save a few billion dollars per year if (a big “if”) it could efficiently target the gasoline subsidy.