Venezuela is Not Greece

With Venezuela's
economy having contracted last year (as did the vast majority of
economies in the Western Hemisphere), the economy suffering from
electricity shortages, and the value of domestic currency having
recently fallen sharply in the parallel market, stories of Venezuela's
economic ruin are again making headlines.

The Washington Post, in a news article
that reads more like an editorial, reports that Venezuela is "gripped
by an economic crisis," and that "years of state interventions in the
economy are taking a brutal toll on private business."

There is
one important fact that is almost never mentioned in news articles
about Venezuela, because it does not fit in with the narrative of a
country that has spent wildly throughout the boom years, and will soon,
like Greece,
face its day of reckoning. That is the government's debt level:
currently about 20% of GDP. In other words, even as it was tripling
real social spending per person, increasing access to healthcare and
education, and loaning or giving billions of dollars to other Latin
American countries, Venezuela was reducing its debt burden during the
oil price run-up. Venezuela's public debt fell from 47.5% of GDP in
2003 to 13.8% in 2008. In 2009, as the economy shrank, public debt
picked up to 19.9% of GDP. Even if we include the debt of the state oil
company, PDVSA, Venezuela's public debt is 26% of GDP. The foreign part
of this debt is less than half of the total.

Compare this to
Greece, where public debt is 115% of GDP and currently projected to
rise to 149% in 2013. (The European Union average is about 79%.)

Given
the Venezuelan government's very low public and foreign debt, the idea
the country is facing an "economic crisis" is simply wrong. With oil at
about $80 a barrel, Venezuela is running a sizeable current account
surplus, and has a healthy level of reserves. Furthermore, the
government can borrow internationally as necessary - last month China
agreed to loan Venezuela $20bn in an advance payment for future oil
deliveries.

Nonetheless, the country still faces significant
economic challenges, some of which have been worsened by mistaken
macroeconomic policy choices. The economy shrank by 3.3% last year. The
international press has trouble understanding this, but the problem was
that the government's fiscal policy was too conservative - cutting
spending as the economy slipped into recession. This was a mistake, but
hopefully the government will reverse this quickly with its planned
expansion of public investment this year, including $6bn for
electricity generation.

The government's biggest long-term
economic mistake has been the maintenance of a fixed, overvalued
exchange rate. Although the government devalued the currency in
January, from 2.15 to 4.3 to the dollar for most official foreign
exchange transactions, the currency is still overvalued. The parallel
or black market rate is at more than seven to the dollar.

An
overvalued currency - by making imports artificially cheap and the
country's exports more expensive - hurts Venezuela's non-oil tradable
goods' sectors and prevents the economy from diversifying away from
oil. Worse still, the country's high inflation rate (28% over the last
year, and averaging 21% annually over the last seven years) makes the
currency more overvalued in real terms each year. (The press has
misunderstood this problem, too - the inflation itself is too high, but
the main damage it does to the economy is not from the price increases
themselves but from causing an increasing overvaluation of the real
exchange rate.)

But Venezuela is not in the situation of Greece - or even Portugal, Ireland, or Spain. Or Latvia
or Estonia. The first four countries are stuck with an overvalued
currency - for them, the euro - and implementing pro-cyclical fiscal
policies (eg deficit reduction) that are deepening their recessions
and/or slowing their recovery. They do not have any control over
monetary policy, which rests with the European Central Bank. The latter
two countries are in a similar situation for as long as they keep their
currencies pegged to the euro, and have lost output six to eight times
that of Venezuela over the last two years.

By contrast, Venezuela
controls its own foreign exchange, monetary, and fiscal policies. It
can use expansionary fiscal and monetary policy to stimulate the
economy, and also exchange rate policy - by letting the currency float.
A managed, or "dirty" float - in which the government does not set a
target exchange rate but intervenes when necessary to preserve exchange
rate stability - would suit the Venezuelan economy much better than the
current fixed rate. The government could manage the exchange rate at a
competitive level, and not have to waste so many dollars, as it does
currently, trying to narrow the gap between the parallel and the
official rate. Although there were (as usual, exaggerated) predictions
that inflation would skyrocket with the most recent devaluation, it did
not - possibly because most foreign exchange transactions take place
through the parallel market anyway.

Venezuela is well situated to
resolve its current macroeconomic problems and pursue a robust economic
expansion, as it had from 2003-2008. The country is not facing a
crisis, but rather a policy choice.