Politics Behind Hugo Chavez's Currency Devaluation

Andres Oppenheimer

A lot has been written in recent days about the economic impact of the maxi-devaluation announced Friday by Venezuela's authoritarian-populist President Hugo Chavez.

But the measure's political impact may be just as important, if not more.

With his drastic devaluation of the Venezuelan currency, Chavez can transform the dollars his government gets from oil exports into twice as many bolivares, the local currency.

Once converted under the new exchange rate, the Chavez government's oil export income will increase from 47 billion to 94 billion bolivares, which it will be able to spend in social programs before September's crucial congressional elections.

In the short run, it may allow Chavez to avoid an embarrassing defeat in this year's legislative elections.

But in the long run, this is a financial gimmick that -- without measures to re-invest in Venezuela's crippling oil industry infrastructure or address the government's economic mismanagement -- will sink the economy even further.

Venezuelan opposition leaders told me in separate telephone interviews that they don't believe the devaluation will help Chavez in the congressional vote, among other things because the local currency will be eaten up by galloping inflation. Venezuela's inflation was more than 25 percent last year, the highest in Latin America. It's likely to increase even more this year, they say.

"Sure, this devaluation will feed the monster, giving him a bag full of bolivares to spend on social programs," said Julio Borges, president of the Primero Justicia opposition party. "But that won't matter, because his bolivares will be worthless."

OK, but spending like crazy ahead of an election has worked for Chavez in the past, hasn't it?, I asked.

'A BAD WORD'

It won't this time, Borges said.

"Historically, 'devaluation' is a bad word in Venezuela," Borges said. People still recall with horror the 'Black Friday' devaluation of 1983, which made most Venezuelans much poorer.

"We did a poll last year, and we found that 70 percent of the country was against a devaluation. People know they will become poorer."

Borges added, "The people will want to get even with a president who had plenty of dollars and spent them in presents to other countries, military purchases and payments for nationalizations."

Caracas Mayor Antonio Ledezma, a leading opposition figure, told me that Chavez's political future will be threatened by Venezuela's growing electricity cuts, increasingly frequent water shortages, massive corruption and rising crime rates.

"He's going to bet on short-term solutions, such as giving away more blenders or refrigerators," Ledezma said. "But people will understand that this is bread for today, hunger for tomorrow. This government wants to make the country poorer so that a depressed society ends up exchanging a promising tomorrow for crumbs today."

Supporters of Chavez's devaluation argue that -- much like the weakening of the U.S. dollar -- a weaker Venezuelan currency will stimulate exports and make imports more expensive, thus helping domestic production.

Mark Weisbrot, an economist with the left-of-center Washington, D.C.-based Center for Economic and Policy Research who generally supports Chavez's policies, told me that the experience from Brazil's 1998 devaluation and Argentina's 2002 devaluation shows that devaluations often have a positive economic impact.

"The Venezuelan devaluation is not going to come even close to doubling consumer prices," Weisbrot said. "On the contrary, it will stimulate the economy, and it will increase the revenues available for the government."

My opinion: In most other Latin American countries, given sound economic management, devaluations can be handled without causing hyper-inflation. But Venezuela imports virtually everything its consumes, including most of its food, which will drive importers to increase prices and further drive up inflation.

BETTING ON OIL

Chavez is betting that rising oil prices will save him, or that Central Bank disbursements of dollars will avoid hyper-inflation before September.

If things go his way, he could win the September elections, and then, when the lights finally go out in Venezuela, he will try to pull his usual trick -- blaming the U.S. "empire" for the total destruction of the country's economy and growing poverty rates.

WORLD NEWS & CURRENT EVENTS ...