Caracas Chronicles

A shorter version of this post appears in Foreign Policy’s Democracy Labs blog. 

Say “macroeconomic adjustment” and Venezuelans immediately cast their minds back to 1989. That year, an IMF-inspired shock therapy program pushed through by President Carlos Andrés Pérez set-off serious rioting throughout the country, costing hundreds of lives and undermining governability for a generation to come. The memory of those traumatic events still colors policy discussions today.

As October 7th draws near, the opposition is thinking through its macroeconomic approach to transition.

At first blush, the parallels are jarring. Just as in 1988, the country faces a fixed, severely overvalued exchange rate; a structural budget deficit fed by a sprawling, loss-making state-owned enterprise sector; rigid price controls; and ruinous gasoline subsidies. It’s enough to give any Venezuelan macro-economist the heebie-jeebies.

So is the country is on the verge of another massively disruptive adjustment experience?

Not at all, for two reasons: the economic fundamentals of 2012 are nothing like those of 1988, and the opposition’s presidential candidate now is nothing like the one we had back then.

Barring an unexpected collapse in oil prices, Venezuela will face next year’s adjustment from a position of strength this time. It’s one thing for a petrostate to undertake structural adjustment with oil trading at $16 a barrel, and quite another to do it with a barrel selling for $110. Masses of petrodollars will be flowing into state coffers every day, and while the incoming government in 1989 found the cupboard almost completely bare, Venezuela’s net foreign asset position is now estimated at $72 billion.

Economist Miguel Angel Santos stresses another key difference between then and now: private sector firms had been accumulating dollar denominated debt fast in the years leading up to 1989, which amplified the impact of adjustment on the real economy. In recent years, by contrast, Venezuelan private firms have been deleveraging abroad.

If starting conditions are different, so is the approach of adjustment advocates. Henrique Capriles Radonski has explicitly rejected shock therapy, committing instead to a gradual approach that could make 2012’s experience – dare one say it? – nearly painless.

Here’s how: Continue reading →