How Will Venezuela’s Currency Devaluation Affect the Country?

G. Philip Hughes (Ambassador to Barbados and Eastern Caribbean, 1990-1993)

Cross-posted from Ambassador Hughes’ op-ed which appeared in the February 22, 2013 issue of Inter-American Dialogue’s Latin American Advisor.

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“Venezuela’s devaluation of the ‘strong bolívar’—the fifth of Hugo Chávez’s presidency—is but further testimony to the abysmal economic failure of Chávez’s ’21st Century Socialism.’ For a nation with a roughly Texas-sized population and a territory a bit smaller than Texas and New Mexico sitting astride the world’s largest proven petroleum reserves to be running a $30 billion fiscal deficit on a roughly $330 billion GDP, and experiencing food shortages in practically every staple category, is evidence of economic mismanagement on a scale that makes Venezuela’s previous unhappy and wasteful economic experience pale by comparison. The devaluation provided a prehomecoming ’proof of life’ for ailing protodictator Hugo Chávez, since the government reportedly produced his signed authorization for the move. It permitted the government, at a stroke, to close its fiscal gap and avert default.

However, the devaluation also will further fuel Venezuela’s 22 percent inflation rate, now the highest in Latin America, squeezing Venezuelan consumers more tightly, nicking the profits of the major multinationals that continue to operate there and inevitably exacerbating shortages. It has also confirmed that, regardless of Chavista rhetoric, citizen and consumer welfare is quite low on the  Chávez regime’s list of priorities—now obviously endorsed by his successors-in waiting. How severely will the government crack down on firms raising prices? Who knows? Steeper inflation means price increases—literally. Which firms are singled out, and when, to be victimized for bowing to the inevitable will be a function of cynical and opportunistic political calculation, as in the past.”

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