Why The Incoming Venezuela President Should Remove Exchange Controls Fast

October 19, 2011

Over in Caracas Chronicles, I have been having this discussion with Juan N. about exchange controls and their possible removal. Basically, one of the candidates, Henrique Capriles, said twice in one week, that he would not remove exchange controls. In particular, he told El Mundo something like: “En este momento, no estan dadas las condiciones para remover el control de cambios” (At this time, conditions are not given for the removal of exchange controls)

I did not like this statement for a number of reasons. First of all, there are so many specific proposals he could make, why choose this topic to be specific, in the absence of others. On top of that, thing could be better or worse i January 2012, the fact that his mind is set worries me.  Second, because keeping exchange controls is the easy way out, the typical trap of “I will remove them slowly”, “I will remove them later” and their many variations. But in the end it is a trap. There are so many political consequences to removing exchange controls, that they become impossible to remove after a while. But I think they should be like the proverbial band-aid removal: Do it all at once, fast and speedy.

There is never an ideal moment to remove exchange controls.

Rather than continue the discussion with Juan over there, then let me outline my thoughts here for all to argue and destroy what I say. I am, after all, not an economist.

My first argument for the removal of exchange controls is very simple: Exchange controls represent today the biggest source of corruption and graft there is in the country. A whole system of approvals has been set up and we have no idea why some requests in CADIVI are approved and others are not. To say nothing of bond offerings with huge profit margins, CADIVI cupos, “remesas” to family members and the like all of which generate an industry of people benefiting at the expense of the remainder of Venezuelans. Arbitrage has become a way of life in Venezuela, if you can get at it.

Doing away with controls will wipe all of this insanity. Instantly.

But there is more. When you go to a store and buy a computer, for example, that company probably obtained dollars at Bs. 4.3 per dollar, but you have no clue if they did. In your mind, you are thinking about prices in the context of that now non-existing exchange rate which was forbidden a year and a half ago. Or think about what happens when you get a bottle of wine: How do you differentiate between the wine imported by that large company, which is given no CADIVI dollars or that imported by the small company which needs less than US$ 300,000 a year and can thus bring things in via the Central Bank’s SITME system at Bs.5.3.

The fact that you can’t tell at what price the dollar was purchased at from the Government,  turns into obscene profits for someone, whether the wine seller, the laptop seller, the camera seller or the whatever seller. By keeping exchange controls, you keep these so called arbitrage opportunities all over the economy.

There is a vast sector of the economy that lives off this arbitrage. You think you are getting a great deal buying something and the seller is making a mint, because the dollars were bought at Bs. 4.3 (CADIVI), Bs. 5.3 (SITME) or they were obtained at around Bs. 6 from one of the Bs./US$ local bond issues. Some food even importers bring in the food, over bill and don’t even bother to sell the food, with the over billing they already made a lot of money.

All of that has to go.

Think for a moment, you are assuming the Presidency of a State that has been destroyed. There are no checks and balances. No controls. If you keep the current system in place: Who are you going to trust to control the myriad requirements, steps, approvals and the like that are built into the system? It is simply impossible, you are trying to play a game you can’t possibly win.

Then there is the problem of competition. It is very difficult for local industry to compete with 30% inflation year after year, with imported products at the official rate of exchange. Thus, by allowing for the differential, you favor foreign producers. Think chicken producers, for example, in 2002 with the dollar at Bs. 1.6, a Venezuela chicken producer competed with that dollar. Since then, assume 25% inflation per year, if he could compete then, his costs are now, if we adjust them for inflation, at Bs. 11.9 per US$, while imported chickens are being brought in at Bs. 4.3 per US$. This guy can’t possibly compete with this. This happens everywhere, this is why local production has been destroyed over the last few years.

The problem in removing controls is three fold: Where will the exchange rate go, where will the inflation rate go and will international reserves be depleted. Let’s take them one at a time:

The Exchange Rate

The number of Bolivars available in the Venezuelan Economy is well known. Go to the BCV’s Indicadores page, go to Agregados Monetarios and download the Liquidez Monetaria spreadsheet, the latest number says M2 is Bs. 364 billion. Since International Reserves are at US$ 30.4 billion, then if the first day ALL Bolivars were exchanged for dollars, you would have to set the rate at Bs. 11.98 (Funny how close that comes to the chicken rate above, no?)

That’s the upper limit, the maximum rate which it could possibly go to if all Bs. fleed the country day one.

But the Government has many mechanisms to control this. First, 14% of all the deposits in the banking system are in the BCV, say the banks can’t get them for three months. Second, 35% of all deposits or so (Haven’t seen the numbers recently) are “official deposits”, prohibit all Government institution without Cabinet approval from buying dollars. See that rate coming down fast already?

In fact, if 50% of the goods are imported at Bs. 5 and 50% at whatever the forbidden rate is, the average is not Bs. 11.9, but something like Bs. 6.5 or Bs. 7.

Given that the Chavez Government just went from Bs. 2.6 to Bs. 4.6, is that jump so huge in order to eliminate, corruption, arbitrages and distortions? Or to help create a healthier economy?

I think not. The benefits outweigh the initial negative impact of the measure.


Yes, that is where the problem is. You devalue, you create inflation. In fact, Giordani has been trapped in this labyrinth for a few years. He devalues, but he does not allow prices to rise and inflation just stays at an unacceptable level. Because he is simply delaying the adjustment. He (and Chavez) would be better off allowing a big jump in inflation and then prices would come down. Inflation only stays at 25-30% because increases are repressed.

In fact, this is what happened under Caldera, when he devalued from Bs. 290 per dollar to Bs. 530 per dollar in April 1996 (and the rate went quickly down to Bs. 460). Inflation in January 1996 was running at 8.11% per month with exchange controls in place. Controls were removed in April, inflation jumped to 12% in May, was 7.1% in June, but then dropped and none of the second six months of the year were above the first six. Inflation went down!

And it was not that different in 1989 when Carlos Andres Perez devalued from Bs. 14.5 to Bs. 45. Inflation was running at 6.8% in December before CAP even suggested he would devalue. Yes, it jumped to 21% in March and 13.5% in April, but after that it began dropping like a stone and closed the year at 1.33% for November and 1.74% in December 1989.

The problem is, of course, how to mitigate the impact of that devaluation on the people and the jump in inflation. There are two ways. One is to allow the currency to float for everything, but subsidize individual food items. The second is to take a big chunk of the money saved from direct aid to Cuba and give it to people directly. Say you take US$ 3 billion and give every Venezuelan with a cedula US$ 100 to compensate the peak in inflation in February and March 2012.

What happens to International reserves

There will be a drop. There is a lot of money repressed currently in the economy. Companies have not been able to repatriate dividends for years. There is pent up demand from individuals. But there will be savings also. The number of people traveling will go down*, it will no longer be the bargain it is at Bs. 4.3 per US$. The same with “remesas” and the large number of people who are studying abroad because it is cheap. But maybe you can create tax incentives so that companies don’t repatriate it all.

But parallel funds like Fonden will be gone, that should add to reserves about US$6-7 billion per year, so will savings from aid programs that never collect payments, to say nothing of Chavez’ largesse giving money away. Venezuela can also go to multilaterals and ask for money for specific projects. With the infrastructure decimated, there should be plenty of projects to get financing for. CAF pledged Peru’s elected President US$ 7 billion in loans, how much should Venezuela under a new Government get?

Just remember, in 1989, Venezuela pledged part of the gold to have cash in an emergency when exchange controls were removed. The loan was for all of US$ 100 million and was actually never needed. At the time liquid reserves were practically zero and the devaluation was from Bs. 14.5 to Bs. 45. Going from Bs. 4.3 to Bs. 9 initially should not be as painful this time around. And the rate will drop to below Bs. 8 fast, just watch.

And may be we can start building a healthy economy without distortions from there.

* Want to go to Europe cheap? If you have a friend in Caracas, have them buy a Miami/Madrid/Miami flight at Bs. 4.3 to the US$ with American/Iberia…

76 Responses to “Why The Incoming Venezuela President Should Remove Exchange Controls Fast”

  1. Marianne Says:

    I agrre with you Miguel, the conrol exchange has to be removed fast, just when a new goverment take the control. Are the only way to stop the corruption.

    Also the Goverment (the new one) will have on his hands many companies that must be sold ASAP, like: CANTV, MOVILNET, Electricidad de Caracas, CORPOELEC, and many others the list are long.

    I think that are the only way to reactived fast the economy on Venezuela.

  2. moctavio Says:

    Something is funny here, ads are appearing in my blog and Quico’s must be a bug…

  3. ElTank Says:

    Well me and Miguel discussed it with Juan at CCS Chronicles so Im happy to see this post up. I don’t have anything to add besides I agree a 100%.

    Venezuela needs a president with balls to do what needs to be done, the FIRST thing on the agenda should be to eliminate CADIVI and all the corruption it brings just like Petkoff did in 1996.

  4. BETO Says:

    Inflation is just a consequence of how bad the Economy really is, and not all the way around. When a country is well industrialized and well capitalized, from Internal and external sources, you have issues with deflation, not inflation, Look at China, they have to keep the paper down, to be able to compete with USA and Euro. Why?? Well, too many People want to invest in China, so you need to convert your Dollars in to Chinese paper, (Supply/Demand rule) too many people offering Dollars for same Chinese paper, Price of the Paper Goes UP…! simple Economics. Trying to control exchanges is a blasphemy..! it is stupid..! it is just to mask the real trouble of the economy, it is not that Jordany does not know how the Economy works, it is that they prefer to mask it and Lie..! That’s all. For Capriles to say that is a grave Mistake, I agree with you. (It may have being a political decision to say so, I’m sure he has economic advisers that can explain that to him.)

  5. BETO Says:

    Not to mention that after Initial Panic, Capital will soon stop fleen the country. What makes capital leave is the Uncertanity in the Future. If New goverment comes with Clear Plan for the Future, (Including de-regulation of exchange.) that will stop capital from fleen.

    Venezuelan Business will need a lot more Bolivars to Be able to invest in the country. that is simple economics 101.

  6. Joe Says:

    Honestly, I read all the comments and I feel that all venezuelans are socialists in their heart. As Miguel saids the honeymoon period with the new president must be used to release the exchange control, of course, this could not be an isolated action…..However, as I mentioned in previous post there is no liberal candidate in the opposition, the statements about the most important thing in Venezuela, the oil, are mainly the same that I have heard in the last 20 years. We really need a change, we really need to be more liberal, and for once dont try to protect the “people” and the “local companies”, we are crazy if we are going to do the same than in the past and expect a different result….

    • CharlesC Says:

      Joe-we are socialists,with a small s emphasized here.
      I believe we should drop the labels for a while here- it only gets
      into sticky discussions that trap everyone ending up in-fighting…
      Opposition- is all about change – let that stand.Number one.
      We are not going to “do the same” -we are going to change
      things from the Hell it is now under Chavez…it
      will be very different.

      • captainccs Says:

        Not just Venezuelans, all of Latin Americans are socialists but not because we own the wealth but because our governments own the the wealth, supposedly in our name. It’s a crock! Whoever sits in the president’s chair is the de-facto owner of the wealth. The rest of us are just serfs. We are given trinkets when the time comes to vote. Like stupid lap dogs, we salivate for the trinkets!

        >>>We are not going to “do the same” -we are going to change
        things from the Hell it is now under Chavez…it will be very different.

        Glass beads and mirrors all over again.

  7. island canuck Says:

    Another of Hugo’s buddys has now fallen.
    Will he be next?

    • CharlesC Says:

      Island Canuck- can you imagine -say 5 years from now-Chavez still in power- and a huge Russian military base in Venezuela, a large russian port
      large number of Russian soldiers in Venezuela- plus more Cuban soldiers in Venezuela, and more Iranian soldiers here–then, then
      what is the possibility of a coup happening from within by Venezuelans????
      No- more than likely a military dictatorship is really standing in the background
      right now-and it is. We all know- it is the opposite of what Castro says about Venezuela- Castro calls “Venezuela-an example of a perfect democracy for the world” -paraphrased.

    • captainccs Says:

      Libyans are to be congratulated! Venezuelans? Well… we are going to vote! We are going to wait for cancer to do our work for us. Then we are going to vote!

      As someone said, we now have eight stars and not seven, we have one legislative chamber, not two, the horse looks forward instead of back. And we take it all sitting down waiting for the next rigged election. Pitiful.

  8. Juan Cristóbal Nagel Says:

    Sorry I have not been able to comment on this Miguel. I’ll post a more detailed response later today.

  9. Charly Says:

    Whatever they do will be a half cooked proposition, Chavez or not, remember, this is a petrostate.

  10. moctavio Says:

    I would let it adjust freely. Look, it is not easy, but a change in mood will bring investment, you could get billions from multilaterals even before the new President takes over. CAP had it much worse than now, Caldera’s case was closer to what is happening today. Companies have more Bs. than the people, the President could/should ask for help. I dont think teher will be bank runs, few people have that much savings and they need Bs. to live on day to day, so do companies, if you reverse expectations, things would be quite easy. Just think Venezuelans have taken out US$ 110 billion during the controls, if they feel positive about the change, then this will come back. It took Petkoff one month to do it when Caldera appointed him, that is as gradual as it should be.

    What’s different this time around?

  11. Manuel Says:

    Miguel, it’s not as simple as you argue. Your analysis has some caveats. First, you have to consider a possibility of bank runs, People would like to withdraw their deposits so they can buy dollars to protect themselves from a expected devaluation and increasing inflation. That could bring down many banks and cause a financial crisis. Also, as people withdraw their deposits, the fraction of money supply going after dollars goes up.
    A second caveat is that there is also a possibility of a strong speculative attack against the bolivar (i.e, a balance of payment crisis), which would result in a much greater devaluation than the one you expect since the BCV would not be willing to sell all of its reserves to protect the exchange rate.
    These two crises together (banking + BofP crises, known as Twin crisis) would really have a negative effect on aggregate demand and GDP. All this could result on a sovereign debt crisis.
    In my opinion, a safer bet would be a gradual removal of the foreign exchange control regime with a relatively short and clear schedule. A removal plan also has to consider what to do with the exchange rate. Do we let the exchange rate to adjust freely or we fix it or we have something in between?

  12. island canuck Says:

    Carolina says:
    “I just compared minimum salaries of Venezuela and Alberta. Venezuela is roughly $2.25/hour and Alberta is $9.5/hour

    Interest rates for mortgages in Venezuela are….10% (?) and here vary between 3% & 5%”

    That’s the problem with false economies.

    While on paper these numbers are more or less correct in reality they are not.
    The actual hourly rate when you use the factor of 8 to US$ at which most internal products are priced at (and I don’t mean the fixed price but the price you actually have to pay) is around $193.50 per month or US$1.08 per hour at 180 hours per month.

    Mortgage rates at 10%. Well try going to a bank and getting them to lend you that. They pay 13.5% on savings accounts & 14% on CDs so do the math. There are so many hidden costs, commissions & red tape that most people just walk away.

    There is no free market in loans. The public banks are using all their spare cash to buy the government bonds. Veneconomia had a comparison of public & private banks awhile ago showing that the public expropriated banks are not lending out any money.

    If you are able to get a loan at a private bank you will be paying upwards of 20 to 30% annually.

    • Carolina Says:

      Island canuck – that 10% was something I justpulled from the internet. I was a little surprised becuase it seemd low to me. The last apartment I bought in Caracas 20 years ago , the mortgage was at 16% and it was low becuase it was a private loan from the builder to buyers (who does that nowadays??
      If I recall correctly, bank mortages were at 19 or 20%

      (OT- hockey season started…my husband, who loves Margarita, is always talking bout opening a hockey bar there, for the island canucks, LOL)

    • Carolina Says:

      Now hockey aside (shame on you..), I see your numbers and they make more sense than mine. I actually got the hour rate at the official rate of $4.5, calculating 40 hours a week (160 hrs a month).

      In any case, what I’m getting is that the proportion is reversed in both. High interest rates w/ low wage for Venezuela and the opposite for Canada.

      What are the chances of this situation fixing by itself if the control exchanges are lifted?

      • Roy Says:


        In part, for wages to go up, the labor offered has to be worth it in terms of productivity. At this moment, Venezuelan labor does not have a high intrinsic value. Venezuelans will have to go through a slow process of education, training, and improvement in work ethic in order to merit and justify wages equivalent to those of Canada or any other of the modern countries in the world.

        Mind you, I am speaking in generalities. I acknowledge that exceptions exist. This is part of the re-education process that will be required for the post-Chavez era.

        • Carolina Says:

          Roy – I see your point. Except that the people earning the minimum wage here are not educated or trained people either. That is the salary my teenage kids earn on their first jobs.

          I do agree that better labour is greatly needed, but educated or trained labour should make more than the minimum wage.

  13. Gonzalo Says:

    In fact, with due respect to MO, I would change the title of this post to Why remove exchange controls in Venezuela fast.

  14. Gonzalo Says:

    I will love for this to happen asap. We really need for all the above stated good reasons to eliminate the exchange control, but the big question is : when? timing? and under the asumption Chavez dies when? Do not want to feel sarcastic but there will be no incoming president until HRC dies or he is overthrown.

  15. Alex Dalmady Says:


    For some people the conditions are never right for lifting exchange controls. Venezuelan governments (all of them) fear capital flight like no other governments on earth.

    Truth is, the controls weren’t necessary in 2003 (a devaluation had already occurred) and they’re not necessary now.
    Best thing would be to dollarize like in Ecuador, although economists hate it because it gives them little or no room to tinker with the economy.

    Henrique Capriles is just like all the others (Caldera, Lusinchi, Chávez).

  16. CharlesC Says:

    O/T -when Chavez realizes he will lose the elections-chavistas will
    activate and violence will occur across Venezuela- Chavez has
    always been good at mobilizing “el pueblo” with money, etc.
    and busses- andwill orde the military to do nothing..

  17. moctavio Says:

    Carolina: I am going blind, the bank of Canada can keep interest rates low, because inflation is low. With inflation at 26% for 2011, more or less, you can’t lower rates until that number drops.

  18. Roy Says:


    “raising the minimum salary and/or lowering interest rates before lifting the controls, would help with the initial impact or not?”

    These are also forms of artificial economic distortion. The idea is reduce the artificial distortions, not increase them. As a general economic rule of thumb, you can assume that if you subsidize something, you will get more of it, and if you tax or penalize something, you will get less of it.

    Raising the minimum salary will reduce official (tax paying) employment. Mandating reduced interest rates will reduce the loans made by banks.

    • Carolina Says:

      Sorry, I don’t get it. I don’t understand why they are “forms of artificial economic distorsion”. Why?

      the way I see it is that higher wages combined with lower interest rates would move the money around 9more acquisition power), which increases demand and therefore stimulates production.

      Let me wait for other comments while I try to understand the whole thing.

      • moctavio Says:

        If you keep interest rates low, money leaves the country.

        • Carolina Says:

          Why? People don’t buy things there?

          I’m not too sure we are talking the same thing, I’m referring to mortgage rates. I’m just thinking people buying property so the money stays in the country.

          • moctavio Says:

            mortage rates are low and “forced”. banks are forced to lend for housing, the problem is housing is expensive because there has been no building in years.

          • Carolina Says:

            Isn’t that due a combination of high interest rates for construction costs and inflation?
            I remember how it was when I was still there and I was building: trades wouldn’t hold a quote for more than 15 days in the best of cases. It was almost impossible to price any building (that’d be the inflation thing) so therefore credits weren’t easy to get. Add to that high interest rates to those credits plus a profit (nobody builds for free..) and you have a super high unafordable selling price.

            • Carolina Says:

              …that also has to be financed to the buyer at another super high interest rate!

            • BETO Says:

              Carolina & Moctavio;

              Carolina, minimum wage is a disaster. You keep the capital from fleeing the country by having clear rules, and a stable political climate. You de-regulate, not regulate the Housing market. You can do some things like for example in panama, I remember there was a time not sure is now, but You will pay no Taxes for 20 years on new construction.

              Now to the banks, same thing, you de-regulate, forcing the banks to lend for Housing just Bubbles the pricing of the existing inventory.

              You have to do two things, Increase Inventory and De-regulate banking for housing. Interest rates will go up initially, then will stabilize. There is no reason why they will stay High with the Bolivar so Cheap.

              Interest may go up later, say 10 15 years later, after people start feeling the appetite to invest in National Paper, therefore the price of such paper will go up.

              (Read Thomas Sowell, Milton Friedman, and the such… look at Chile and Singapore.) I’m not an economist either, I’m just an Observationist…!

              Good Luck…!

  19. Carolina Says:


    I love these posts because I learn from them. Economy has been always for me something like 2+2 and a house budget. Thanks Miguel!
    After reading carefully, I’m leaning towards Daniel’s take on it. Your Approach is merely economic based but I have the feeling it’s not taking the social impact into consideration (well, maybe the safety net helps).

    Now I have a question: raising the minimum salary and/or lowering interest rates before lifting the controls, would help with the initial impact or not?

    • Carolina Says:

      I just compared minimum salaries of Venezuela and Alberta. Venezuela is roughly $2.25/hour and Alberta is $9.5/hour

      Interest rates for mortgages in Venezuela are….10% (?) and here vary between 3% & 5%

      It’s interesting it goes with I just said, except that might have been a fluke.

  20. concerned Says:

    Yes, exchange controls are a fantasy world, but the level of dependence from the people on some of these controls is too great to remove without disasterous effects. It has gone on for so long that you would first have to increase the publics standard of living through jobs and increased wages so that they could afford the basics as you removed the controls.

    The worst thing you could do is label your party as the one who will yank off the bandaid on controls. They need to be adjusted, or removed in some cases, but only after the quality of living is improved enough to absorb it. Cut off special interest external aid, crack down on the coruption and “Opportunistas” who have become multimillionaires at the countries expense. Put that money back into the States hands to improve the daily standards of living. Crime, road repair, electrical and water service improvement will pave the way for the needed control adjustments later.

    There is so much money bleeding out of the country, you need to apply the bandaid first. Cut off the Cuban aid, and any other XXI socialist/communist external whim that chavez has pulled from his ass, keeping this money inside Venezuela. Open up for investment and job producing ventures. Put money back into PDVSA to repair and maintain/increase production to replenish the cash cow. Do away with the “lists” that bar available, skilled Venezuelans from participating in future projects…Without this addition/return to the workforce, these projects will have difficulty resourcing the needed personnel.

    I could go on and on, but everyone who reads this blog knows the problems created by 12 years of thoughtless government.

  21. gioia Says:

    The medicine to the Venezuelan disease is more about corruption, bad habits and violence than just new economics measures. Cadivi has stablished its own rules and they are not going anywhere even with a new president. Economic measures can’t change the Venezuelan reality, el compadrazgo, el clientelismo, etc….

  22. jau Says:

    Miguel, of course your are right, but If I have learned a thing from Chavez is that you could do ANYTHING in Venezuela if you do it little by little.

    Lets change the name of the country, then add another star to the flag, then the education law Not ready for that? sorry then, I take that one back and introduce it again in a year, no harm done, wink wink…. and on and on and on….

    As far as I am concerned, the new president will have 7 year terms and could have as many terms as he wishes, so he or she has plenty of time to steer the country in the HOPEFULLY right direction.

  23. moctavio Says:


    We have to make our own rain. Mine says no Chavez by Jan.2013, oppo wins, Chavismo unravels, there could be bumps, pero el equipo gana.

    Have always been an optimist!

  24. megaescualidus Says:

    I hate to “rain on people’s parade”. First things first. Let’s see really how much longer HC will be in power. For all I know, 2021 may now not be possible. Anything more precise than than is anybody’s guess. Second, I’m not convinced 100% that when HC is out of the way (literally, and for the sake of an example, say in no more than 2 years) that all the Chavista establishment will freely and readily accept a non-chavista government elected with free elections, which can then proceed to, or at least try, putting a few of them in jail. I do believe after HC a period of shakiness will come (a coup by the military, perhaps). And then, after a while, someone really willing to work for the country may become president and issue a few economic reforms like what Miguel is suggesting.

  25. deananash Says:

    “…we can start building an economy without distortions…” And this can’t happen until controls are lifted. Some people are under the illusion that you can do the former without the latter. You can’t. And your comment about “now or never” is also spot on.

  26. Roy Says:


    I am not an economist either, but it seems that dropping the currency controls in one single stroke upon taking office would be like a fully loaded bus attempting a sudden 180 degree turn at high velocity on a narrow and windy mountain road.

    I am like Daniel. I think this needs to be implemented in stages to allow the domestic producers to prepare for the changes. I do think that the transition plan should be announced and implemented at once. If it is delayed, it may become politically impossible to implement.

    Speaking of political possibilities, just exactly how is the new president going to be able to implement ANY changes with a Chavista AN and TSJ?

    • moctavio Says:

      If you dont do it during the honeymoon period you never will.

      • Roy Says:

        I agree. I just think it should be implemented in a manner to allow the private economy some limited time to anticipate the changes, and prepare for the consequences.

        Starvation may be a superb motivator, but if the subject starves to death before he learns new skills, you are defeating your purpose.

  27. Yngvar Says:

    Dollarize the economy at the same time.

    • moctavio Says:

      My dream!!! Eliminate the Bs. Period.

      • Jeffry House Says:

        Of course, that would mean that core decisions about the Venezuelan economy would be made in the US…..

        If the two economies are entirely in synch, the damage is less. But if the US needs higher interest rates to cut off inflation, as it sometimes does, and Venezuela needs cheaper money to spur investments outside of the oil sector….

        Venezuela’s interests will have zero weight.

        • moctavio Says:

          No, it means that some monetary decisions are made in the US. Given the record of Venezuelans, I will take that any day. There is a factor of ten difference in inflation for example. Hong Kong has a dollar peg, which has been in place for decades, they have done well. Maybe a basket of currencies would be best, reflecting our imports or our exports.

      • Corralito Olvidao Says:

        Miguel’s dream looks a lot like Greece’s nightmare…

      • extorres Says:

        I know Venezuelans whose dream is that Venezuela become the 51st state of USA. You can see the analagous problem with that, no?

        • moctavio Says:

          Doing away with the Bs. is much more different than Greece’s problem with the euro. Investors assumed Greece would be defended by the EU, if Venezuela unilaterally adopted the $ as the currency or a basket of currencies, then Venezuela would still be in charge of running its economy and its deficit. Interest rates on debt issued would depend on that. But if the dollar was the freely circulating currency, how much of the money people have abroad would return? That alone would give the economy a huge boost. And if politicians screw up, nothing will be different…

          • extorres Says:

            I would normally agree, except for the fact that dollarizing implies betting that a local currency would never represent a more efficient economy than the USA’s, yet I can easily see Venezuela being more efficient. In hopes of those more efficient policies being implemented, such as UCT, is that I would prefer we keep our own currency.

      • captainccs Says:

        We would be in the same bind as Greece with the Euro! They can’t devaluate the Euro so the only solution is to go into depression which would be a social bomb.

        Of course, Uncle Sam could always send us a few trillion to bail us out…

        • moctavio Says:

          Greece got int the problem because people assumed the EU would help Greece in a bind, no such thing would happen with Venezuela, it would be a unilateral decision. We would see how many $ there are and if Venezuelans had confidence that the currency would be strong, they would bring their US$ 200 billion or part of that back. Greece does not have oil, there is a huge difference between Greece and Venezuela.

          • megaescualidus Says:

            Greece got in the problem (being fiscally irresponsible) much before being accepted in the EU, and they got accepted in the EU with EU authorities at the time happy to look the other way.

  28. Miguel

    I am of two minds on this one. The reason is that we never had an exchange control as rigid as this one that lasted as long. thus its pernicious effect are worse than those of RECADI or Caldera.

    I do agree with you that currency exchange controls must be removed as fast as possible BUT if some adjustment measures are taken first to balance a little bit better government accounts. And give time to the new government to create a temporary safety net for the populations that will be hit the hardest by the devaluation that will come (namely a working, targeted Mercal and Barrio Adentro).

    For example on assuming office after a blood, sweat and tears speech, announce that gas must be increased to at least half of its production value in 6 month and to its full production cost in one year (there you get your money for neo-Mercal and neo-Barrio Adentro).

    Then create a free exchange rate for travelers, dividend repatriation, family support, electronics and household items etc… Big companies at the very least will wait before sending their dollars out to wait for full CADIVI lifting. There you get people used to the idea and make foreign companies save a little bit in bolivares.

    Then 6 month into the new system you can decide to lift CADIVI altogether on the remaining which is food and medicine but by then you will have had time to organize a new targeted subsidy system.

    Or something like that. NOTE: I am not advocating a progressive release, I am advocating one in two steps, withing the first 6 months of the new administration because after 6 month it may become impossible to do it.

    Capriles is not wrong in a way, he needs to win the election, but it is something that I have written on and on in my blog: if you win on lies or omissions within 6 months chavismo will have recouped and make your administration difficult (Chile’s students anyone?)

    • moctavio Says:

      In the end, what matters is the magnitude of the devaluation. As to “rigidity”, it has been more rigid the last 16 months. Caldera’s were rigid, so were Lusinchis. Caldera allowed a parallel market only for the last seven months. I pointed out that safety net. As for gas, that I have written a lot about. Gas I would do it gradually.

      You want to talk details: day 1, all controls but food and mediciens are removed.

      Food and Medicine at Bs. 6.5, day one.

      Three months later food and medicines go float.

      Capriles is wrong in that he is saying today conditions are not give, I disagree strongly, not removing controls is falling into the trap.

    • BETO Says:


      With all due respect, I disagree.

      All Targeted programs, like “Exchange for Travelers” , some Type of Importers, etc etc..! just creates more corruption.

      Clarity, Openness, Simplicity, Fair and Clear Rules, Level Playing field, reduce corruption.

      The reason among others, of why (Recadi) never worked Properly (despite it was less corrupted than Cadivi.) was the fact that many other factors of the economy had those triggers for corruption, therefore the capital was already fleeing the country.

      The only reason why someone would like to move VAST amounts of national paper to Dollars is 1. Uncertainty in the state of the country. 2. Money laundry.

      Other than that, to be able to invest in your country you need National Paper. Exchange is just a mere exercise.

      I.e. usually countries that work well, economically speaking, have the contrary..! people want to re-patriate the wealth and are penalized from bringing external sources of profits in to the country, that keeps you from extracting that money on the first place.

      However, let me make clear, I agree that Exchange is not the only measure that needs to be addressed. This is just one of the many things that are wrong in Venezuela.

      I also understand that Social safety nets need to exist, but “Safety net” does not mean a “Lazy buy couch” that means if you work and pay taxes you get an work insurance, and if you retire and pay in to your social program, you get your retirement back. Instead of Barrio Adentro.

  29. captainccs Says:

    Miguel said: “I am, after all, not an economist.”

    You lucky Devil! hahaha

    But the real troublemakers are the eCommunists. I’ll read the rest of your article later to make some serious comments.

  30. extorres Says:

    I agree, exchange controls should be removed, ASAP. I would one-up that and suggest a constitutional article near the top to prevent their ever being implemented again.

    By the way, happy to see mention of cash transfers. Using unconditional cash transfers is the ticket to fast-tracking all corrections to the current distorting economic policies, causing as little hardship to the most disenfranchised. Setting up an efficient, inclusive cash transfer system seems crucial for so many corrections that need to be made in so little time.

  31. island canuck Says:

    Excellent post Miguel.

    I agree 100%.
    Exchange controls add up to a fantasy world.

    Most of the things we now buy are priced at a rate of 8 or above, at least here in Margarita.

    If you review the $$ cost of things we are definitely using a higher rate right now. Whether it’s cars or bacon prices are outrageous when compared to prices in,say, Miami.

    Drop the controls, subsidize the basic foods & free up everything else.
    I predict, as you say, a short adjustment period but then a return to normality as every one know what rules we are playing by.

  32. Gene Says:

    Well I think any solution to Venezuela’s economic and social ills has to be holistic and systemic. You need to correct many, many other distortions simultaneously. For example, not opening up the country to investment by imposing the rule of law, defense of property and promoting employment and retraining, while abolishing lower exchange prices for food and medicine is a recipe for disaster. And all this cannot be done helter skelter, it must be dome right and maybe some other thing first.

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