Imagine if Theresa May suddenly announced that her government was going to devalue the pound by 96 per cent; increase the minimum wage by 6,000 per cent; pay the wage increases for millions of businesses for three months; tie the pound to a mythical cryptocurrency; prepared for petrol rationing; and impose a 0.7 per cent tax on big financial transactions. It would be seen either as an act of lunacy, of a collapsing country — or both.
For the long-suffering people of Venezuela, it’s just the latest stage of their country’s grand socialist experiment.
President Nicolás Maduro has just issued a new currency, called ‘sovereign bolivars’. The original idea was that the currency would be like the old one, but with three zeros lopped off. But then hyperinflation got so out of hand that the government decided on five zeros.
Maduro’s new plan is supposed to be a big economic reset but, on its launch, those who turned up at bank machines found a withdrawal limit of ten sovereign bolivars a day — about 12p. This, they discovered, is only the latest part of what Maduro calls his ‘really impressive magical formula’ to restore the economy. To many Venezuelans, residents of what was once the strongest economy in Latin America, it feels not like magic, only more misery.
Last month, the minimum wage was increased for the umpteenth time this year to three million bolivars. On Friday night the president jacked that up to 1,800 in sovereign bolivars — about $30 a month. His government is offering to pay the 60-fold rise in salaries because employers say that they can’t afford to. With the shortages of medicine and basic food, and the economy in such freefall, Venezuela’s two million slum-dwellers have started to barter goods to survive. It is understood that Iran and Russia advised Maduro on the changes. What interest they might have in the destruction of a once-rich country remains unclear.
For years, Venezuela has been one giant economic laboratory, its 32 million citizens reduced to guinea pigs. The Maduro regime has been condemned worldwide (except by Jeremy Corbyn, who rang Maduro to congratulate him on his election victory and refuses to denounce him). Maduro’s latest experiment is telling, and may well lead to greater economic catastrophe and even massive famine.
Socialist principles are at stake: if the economy will not behave, issue edicts. If money is short, then borrow — or print — more of it. If prices are rising, enforce price freezes. Venezuela is imposing a huge version of ideas that Corbyn has been proposing in miniature. The world can now see the results.
‘Everyone is terrified,’ says Paola Rodriguez, a 32-year-old civil servant. ‘People cannot sleep. We do not know what is going to happen. It is too much to take in all at once.’ Even before the measures were introduced, the IMF was forecasting that the country’s hyperinflation could reach a million per cent by the end of the year (prices have been doubling every month at the moment). One economist says the reforms are like throwing a ‘bucket of petrol on a fire’.
Venezuela now faces one of the worst hyperinflations in history. In his seminal study of Weimar Germany, When Money Dies, Adam Fergusson described what happens when savings evaporate, payment is pointless and banknotes are so worthless that beggars don’t bother to pick them up from the streets. Not just economic ruin, but terrible social consequences; looting, corruption and a country desperate for order.
In August 1922, inflation in Germany peaked at 21 per cent per day. The worst hyperinflation on record, however, was in Hungary in July 1946 when prices jumped by 207 per cent per day (doubling every 15 hours). The second worst occurred in Zimbabwe in March 2007 when inflation hit 98 per cent per day (prices doubled every 24.7 hours). Venezuela may yet smash those terrible records.
‘It’s a cosmetic thing that’s happening, the zeros,’ said Steve Hanke, an applied economics professor at Johns Hopkins University, who has advised governments facing hyperinflation. ‘It means nothing unless you change economic policy.’
Most shops and small companies in Venezuela have locked their doors and shuttered up until they see how all the changes pan out. The great fear is that many of them will not be able to afford the new minimum wage and could close for good. Some 11 million Venezuelans are employed by small-to-medium sized enterprises. Many will now be laid off, only exacerbating the unimaginable social catastrophe underway. Businesses could try to pass on the increases to customers but are not sure people would pay the much higher prices for goods and services.
‘I have changed my prices 40 times this year already,’ says Carlos Esteves, who owns a small bakery in the city of Merida in the Venezuelan Andes. ‘I cannot imagine putting them up 60-fold. I have already laid off five staff in the last two years. I might now have to fire my last remaining two.’ Venezuelans are deeply sceptical about Maduro’s offer to pay staff. ‘Do they have the systems in place?’ Esteves asks. How will we get the money? This government is useless and I just cannot see that happening. Do they plan to take over our businesses? Nationalise us?’
It’s often said, including by some Corbynistas, that Venezuela is not proper socialism. Quite a few on the Venezuelan left agree and have for some time been pushing the government to take the socialist experiment even further; to radicalise the ‘Bolivarian revolution’ by setting up one giant commune. So far that idea has proved too wacky even for Maduro. However, since the Venezuelan state’s answer for everything tends to be more disastrous state intervention, not less, it’s quite possible that this experiment is about to happen.
In pegging the bolivar to a cryptocurrency called the ‘petro’, Maduro has taken a wild leap towards 21st-century technology. In theory, such a move could mean liberation from the power of the US dollar and world monetary authorities (or ‘money mafias’ as Maduro recently dubbed them). The ‘petro’ was created by his government, and is supposedly tied to its oil reserves, so a ‘petro’ is worth as much as a barrel of oil. It’s certainly novel. Russia, Turkey and Iran are thought to have looked at whether they should also try this: creating a cryptocurrency, pegged to some national asset, so that they can then defy sanctions by selling to foreign investors.
But if the ‘petro’ cannot rise and fall in value depending on demand, and if it’s subject to the same arbitrary abuse that Maduro inflicts on his paper currency, then it will be seen as a fraud from the get-go. ICOindex.com, a ratings agency, has labelled the ‘petro’ a ‘scam’. When even the crypto-world thinks your offering is worthless, you are in big trouble.
The reality is that no one — neither mafias nor markets — will trust a cryptocurrency that cannot be exchanged for oil or dollars. They will also not trust (or lend to) a government that has defaulted on $6 billion of foreign debt. And nothing will tame inflation while the government is still engaged in the uncontrolled printing of money.
Maduro has had a tough few weeks. He was recently the target of the world’s first assassination attempt by an explosive drone, and many believe that the incident may have pushed him into total insanity.
Or perhaps he’s just looking for an excuse to force the troublesome middle classes out of the country — then subjugate the poor through hunger. The United Nations estimates that 2.3 million Venezuelans have fled since Maduro came to power, creating a refugee crisis in Latin America to rival that in Syria. It’s a crisis that has knock-on effects on North America too — one of the reasons that President Donald Trump has repeatedly threatened a US military intervention in Venezuela.
The crisis has been a long time in coming. It’s now five years since Maduro succeeded Hugo Chávez, the hero of the international hard left. When Chávez died, Corbyn wrote that he deserved thanks ‘for showing that the poor matter and wealth can be shared’, that he inspires politicians — even in Britain — to ‘march on’. But march on to what? Ten years ago, Chávez was the one removing zeros from Venezuelan banknotes to create the supposedly ‘strong’ bolivar, and running massive deficits because he believed that borrowed money would somehow grow the economy and pay for itself. Maduro is quite right to call himself the ‘son of Chávez’. He is continuing what his predecessor started, dismantling the economy by regulating, nationalising and ruining his country’s industries.
Diane Abbott was right to say that ‘the importance of Venezuela is it shows another way is possible’. It shows that, even when the free enterprise system is spreading worldwide, it is still possible for political ideologues to bring rich countries to their knees.
Maduro is now talking about austerity measures that would terrify the harshest neo-liberal, including a massive hike in petrol prices (the last time this was tried, riots followed). Any remaining social missions are likely to be ditched. And this may be a small down payment on the agony to come.
The Venezuelan recession now dwarfs the United States’ great depression. The country’s economic output has almost halved over the past four years and the IMF expects it to decline by a further 18 per cent this year. By comparison, the American economy dropped by 30 per cent between 1929 and 1933. Socialist incompetence is underlined by the steep decline in oil production, from 2.8 million barrels a day when Chávez came to power in 1999 to 1.3 million now — and oil accounts for 95 per cent of the country’s exports. It may halve next year.
‘Let’s have faith,’ Maduro said in the speech detailing his latest plan. ‘Rest assured that sooner or later, we, in economic matters, will be harvesting victories.’ Thousands of his citizens gave their answer this week by heading for the border: so many that Ecuador has started to demand passports, rather than the identity cards they used to accept. A passport is hard to come by. Such is the corruption that it costs $1,500 in bribes — so only the wealthy can afford to walk over the border. The rest are trapped in a country run by a narco-criminal gang whose cronies have benefited hugely from arbitraging the official and black market exchange rates for more than a decade. They do not care one jot about reducing the people to paupers in the process. It is estimated that two million Venezuelans have become food scavengers.
Nationalisations, non-stop borrowing, belief in magic money trees: it can all sound like playground patter in British debates. But a strong enough dose of this formula has reduced what was once Latin America’s most prosperous country to penury. The rhetoric, as always with socialism, is aimed at the wealthy. One of the many morals of the Venezuelan tragedy is that it is the poorest, those who do not have bank accounts, who suffer the most when money dies.
Dr Julia Buxton and Professor Steve Hanke on money.