It is a point of honour for the Venezuelan government that despite the sharp plunge in oil prices and acute shortages of goods, President Nicolas Maduro has ruled out austerity measures.

In a recent TV interview with former vice president Jose Vicente Rangel, Venezuelan Central Bank president Nelson Merentes explained why, saying: “Do you remember what happened on February 27, 1989?”

On that day, huge nationwide disturbances broke out after the government of Carlos Andres Perez announced sharp price hikes at the behest of the International Monetary Fund. Although brutally repressed, this event, known as El Caraazzo set the stage for the 1992 military uprising led by Hugo Chavez.

The memory of February 27, sparked by the decision of the formerly left-leaning Perez to come to terms with powerful economic groups as a way out of pressing economic difficulties, undoubtedly weighs on Maduro’s response to current problems.

Post-Chavez

Since assuming the presidency after Chavez’s death in March 2013, Maduro has faced intense economic and political problems.

In the first place, he inherited a highly depreciated bolivar, the local currency, which began to lose value in late 2012. At the time, immediate government action was required, but Chavez was undoubtedly suffering intense pain from the cancer that killed him.

Any attempt by Maduro to devaluate the official exchange rate once he assumed the presidency would have run the risk of setting off an inflationary spiral.

Also, throughout Maduro’s two years as president, opposition forces have engaged in many disruptive and sometimes violent protests with dozens of fatalities, including 10 security force officers. These have been abetted by an international media that minimises the gravity of their actions, and the US government, which has imposed sanctions on Venezuelan officials for alleged human rights violations.

In March, US President Barack Obama issued an executive order that declared Venezuela “an extraordinary threat” to US “national security”. This legally paved the way for economic sanctions.

In an economic policy announcement on February 10, Maduro took the middle ground between regulated prices completely out of sync with the market, or even production costs, and prices pegged to market conditions.

On the one hand, recognising economic reality, the government legalised and regulated the open market for the purchase of foreign currency, transactions that had previously constituted a black market.

On the other hand, in a deviation from market economics, Maduro kept the exchange rate at 6.3 bolivars to the US dollar for the import of basic commodities. This rate was 27 times less than the open market's.

The ever-widening disparity between the official and unofficial exchange rates over the past two-and-a-half years has generated acute problems of money laundering, contraband, hoarding and price speculation.

Price controls

The government also sets artificially low prices for basic commodities. This contributes to the problem of contraband and a black market for scarce goods. The most blatant example is the artificially low petrol price, which is the cheapest in the world.

The policy of subsidised prices undermines the viability of state companies that are forced to sell below cost. In contrast, private firms sometimes get around price regulation by altering the content of products and marketing them as non-regulated.

The recent law allowing for an open market for foreign currencies is designed to check speculation. The main service that quoted the price of the dollar on the black market was the vocally anti-Chavista online “Dollar Today”, which operates out of Miami. This indicates that the bolivar’s rapid depreciation may have been at least partly politically motivated.

A second motive behind the new measure was promoting exports by allowing enterprises to repatriate profits legally at the open market rate.

The government has also avoided extremes in enforcing laws banning hoarding, contraband and price speculation. On the one hand, through the Just Price Superintendence (SUNDDE), it has fined, confiscated merchandise from, and in some cases occupied, hundreds of commercial establishments, including large ones.

In recent months, the government took over eight warehouses of Herrera CA, exclusive distributors of Kellogg’s, Nestle, General Mills, Procter and Gamble and Pfizer products. Executives from leading oligarchic pharmacy FARMATODO were also detained.

Large companies that engage in hoarding have more to lose than smaller ones, and thus political motives most likely enter into play. Their hoarding practices and probable complicity in the black market and contraband lend credibility to the government’s claim that powerful groups are engaged in an “economic war”.

On the other hand, the government has accepted the insistence of the nation’s chamber of commerce, FEDECAMARAS, that it proceed according to established legal channels.

No drastic measures

Consequently, the government has ruled out a fast track, which may be justified in emergency situations. It has also refrained from publicising the judicial proceedings against accused businesspeople.

Maduro says political conditions are not suitable to implement drastic economic measures that an aggressive opposition could exploit. Maduro also told Vicente Rangel that the issue of gasoline prices “is always a delicate one with regard to the sensibilities of Venezuelans”. He said that given the existence of “mafia speculators in Venezuela”, raising petrol prices “may add fire to the flame”.

Leftist hardliners ignore the importance of the market, and thus write off the black market as the creation of speculators that could be eliminated by efficient government policing.

At the opposite extreme, some pro-Chavista economists call for discontinuing the 6.3 exchange rate and pegging the official rate close to the open market's. This plan, while logical in the abstract, ignores its detrimental social effects.

Eliminating highly subsidised prices — made possible by an overvalued currency for importing basic products — to stimulate production and commerce will disproportionately hit the popular sectors.

Although the Chavistas have won elections held during the past two-and-a half years, solving the problem of scarcities is an urgent political imperative.

According to respected polling firm Hinterlaces, the nation’s pressing economic problems are the principle source of concern for eight out of 10 Venezuelans. Pro-opposition polling company Datanalisis reports that 51% of government supporters consider the country's situation as “negative.”

Hinterlaces president Oscar Schemel says the main Chavista challenge does not come from the opposition, which lacks a viable program, but rather undecided voters and the likelihood of a “punishment vote” against it.

National Assembly elections are slated for the end of the year. Opposition leaders insist a triumph in these elections will pave the way for regime change, and that the scarcity of goods guarantees such an outcome.

The government has denounced the radical opposition’s plans to turn agitation on the long, slow-moving lines outside of stores into violent disruptions leading to regime change.

At the start of the year, federal district head Ernesto Villegas warned Chavistas of provocations, saying “when you are online and see an infiltrator calling on people to loot, respond with the symbol of peace”.

The danger of such disruptions comes from an opposition that for more than a decade has kept open the option of a non-democratic seizure of power. In February, Maduro presented evidence of an alleged coup plot for which it jailed the Greater Caracas mayor Antonio Ledezma.

Uncharted waters

Venezuela finds itself in uncharted waters. It faces a sharp political polarisation without parallel among governments committed to democratic socialism that have lasted this long — 16 years — in office.

Nevertheless, the challenges generated by shortages and the inconveniences, as well as the knotty issue of the role of the market, hold implications for all governments committed to socialism. The Soviet Union, for instance, was plagued by corruption stemming from an extensive black market, a problem that had much to do with its demise. Cuba is grappling with similar predicaments.

Maduro’s recent measures were a step in the right direction in recognising that market conditions must be part of the equation. At the same time, the government will not renounce its strong interventionist role, which includes regulating exchange rates and prices.

Maduro has also announced social initiatives and said lower oil prices cannot be a prelude for austerity measures that punish the non-privileged.

Nevertheless, until the government cuts the colossal disparity between official prices for goods and foreign currency and that on the open market, contraband and corruption will be virtually inevitable. This problem is exacerbated by unscrupulous and politically motivated powerful of the private sector.

Subsidised prices for currency and goods are perfectly legitimate correctives to neoliberalism, but the Chavista government needs to stake out a middle ground between production costs and market prices. Otherwise, the consequences may be the same as those faced by post-socialist governments.

Radical measures from the left, such as more expropriations of large companies, may have to wait until the government has delivered heavy blows against an enemy that refuses to recognise its legitimacy.

Maduro is seeking to gain breathing space in a context of extensive discontent and well-organised insurgent tactics. He has thus pushed “peace talks” to achieve stability, which the political opposition has rejected.

Maduro also prioritises political objectives out of fear of further destabilisation if the opposition gains control of the National Assembly later this year. In light of these considerations, a middle ground between radical devaluation, on the one hand, and highly subsidised prices for basic commodities and currency, on the other, represents the most viable formula for the Chavistas at this critical juncture.

[A slightly longer version can be read at Alborada.net. Steve Ellner teaches at the Universidad de Oriente in Venezuela and is the editor of Latin America’s Radical Left: Challenges and Complexities of Political Power in the Twenty-First Century.]

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