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Long-Awaited Apocalypse Not Likely in Venezuela

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For more than a decade people opposed to the government of Venezuela -- which today includes almost all major Western media outlets -- have argued that the Venezuelan economy would implode. Like communists in the 1930s rooting for the final crisis of capitalism, they generally saw Venezuela's economic collapse as just around the corner. How frustrating it has been for them to witness only two recessions: one directly caused by the opposition's oil strike (December 2002-May 2003) and one brought on by the world recession (2009 and the first half of 2010). Despite these recessions, the whole decade's economic performance -- the government got control of the national oil company in 2003 - turned out quite well, with average annual growth of real income per person of 2.7 percent, poverty reduced by more than half, and large gains for the majority in employment, access to health care, pensions, and education.

Now Venezuela is facing economic problems that are warming the cockles of the haters' hearts. We see the bad news every day (Western reporting on Venezuela is almost exclusively bad news, as if by decree): consumer prices up 49 percent over the last year; a black market where the dollar fetches seven times the official rate; shortages of consumer goods from milk to toilet paper; the economy slowing, Central Bank reserves falling. Will those who cried wolf for so long finally see their dreams come true?

Not likely. In the opposition and international media's analysis, Venezuela is caught in an inflation-devaluation spiral, where rising prices domestically undermine confidence in the economy and currency, causing capital flight and driving up the black market price of the dollar. This adds to inflation, as does -- in their theory -- money creation by the government. And the government's price controls, nationalizations, and other interventions have caused more distortions and structural problems that will hasten the economy's demise. Hyperinflation, rising foreign debt, and a balance of payments crisis will mark the end of this economic experiment, they hope and pray each day.

But how can a government with more than $90 billion in oil revenue end up with a balance of payments crisis? Well, the answer is, it can't, and won't. In 2012 Venezuela had $93.6 billion in oil revenues, and total imports in the economy -- which were at record high levels - were $59.3 billion. The current account was in surplus to the tune of $11 billion, or 2.9 percent of GDP. Interest payments on the public foreign debt, which is the most important measure of public indebtedness, were just $3.7 billion. This government is not going to run out of dollars. The Bank of America's analysis of Venezuela last month recognized this, and decided as a result that Venezuelan government bonds were a good buy.

The Central Bank currently holds $21.7 billion in reserves, and opposition economists estimate that there is another $15 billion held by other government agencies, for a total of $36.7 billion. Normally, reserves that can cover three months of imports are considered sufficient; Venezuela has enough to cover at least 8 months and possibly more. And it has the capacity to borrow more internationally.

One problem is that most of the Central Bank's reserves are in gold. But gold can be sold, even if it is much less liquid than assets like U.S. Treasury securities. It seems far-fetched that the government would suffer through a balance of payments crisis rather than sell its gold.

Hyperinflation is also a very remote possibility. For the first two years of the economic recovery that began in June 2010, inflation was falling even as economic growth accelerated to 5.7 percent for 2012. In the first quarter of 2012, it reached a low of just 2.9 percent, or 12.1 percent at annual rate. This shows that the Venezuelan economy - despite its problems - is very capable of providing healthy growth even while bringing down inflation.

What really drove inflation up, beginning a year ago, was a cut in the supply of dollars to the foreign exchange market. These were reduced by half in October of 2012 and practically eliminated in February. This meant more importers had to purchase increasingly expensive dollars on the black market. This is where the burst of inflation came from. The devaluation in February also contributed something to inflation, but probably not that much.

Inflation peaked at a monthly rate of 6.2 percent in May, then fell steadily to 3.0 percent in August as the government began to provide more dollars to the market. It jumped to 4.4 percent monthly in September, but the government has since increased its auctions of dollars and announced a planned increase of food and other imports, which will likely put some downward pressure on prices.

Of course Venezuela is facing some serious economic problems. But they are not the kind suffered by e.g., Greece (now in its sixth year of recession) or Spain, which are trapped in an arrangement in which macroeconomic policy is determined by people who have objectives that conflict with their economic recovery. Venezuela has sufficient reserves and foreign exchange earnings to do whatever it wants to do, including driving down the black market value of the dollar and eliminating most shortages. These are problems that can be resolved relatively quickly with policy changes. Venezuela - like most economies in the world - also has long-term structural problems such as over-dependence on oil, inadequate infrastructure, and limited administrative capacity. But these are not the cause of its current predicament.

Meanwhile, the poverty rate dropped by 20 percent in Venezuela last year. It is almost certainly the largest decline in poverty in the Americas for 2012, and one of the largest - if not the largest - in the world. The numbers are available on the web site of the World Bank, but almost no journalists have made the arduous journey through cyberspace to find and report them. Ask them why they missed it.

This was published in The Guardian (UK) on November 7, 2013.