Only without Maduro

Issue 78 - November | December 2018

Klaus-Jürgen Gern from the Kiel Institute for the World Economy sees the expulsion of foreign investors as a major cause of Venezuela's misery. Now it needs confidence-building measures - and possibly the US dollar.

Klaus-Jürgen Gern, economist at IfW Kiel
Klaus-Jürgen Gern, Economist at IfW Kiel
Maduro devalued the currency in August and introduced the "sovereign Bolivar". When do the zeros return to the price tags?

Gladly: This will not be long, because new banknotes alone do not help against rising prices. The devaluation has even fueled the monetary fire. The new currency is already traded on the black market at much lower exchange rates than when it was introduced a few weeks ago. The President has announced that he wants to practice Prussian discipline in the household. But these are just hollow words. The crisis is similar to Zimbabwe ten years ago or the Weimar Republic 1923. An economic and above all social catastrophe for the population. It brings the entire middle class to his fortune and permanently.

Are corruption and mismanagement the main causes of the misery?

Gladly: Corruption and mismanagement are of course problems, but we can observe these phenomena worldwide. In Venezuela, however, Chávez and Maduro have long eroded the structures of the economy with their policies. The scare away of foreign capital and investors was probably the most serious mistake. Technology and know-how, which were incredibly important to the country, pulled away. In addition, hardly any money has been invested in the now ailing crude oil production facilities in recent decades. The production has been falling since the end of the 1990 years - despite the world's largest oil deposits. As long as oil prices were high, the regime could muddle through. But when 2014 broke the oil price, the state's funding was suddenly gone. Meanwhile, the oil production is in free fall. Productivity today is only half as high as when Maduro took office five years ago. The country is in an unstoppable downward spiral.

So everything just gets worse?

Gladly: The crisis will continue to worsen. And the further the economic crisis gets worse, the closer a regime change may be. In any case, without this there will be no way out of the crisis.

However, there are a number of factors that speak in favor of "keep it up": protests are brutally suppressed, many opponents of the regime have left the country, the military is behind Maduro, and it has powerful allies in Beijing and Moscow.

Gladly: The government clings to China as a savior. But that will not work. China has no interest in investing in a bottomless pit.

What could be the way out of the crisis?

Gladly: The currency devaluation was basically correct. However, this does not work without flanking confidence-building measures so that courageous entrepreneurs return to Venezuela. Other countries, such as Zimbabwe and Ecuador, have quite differentiated from their currency and introduced the US dollar in similar situations. That would be conceivable for Venezuela. This is not to be expected with the current government. Only through a new government can confidence in monetary stability be rebuilt.

Vielen Dank für das Gespräch!

Photo: IFW

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