By David Whitehouse
The US should ditch economic sanctions imposed on Venezuela, regardless of whether genuine elections take place in 2024, US economist Steve Hanke says.
Hanke, professor of applied economics at The Johns Hopkins University in the US, was recently appointed chief economic adviser to Roberto Enrique, the leader of Venezuela’s Comité de Organización Política Electoral Independiente (Copei), a Christian democrat opposition party. Enrique is making a presidential run in the 2024 elections.
The US first imposed targeted sanctions against Venezuelan individuals in 2008 for human rights abuses, corruption, and anti-democratic actions. These were expanded under Donald Trump in response to the increasing authoritarianism of President Nicolás Maduro, who has held power since 2013, as part of an effort to support an interim government led by Juan Guaidó. Despite the sanctions, Maduro has consolidated power.
The regime has been maintained by arbitrary prosecution of critics and political opponents. His election victory in 2018 was widely condemned as undemocratic, and the Centre for Strategic and International Studies found that the 2021 regional elections were marked by “systemic” electoral manipulation in favour of the ruling United Socialist Party of Venezuela (PSUV).
The Biden administration has softened US sanctions against Venezuela, and in 2022 granted oil giant Chevron Corp. a license to resume oil production in the country. More concessions may be made if genuine elections take place next year.
Hanke says he has no idea if Venezuela will have free and fair elections in 2024. The US should remove its sanctions regardless, he says. “Sanctions are counterproductive, ineffective, and have created a “rally around the flag” effect in favor of Maduro, that has kept Maduro in power for a decade. If Venezuela does have free and fair elections, the only factor that could conceivably keep Maduro in the saddle is US sanctions.”
Despite US sanctions, countries such as China, Cuba, Iran, and Russia have continued to prop up the regime. Sanctions rarely accomplish the intended objectives, Hanke says. He relates a call he received from US Secretary of State Mike Pompeo in July 2020. The US was considering the imposition of financial sanctions on Hong Kong, with a final decision to be made by President Donald Trump.
“Pompeo was adamantly for sanctions. I was adamantly against,” Hanke recalls. But his arguments won the day and no financial sanctions were imposed. Sanctions, Hanke says “are always and everywhere for losers.”
Venezuela clearly needs an economic overhaul. The country’s GDP shrank by almost two thirds from 2014 to 2021, and the debt burden is estimated at $150 billion. Economic collapse has triggered an exodus of 7 million people to neighbouring countries since 2014.
Under Maduro, Hanke says, there have been two episodes of hyperinflation, where the inflation rate exceeded 50% per month for at least 30 consecutive days. The first episode — the second-longest in history, lasting two years and four months — occurred from November 2016 to February 2019, with the monthly inflation rate reaching 234% in April 2018. The second episode occurred from April 2020 to December 2020, with the monthly inflation rate reaching 151% in April 2020.
Inflation in Venezuela has exhibited a common pattern observed in developing countries, Hanke says. First, the government engaged in spending largesse, creating fiscal deficits with no way for the public to finance them. So the government sold bonds to the central bank. This meant the deficit was monetised, causing an “explosion” in the money supply and triggering high inflation.
As prices rose, expectations for future inflation among Venezuelans’ become “unchained,” Hanke says, causing the velocity of money to increase. Venezuelans did not want to save their bolivars as they became worth less and less each day. Hanke argues that the official inflation figures produced by many countries understate the true levels. According to his own measure, Venezuela’s inflation rate is now running at 488% per year.
His solution is simple. Venezuela should “immediately replace the central bank with a currency board,” he says. A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. It is required to hold anchor-currency reserves equal to 100% of its monetary liabilities.
A currency board has no discretionary monetary powers and cannot issue credit. It has an exchange-rate policy but no monetary policy. Its sole function is to exchange the domestic currency it issues for an anchor currency at a fixed rate. The national currency therefore becomes a “clone” of the anchor currency, Hanke says. He previously proposed the idea when he was an advisor to the country’s former president Rafael Caldera in 1995-96.
Hanke argues that there are no preconditions for setting up a currency board, so it can be done very quickly. He points to the example of Estonia, which took less than a month to establish a currency board in June 1992. There is no need to overhaul government finances or state-owned enterprises before a currency board can issue money. “Currency boards have existed in some 70 countries,” Hanke says. “None have failed.”
A currency board, if Hanke gets his way, will be the first of a series of reforms. The oil and agriculture sectors will then need to be overhauled, he says.
Venezuela has the world’s largest oil reserves, and oil exports are expected to finance close to two-thirds of the government budget in 2023. But the state-owned oil company, Petróleos de Venezuela (PDVSA), is “failing,” Hanke says. Under Maduro, total crude oil production has declined by 76%, which is not due to falling reserves, but to changes in the rate at which its reserves are being depleted, he says.
Due to PDVSA’s low depletion rate — which, in 2018, stood at 0.182% — Venezuela’s reserves are “essentially worthless” because they are left in the ground too long, Hanke says. In effect, he argues, they are “stranded assets.” At the current rate, Hanke calculates, it would take 380.4 years for PDVSA’s reserves to be halfway depleted.
Meanwhile, Exxon’s depletion rate stood at 6.74% per year at the end of 2018, which is typical for the industry. It would take 9.9 years for Exxon’s oil reserves to be halfway depleted, Hanke calculates. Venezuela should arrange for the privatisation of PDVSA, Hanke argues. The privatisation revenues would be diverted into a wealth fund, where all citizens would have shares.
Agriculture is another area that needs reform. The “SEED Law” introduced by former President Hugo Chávez, which prohibits the use of genetically modified (GMO) seeds, will be scrapped if Hanke’s programme is adopted. “This law has held back Venezuelan agriculture,” just as it contributed to the recent economic collapse in Sri Lanka, he argues.
Venezuela’s agriculture is plagued by insecure property rights. Maduro has not expropriated agricultural land, as did Chavez, but property rights remain weak, Hanke says. “The uncertainty generated by tenuous agricultural property rights holds back investment in that sector. Increasing the clarity and certainty of property rights should command a high position on a reform agenda.”
Only about 5% of the arable land in Venezuela is being properly used, Hanke says. This is, among other things, the result of non-existent or expensive credit, which a currency board would fix. He points to the example of Bulgaria where he designed and implemented a currency board in 1997. Money market rates fell from triple digits to just 2.4%, and credit started to flow.
Author: David Whitehouse
David Whitehouse is a freelance journalist in Paris.