LONDON – In Ernest Hemingway’s 1926 novel The Sun Also Rises, a character is asked how he went bankrupt. “Two ways,” he replies. “Gradually, and then suddenly.”
That is a good description of the collapse of the Venezuelan economy. President Nicolás Maduro’s chavista regime spent vastly beyond its means, just as oil prices softened and domestic revenue stagnated and then began to fall as a result of the weakening economy. So Maduro borrowed as much as he could, until in 2013 lenders cut Venezuela off. At that point, the printing press became the only available financing tool.
In the last couple of years, the decline has accelerated to dizzying speeds. The International Monetary Fund is forecasting 1,000,000% inflation in 2018; the contraction in GDP dwarfs those of the Great Depression, the Spanish Civil War, and the recent Greek crisis; 87% of Venezuelans live in poverty; and untold millions have left their country.
“Gradually and then suddenly” could also describe the regime’s eventual demise. While no one in Venezuela or abroad can be sure how Maduro will go, it seems increasingly clear that he will.
Uncertainty about what happens the day after is one reason why Maduro has clung to power. One cannot fault frightened middle-class citizens who believe kings and dictators favorite dictum: après moi, le déluge. Yet a vision of what a post-Maduro Venezuela would look like is beginning to emerge, and that should speed up the regime’s demise.
Above all, Venezuela after Maduro should be democratic. What began as a populist but democratically elected regime has degenerated in recent years into textbook authoritarianism. Venezuela’s institutions, from the Supreme Court to the National Electoral Council to the Central Bank, no longer have any autonomy. The National Assembly (the unicameral parliament), where the opposition holds a two-thirds majority, has been stripped of most of its powers. Presidential elections in May, which returned Maduro to power, were a farce, and many of the world’s democracies said so in no uncertain terms.
Much will have to change – economically as well as politically – to guarantee Venezuelans’ freedom. One does not have to be a University of Chicago graduate sporting an Adam Smith tie to recognize that the collapse of production in Venezuela owes much to an ever-more intrusive state that has made production all but impossible. Maduro seems intent on realizing Ronald Reagan’s maxim: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” The government today has 457 companies, many of them little more than shells. The Venezuelan state’s jewel in the crown, oil giant PDVSA, produces one-third of what it did in 1998, when Maduro’s predecessor, Hugo Chávez, was elected.
Restoring property rights and reforming this web of controls and regulations will be a colossal legal and political task, more akin to the transitions in Eastern Europe and the former Soviet Union than to previous episodes of Latin American stabilization-cum-reform. Yet one lesson of the region’s market reforms of the 1980s and 1990s seems relevant: privatization must be accompanied by genuine competition. Otherwise, the result may be economic stagnation (monopolies can make fat profits while failing to innovate) and political backlash (voters who see that happening get very upset, quickly).
Likewise, the crony capitalism typical of many post-communist economies must be avoided. When managers who are put in charge of returning assets to private ownership end up owning those assets, reform merely replaces one corrupt elite with another, rather than returning power to citizens.
Another priority for the leaders of post-Maduro Venezuela will be to ensure that the state does what it is supposed to do. The Venezuelan state has nearly three million employees and, by one count, more than 4,200 institutions, yet government fails miserably at its most basic tasks, such as providing education, health, and security.
Take health: public hospitals and clinics are crumbling and largely devoid of medicines (imports of which are barely one-third the level in 2012). One survey found that 79% of facilities did not even have running water. These precarious conditions have allowed the reemergence of long-dormant diseases such as malaria, diphtheria, measles, and tuberculosis.
Or consider security, which has collapsed, placing Venezuela on the verge of being considered a failed state. Vast swaths of territory are so lawless that the police – and in some cases even the army – dare not enter. In large urban centers, the murder rate has shot up, putting Venezuela at the top of the world homicide tables, behind only El Salvador and Honduras and far ahead of Brazil, Colombia, and Mexico.
Venezuela will need a smaller, leaner, yet much more muscular state, focused on those areas where government action is irreplaceable. How to pay for the far-reaching reform that will be required? And how to pay for the indispensable economic recovery?
The country is grossly over-indebted (the ratio of external public debt to exports is higher than in any other country for which the World Bank has data) and has run out of foreign currency. As a result, total imports per capita stand at 15% of their 2012 level, resulting in shortages not only of food and medicine, but also of the spare parts needed to get the country’s trucks and machines running again.
A plan that enables Venezuela to import and function more or less as a normal economy again should have at least three components. First, the international community should recognize upfront the need for large debt reduction, rather than kicking the can down the road for years, as it did with Greece. Second, the International Monetary Fund will have to provide emergency balance-of-payments, through a program not too different in size from the one that Argentina just signed. And, third, a grant component, estimated by Venezuelan experts at around $20 billion, will be needed both to meet emergency humanitarian needs and to avoid Argentina’s mistake of allowing foreign debt to accumulate too quickly just after debt reduction.
Venezuela’s government has been waging war on its own people. The least the world can do is to stand generously on the victims’ side. In doing so, it would help prevent full-scale state failure, thereby minimizing the impact of the country’s humanitarian crisis and massive refugee outflows – not to mention rampant drug trafficking and money laundering – on regional and global stability.
Venezuela’s transition to democracy and a market economy will be filled with perils and pitfalls, and much sacrifice will be required. The leaders of the new Venezuela should acknowledge this, and echo Winston Churchill’s promise of “blood, toil, tears, and sweat.” That shared effort will beget a new and better future. Sooner rather than later, the sun will also rise for all Venezuelans.
Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.