With Venezuela's inflation hitting a million percent, a Chavista economist gets free-market religion
In an article about Venezuela soaring past the million-percent inflation rate (usually, when you get to about 1,000 percent, or 70,000 percent, you pretty well know you have a problem), longtime Chavista apologist and leftwing economist Mark Weisbrot has called on the regime to adopt what's generally known as a currency board. Here's the quote:
Nevertheless, Venezuela could still get rid of hyperinflation by trying to establish an exchange-rate-based stabilization program (ERBS), meaning that the bolivar is fixed to the U.S. dollar at a sustainable exchange rate, according to Washington, D.C.-based Center for Economic and Policy Research Co-Director Mark Weisbrot.
"There are different ways to accomplish ERBS. The most extreme method would be dollarization, to adopt the dollar as Venezuela's currency," Weisbrot added in an essay sent to Newsweek. "The problem with this method is that once the dollar is adopted as the national currency, it becomes politically extremely difficult to get rid of. And if a country does not have its own currency, it gives up its control of most monetary policy as well as exchange rate policy."
Weisbrot noted that "this is a sacrifice that does not have to be made permanent; however, it does have to be made temporarily. That is, the government will have to temporarily give up its use of monetary policy to finance deficit spending, in order to change peoples' expectations about inflation, and to put an end to the hyperinflation," adding that "there will also have to be fiscal reform; the government cannot afford to give away gasoline and other energy for free."
Weisbrot has been the biggest apologist out there for the Chavista regime, and now he's saying something that makes sense. If Venezuela wants a path out of its monetary tailspin, there's a path, all right, and it's precisely what he prescribes: to quit printing money, and don't just quit printing money; quit bad money altogether, and just use the U.S. dollar instead. That's what he's proposing, at least based on those remarks suggesting that Venezuela adopt a currency board, which is just one step behind an open use of the dollar. That's what smart wealthy places, such as Hong Kong, do: they have what's known as a hard peg to the U.S. dollar, meaning the exchange rate never, ever changes (I can deposit Hong Kong dollars directly via ATM into my U.S. bank account because the exchange rate is so hard), but in exchange, the government loses the right to print money and must rely on taxes as its means of keeping itself afloat. That means having a proper economy. That means freeing the people to develop that proper economy so they can pay taxes. See how this works, and why it's such a powerful free-market mechanism? The monetary pie cannot expand from the printing press; if the government wants the cash pile in the economy to expand, it has to draw dollars in from abroad through trade and investment, and that is why Hong Kong is such a rich and free-market place to be.
What's noteworthy is that that is exactly what hardcore free-market economists, such as Johns Hopkins University Professor Steve Hanke, who's also a senior fellow with the Cato Institute, have advocated for Venezuela for years. He's even advised pre-Chavista presidents on it. A currency board, or a straight dollarization, make sense, and such systems work every time they're tried. Hanke is the world's foremost expert on currency boards and knows how they work. He's saying Venezuelans need something like this, and calls on the country to either adopt a currency board or, better still, dollarize.
Venezuela has an additional reason to seek this out for its particular economy – its economy is premised on oil production, and oil is traded only in U.S. dollars. That makes the oil industry powerful indeed, and with the state owning the oil company, well, you get the picture – the commies have all the dollars. That dollar-income is great for the state when oil prices are high, but high dollar inflows drive up the value of the local currency in an unpegged system (well, in normal times, not million-percent inflation times), and that hampers local industry. Venezuela has the world's best coffee and the world's best chocolate and some exquisite design and textile strengths, but you never hear about these things here, because those industries cannot compete with other countries on the export front, due to the way the currency works under an oil-based economy, something that elsewhere has been called "Dutch disease." You don't want Dutch disease in your economy. A currency board or straight dollarization gets rid of that problem right then and there.
A currency board does require honest people to administer it – Hong Kong has those kinds of people, while another country that tried a currency board, Argentina, did not. Does Venezuela have honest people in its government? I'm gonna say no. That means dollarization is a better option. Ecuador recognized that it didn't have honest people and went to a dollarization system, which is why it never fell into the hellhole status that Venezuela did, despite an extended period as a Chavista socialist ally. It actually flipped back to near normalcy because it uses the dollar. Same deal with El Salvador, which went to the dollar, leaving the communist guerrillas it elected unable to completely loot the country as the Chavistas did. Panama has used the dollar for years, and guess what: it has the highest living standard in all Latin America. Venezuelans who go to Panama fall in love with the place because it is so like their own in culture with even the Panama accent similar to theirs – yet so unlike it in the inflation and socialist oppression that make Venezuela so very horrible.
In any case, I'm shocked to see Weisbrot, who is so left-wing his nickname at the University of Michigan was "Marx Brainrot," according to a slightly less lefty classmate, has come out with a sensible economic solution, one that is sure to force Venezuela to become a free-market economy if it is implemented properly. What can anyone say about this? Maybe he doesn't realize the depth and implications of what he is proposing. Or more hopefully, maybe he's getting religion. Maybe he loves Venezuela more than he loves its socialism. If so, kudos, then, to Weisbrot for apparently seeing the light.