The Venezuelan Crisis: Currency Board, Dollarization and Fiscal Reform

By María Belén Wu and Guillermo García Montenegro Published on March 20th, 2018

The Venezuelan Crisis:

Currency Board, Dollarization and Fiscal Reform

  1. Introduction

While the world’s developed economies struggle to generate inflation and even experience deflation, Venezuela is grappling with the opposite problem – hyperinflation. According to the Venezuelan Congress, the cumulative inflation from January to November 2017 was of 1,369%, and was estimated to exceed 2,000% by the end of the year.[1]

This paper outlines the causes and consequences of the Venezuelan crisis, and aims to examine different approaches to solving the crisis. On the one hand, establishing alternative monetary systems can quickly put an end to hyperinflation, by replacing central banking with a currency board or dollarizing the economy. On the other hand, fiscal reform and debt renegotiations are also crucial to eliminate the primary motivation of excessive money-printing. By analyzing other historical Latin American cases of high or hyperinflation, the paper will shed light on the benefits and constraints of currency boards and dollarization, and suggest accompanying fiscal reforms needed to resolve the current crisis and to prevent future crises.

  1. Causes of the Crisis and Current State of Affairs

A combination of a drastic drop in world oil prices along with government mismanagement and corruption drove Venezuela to its worst economic crisis to date. In 2014, after enjoying roughly 15 years of a petroleum bonanza, a sharp drop of roughly 50% in world oil prices exposed the unsustainability of the populist government’s economic system. At this time, the Venezuelan economy was extremely concentrated in the oil sector, to the point that oil exports represented 96% of the country’s export and 40% of the government’s revenue.[2]Both, fiscal and monetary policies devised during the era of high world oil prices, as well as the government response to the changing landscape, have pushed the Venezuelan economy to the verge of collapse.

The beginning of this catastrophic mismanagement can be traced back to 2002, the year in which opposition parties backed efforts to halt oil production of the national oil conglomerate, PDVSA. High-level executives of PDVSA sought to destabilize Chávez’s government from an economic angle. In roughly two months, their efforts to remove the president from office had failed. Chávez counteracted the insurgency by firing more than half of PDVSA’s employees and ordering the military to take over production.[3]This move marked the beginning of mismanagement in the Venezuelan oil sector, as the government was now in full control of its operations and finances.

With high levels of political instability leading to high levels of capital, as well as roughly two months lost in oil revenues, Venezuela’s foreign reserves were plummeting. The national currency, the bolívar, sank to record lows, and, in response, the government created a series of currency and price controls, suspending the free flow of currency exchange.[4]The government now had full control over the allocation of foreign reserves, a resource the private sector was heavily dependent on— the private sector bought around 60% of its supplies and raw materials from abroad.[5]Now the government could control who was of best interest to keep in business and who was best out of it.

Chávez wanted to use oil rents to tackle inequality and diversify the economy, but he failed miserably to do so. By law, any government revenue that exceeds the projected and congressionally approved budget needs to be deposited into a stabilization fund. The fund is intended to be used counter-cyclically: when oil revenues are high, the government should save money so it can inject it into the economy when oil prices drop. As this government’s popularity rested on its massive social welfare programs, the stabilization fund became a political tool, rather than a stabilizing one.

In 2005, the government-dominated Congress approved the creation of the National Development Fund (FONDEN) to receive petro-dollars from PDVSA, while also granting the president complete oversight over the funds.[6]This measure allowed the government to purposefully underestimate oil prices and engage in extremely high levels of discretionary spending.[7]  While the misiones —the government’s social programs—played an important role in alleviating poverty and diminishing inequality[8]in the country, the funds were also grossly misused for political gains.[9]

The controlled-exchange rate system to limit capital flight proved ineffective, at best. Capital flight never ceased, but, in fact, was corrupted. Chávez was able to subsidize imports via the overappreciation of the bolívar— a form of income redistribution. However, the way this capital control mechanism was set up, allowed capital flight to go hand-in-hand with government corruption. Individuals who received government-subsidized U.S dollars would inflate the price of their imports, or not import anything at all. They would then either resell the dollars to Venezuelans at black-market price or put them in an overseas account. This scheme was so widespread throughout the system that Ecoanalítica, an economic consulting firm, estimates that between 2003 and 2014, around $69.5 billion U.S dollars were stolen via import fraud.[10]As the price gap between the government-subsidized dollars and black-market dollars widens, this type of corruption becomes ever more lucrative for individuals to engage in. In fact, in 2007, despite strict capital controls, the Central Bank of Venezuela (BCV) reported a record high capital flight out of the country of 19$ billion U.S. dollars— the highest ever since Chávez came to power in 1998.[11]  In short, what was once regular capital flight, today is government-sponsored capital flight.

Venezuela’s current economic crisis is not a traditional Dutch Disease case wherein the increase of value of one export drives up the value of the national currency, thereby leading to a decline in other sectors of the economy as their exports become less competitive in the international market. Even the productivity of the oil sector has severely declined over the years: PDVSA’s more than tripled amidst a decline of oil production(see Figure 1).  Under the rule of the Socialist Party of Venezuela (PSUV), the government severely hindered national production via arbitrary expropriations of private businesses and subsequent mismanagement. It is estimated that between 2002 and 2015, there were 1,322 expropriations.[12]Even the leader of the PSUV, Freddy Bernal, in 2014 admitted that the government had either bankrupted these companies or failed to make them profitable, because it did not know how to manage them.[13]

The government also exercised price controls to lessen the inflationary pressure from the incoming petrodollars.[14]Many businesses in Venezuela became unprofitable at the price set by the government and were forced to shut down. However, with the coffers overflowing with petrodollars, the government was able to afford keeping the population happy by importing anything that was wanted.[15]The rapid spending of petrodollars to finance artificially cheap imports and social missions made it impossible for foreign exchange reserves to grow.As a result, the national production of food today is barely meeting 30% of the national demand.[16]

When Maduro was elected president in mid-2013, the Venezuelan economy was already in shambles, and his response —or lack thereof— to the 2014 drop of world oil prices have just made matters worse. Maduro inherited an external debt of more than 91 billion USD (see Figure 2). To cover part of this debt that has come due during his tenure, Maduro has opted to further deplete the Central Banks’ foreign exchange reserves, drastically cut imports of basic staples and medicine, and offer generous debt restructuring packages to bondholders. From having 43 billion USD in its international reserves in 2008, today Venezuela’s international reserves have hit an 18-year low of about 9.8 billion USD (see Figure 3). As of 2015, Venezuela’s imports had already contracted by 30% (see Figure 4). With a plummeting foreign-exchange reserve, price controls inhibiting national production, and less goods being imported, Venezuela has entered a seemingly unstoppable inflationary spiral, to the point of reaching hyperinflation. Instead of getting inflation under control, Maduro’s government has increased the minimum wage four times this year, as well as other welfare programs,[17]and drastically increased the supply of money to service its national debt; just in this year, the money supply increased by 384% (see Figure 5).[18]The more money the government prints and the scarcer foreign reserves become, the more worthless the bolívar becomes. Today, the difference between the official exchange rates and the black-market rate is exorbitant: whereas the official exchange rates are trading for 710 bolívares:1USD (Dicom) and 10 bolívares:1USD,[19]the black-market rate is currently at an all-time high of 111,413 bolívares:1USD.[20]

The government has decisions to make, and it is running out of time. It needs to get inflation under control, attract foreign investment to build needed foreign reserves more rapidly to strengthen the value of the national currency. It must privatize, or partially privatize PDVSA, and many other —if not all— companies to make them profitable again and jumpstart national production. Certainly, the government will need foreign aid to accomplish these goals. We determine that receiving foreign aid and access to new loans is more likely if there is a regime change and democracy is reestablished in the country. At the same time, the international community would need to believe that the new government will be able to implement the macroeconomic policies to stabilize the economy. In the following sections, we discuss how these changes can be made.

  • Alternative Monetary Systems

The immediate solution to the Venezuelan crisis is to change the currency. However, currency redenomination alone may be futile, as hyperinflation has damaged the monetary authority’s credibility. Therefore, it would be necessary to accompany the currency change with a fixed exchange rate regime, or abolish the currency altogether. This section will examine currency boards and dollarization as alternative monetary systems that could be adopted in Venezuela.

Currency Board

On the spectrum of degree of exchange rate flexibility, a free-floating exchange rate regime would occupy one end, while a currency board the other. The key feature that differentiates a currency board from a regular fixed exchange rate is that a currency board’s monetary base must have a 100% backing in liquid foreign assets, and must be readily convertible to the reserve or anchor currency on demand, at a permanently fixed exchange rate.[21]In this way, a currency board provides the benefit of price stability of the gold standard, with the additional benefit that money supply growth is not restrained by a commodity, but can be increased by acquiring foreign assets and issuing the corresponding amount of currency.

Due to the limited number of currency boards, historically or at present, there are debates concerning the requirements that a currency board must meet in order to qualify as such. In fact, the degree of orthodoxy of a currency board can play a crucial role in determining its success or failure, as will be examined in the next section. Firstly, an orthodox currency board requires the abolition of the central bank as the monetary authority, and its replacement with the currency board. The currency board’s sole function is to issue currency based on the fixed exchange rate and market demand for the currency: “A currency board does not have discretionary control of the quantity of notes, coins, and deposits it supplies. Market forces determine the quantity of notes, coins, and deposits it supplies, and hence the overall money supply in a currency board system.”[22]This implies that the currency board must relinquish monetary policy autonomy and eliminates other functions of a traditional central bank, such as regulating the banking system, financing government expenditure by buying bonds, and acting as a lender of last resort. In developing countries like Venezuela, where financial institutions have lost credibility and central banks tend to be under government control, currency boards may be a welcome alternative to help restore credibility by imposing both monetary and fiscal discipline.

Secondly, an orthodox currency board’s reserve assets must not only be at least 100% of the monetary base, but also cannot exceed a ceiling of 105-115%.[23]This is necessary in order to avoid the currency board from engaging in sterilized foreign exchange interventions, by selling the excess foreign assets and acquiring domestic assets in return. Sterilization measures of this nature can lead investors to believe the currency has weakened, and invite speculative attacks that may break the peg. This would also contradict the first requirement for currency boards to function solely as a currency issuance authority.

Thus, by restraining the monetary authority’s functions and ensuring its independence from the government, the establishment of a currency board system should in theory tackle the problem of hyperinflation. However, in Venezuela’s case, it may be hard to restore credibility to any new currency peg, given the government’s long tradition of creating overvalued and virtually fictional pegs. In addition, the very existence of a monetary authority puts it at risk of future manipulation by the government. In this light, dollarization may be a more credible yet irreversible alternative.

Dollarization

Dollarizing the economy could bring many immediate benefits to the recovery of the nation, but it also poses a few problems. First, the benefits of dollarizing the economy entail avoiding currency and balance of payment crises.[24]Given that the country is able to use the dollar as legal tender and not its national currency, the problems of the currency’s value plummeting, or being threatened by speculative attacks are ruled out, stabilizing capital flows. Secondly, it makes transaction costs cheaper in international trade, since there is no conversion necessary at the moment of trading goods, thereby creating a potential of a closer integration with the U.S. and the global market.[25]Thirdly, and especially important in the case of Venezuela, it eliminates the possibility of the government engaging in inflationary finance —that is, indirect taxation via the creation of inflation— since the national government cannot engage in monetary policy, a factor that, as we will see, is a double-edged sword. All these factors would create access for the country to lower interest rate, and as such lower the fiscal cost of servicing public debt.

With great stabilizing benefits, dollarizing the economy also brings new problems to the table. The first, and perhaps the biggest problem that dollarization brings is the complete elimination of monetary policy autonomy. This entails that the government cannot devalue its currency at its own will to make exports more competitive in the international market, or manipulate interest rates to influence the national economy. These factors will depend solely as to how the value of the dollar fluctuates and the policies enacted by the U.S. Federal Reserve.  Furthermore, dollarizing the economy hinders the possibility of the central bank to provide liquidity to support the national banking system. However, the central bank, or whatever authority replaces it, could, in theory, save the necessary funds in advance or even secure lines of credit to be able to supply necessary short-term liquidity into the financial system.[26]

Secondly, the central bank’s ability to generate seigniorage —the ability of the central bank to generate profits via the printing of money, because money can be thought of as non-interest-bearing debt— could be lost. However, the U.S. could always decide to share part of its seigniorage with economies that implement dollarization, especially given the fact that the seigniorage of the U.S increases when other countries dollarize. In fact, as Berg and Borensztein point out, there is already a precedent for this; South Africa shares part of its seigniorage with three other states (Lesotho, Namibia and Swaziland) that use the rand.[27]

The following section explores Latin American cases of monetary and fiscal reform as a result of high or hyperinflation, in order to extrapolate important lessons for the Venezuelan crisis.

  1. Historical Cases

Argentina’s Convertibility Plan (1991-2002)

Argentina’s convertibility plan of the 1990s and its subsequent collapse shed important light on the importance of strict, rule-based implementation to ensure the credibility of a currency board, while also highlighting some inherent weaknesses of the system.

Throughout the 1980s, Argentina experienced hyperinflation as a result of excessive money printing in order to finance government spending, reaching four-digit figures in 1989 and 1990. In 1991, President Carlos Menem replaced Argentina’s old currency, the austral, and sanctioned the Convertibility Law, declaring a one-to-one parity between the new Argentine peso and the US dollar, fully convertible and backed by a minimum of 100% of the monetary base in dollar reserves. The convertibility plan was introduced alongside neoliberal reforms modeled on the Washington Consensus.

The convertibility plan did not operate as an orthodox currency board for two main reasons. On the one hand, the Argentine central bank was not replaced by another monetary authority, but instead remained unchanged. As such, it continued financing government expenditures and failed to impose fiscal discipline. On the other hand, the Convertibility Law did not establish a ceiling on dollar reserves, leading to liberal use of sterilization measures by the central bank that undermined the stability of the peg.[28]

Initially, the convertibility plan was effective in halting hyperinflation, lowering the annual inflation rate from a high of 4,924% in 1989 to 84% by the end of 1991, only eight months after its implementation.[29]GDP growth also rebounded quickly, from -7% in 1989 to 10% in 1991, mainly due to high global commodity prices and increased trade openness as a result of the fixed exchange rate (see Figure 6). The positive effects of convertibility lasted until the Mexican peso crisis in 1994 and the “tequila effect,” which caused massive capital flight and devaluations in other emerging markets and weakened the Argentine economy. This was followed by the Asian financial crisis of 1997 and the Brazilian real crisis in 1999.[30]

These external shocks meant that Argentina was in need of expansionary monetary policy, but the implementation of the convertibility plan meant that Argentina was subject to US monetary policy, which was in a contractionary cycle. In addition, excessive capital flight had contracted the monetary base(see Figure 7). This resulted in continuously decreasing inflation in the following years, even reaching negative levels in 1999-2001. Besides, the resulting real appreciation of the peso lowered the competitiveness of Argentine goods, further contributing to the recession. Government debt rose sharply as well; as a result of its inability to print money to finance its expenditures, the government resorted to issuing dollar-denominated debt instruments in international capital markets (see Figure 8).

The unsustainable conditions of the Argentine economy led to investors’ speculation that the peso was overvalued and the one-to-one parity could not be maintained for much longer. The expectations of devaluation resulted in a higher country risk premium on Argentine bonds, which further aggravated the low output and high fiscal deficit. This in turn triggered more expectations of devaluation, creating a vicious cycle. Ultimately, facing bank runs and an external debt crisis, the Argentine government repealed the Convertibility Law in 2002. The Argentine peso lost approximately 75% of its value and inflation rebounded to 41%.

Argentina’s convertibility plan has valuable lessons for Venezuela: unorthodox, currency-board-like systems can undermine the very purpose of changing the monetary regime, thus increasing the likelihood of failure. In addition, the collapse of the convertibility system shows how lack of monetary policy autonomy and loss of export competitiveness can aggravate a macroeconomic shock and prolong a recession, leaving the currency vulnerable to speculative attack. Lastly, the Argentine case also shows that while changing the monetary regime may be effective in curbing hyperinflation and eliminate the domestic inflation tax, it does not prevent the excessive government borrowing from abroad, thus opening the way for an external debt crisis.

Ecuador’s Dollarization (2000- )

Ecuador’s successful dollarization is worth examining in light of the Venezuelan crisis due to both countries’ economic and political similarities: they are both oil-exporting Latin American countries, and both countries’ leaders have adopted socialist policies that resulted in large government expenditure. Prior to 2000, the sucre –Ecuador’s now-extinct currency– experienced high inflation due to a policy mix of fiscal deficit and expansionary monetary policy. These conditions were exacerbated in the late 1990s by the El Niño weather phenomenon, a sharp drop in oil prices, and the instability in emerging markets following the Asian financial crisis, leading to a crisis in Ecuador and the rapid devaluation of the sucre: “The sucre traded at 6,825 per dollar at the end of 1998, and by the end of 1999 the sucre-dollar rate was 20,243. During the first week of January 2000, the sucre rate soared to 28,000 per dollar.”[31]

In January 2000, President Jamil Mahuad announced plans for dollarization, which caused large-scale social unrest and resulted in a coup d’état. After his replacement by Vice President Gustavo Noboa,[32]the government carried on with the plan to dollarize and the dollar became legal tender in March 2000, at a rate of 25,000 sucres per dollar. The sucre remained exchangeable for one more year and was then taken out of circulation. The immediate effect of dollarization was the rapid reduction in the inflation rate, from a high of 96% in 1999 to 38% in 2000 and has remained at single digits since 2003 (see Figure 9). Furthermore, GDP growth since dollarization has surpassed pre-crisis levels, and has diverged starkly with Venezuelan growth, which has gone the opposite way (see Figure 10).

However, dollarization also has important constraints in Ecuador, most of which are the same problems facedby currency boards, amplified by the permanence of dollarization. First and foremost, while dollarization supports international trade and foreign investment in normal times, it makes countries more vulnerable to external shocks. This was evidenced in the aftermath of the global financial crisis: “The effects of the international financial crisis of 2008-2009, transmitted to Ecuador through trade, caused the monetary base to shrink by US$ 844 million between December 2008 and May 2009. This led to a deterioration in the labor market and halted the progress made with income distribution, poverty and indigence in the previous 24 months.”[33](see Figure 11) Moreover, it is evident that the social costs of dollarization are a reason for the unpopularity of the policy in Ecuador.

Additionally, Ecuador’s dollarization was not accompanied by the abolition of the central bank as the monetary authority, which limited the fiscal credibility of the new monetary regime. Similar to the Argentine case, the central bank retained the roles of banking sector supervision, government debt monetization, and lender of last resort. Initially, dollarization was introduced together with fiscal austerity measures, which were effective in reducing government deficit and debt (see Figure 12). The unpopularity of austerity measures in addition to dollarization were instrumental in bringing the rise to power of socialist president Rafael Correa in 2007.

In the aftermath of the global financial crisis, “the Government of Ecuador created degrees of monetary policy when, by virtue of a resolution of the Central Bank of Ecuador, it obliged private-sector banks to repatriate depositors’ savings held in foreign banks to boost credit in the country.”[34]In addition to this attempt at reversing capital flight made possible by the central bank’s retention of discretionary powers, the government also ended fiscal austerity, leading to rising deficit and debt levels.

Moreover, the Correa administration also allowed the central bank to issue an electronic currency beginning in December 2014.[35]While the government claims that this is meant to aid dollarization and that the electronic currency is fully convertible to dollars, the fact is that the law creating the electronic currency system does not ensure one-to-one parity.[36]Therefore, this could be seen as an attempt at de-dollarizing the economy and creating a new Ecuadorian currency. De-dollarization would prove costly for the Ecuadorian economy; if the government attempts to convert deposits from dollars to electronic currency, the country would experience bank runs as investors panic and withdraw their savings. This would result in a sharp devaluation of the electronic currency, likely triggering another currency crisis.

Ecuador’s experience with dollarization, albeit successful in name, has important flaws parallel to the convertibility plan in Argentina. Firstly, both Argentina and Ecuador failed to abolish the central bank as the monetary authority and fully commit to the new monetary system in orthodox ways, undermining their effectiveness. Furthermore, both countries introduced austerity measures along with currency reform, which were effective in reducing government debt and deficit at first but weakened the economy in the face of new external shocks. This resulted in renewed debt accumulation, domestic and external alike, and in Argentina’s case, this led to an external sovereign debt crisis.

It becomes clear that both convertibility and dollarization would have performed better if fiscal reform had been carried out in a different way that would complement the monetary regime. Bolivia’s experience with fiscal reform illustrates a successful case of debt relief as well as moderate fiscal austerity that helped the economy recover relatively quickly from hyperinflation.

Bolivia’s Fiscal Reforms and Debt Buyback (1985)

The Bolivian case serves yet as another example —perhaps even the best— as to how the Venezuelan crisis can be potentially solved. Like most countries in Latin America seeking to decrease economic dependence from developed nations, Bolivia, too experimented with the Import Substitution Industrialization (ISI) model in the 1950s. The purpose of this model was to expand the internal market, as to not be dependent solely on the export of commodities whose prices are highly volatile in the global market. However, this model failed, because it needed countries to borrow heavily, and when commodity prices fell sharply in the 1980s, Bolivia accumulated an external debt that could not pay back (see Figure 13). In 1985, Bolivia had entered the highest hyperinflation episode in Latin America’s history. Calculations estimate the rate of hyperinflation to be between 10,000%[37]and 24,000%.[38]

WhenVictor Paz Estenssoro came to power in the last months of 1985, his government needed to deal with an unpayable external debt and uncontrollable hyperinflation, the government. Before any talk of debt restructuring and forgiveness could bring any positive result, the Estenssoro government needed to make necessary structural changes to get the economy back on its feet. First, the Paz Estenssoro government continued the moratorium on repayments of principal and interests to the commercial bank creditors, ever since Bolivia ran out of foreign reserves in 1984.[39]Then, the most influential steps that follow were: (1) devaluation of national currency and allow full currency convertibility; (3) full liberalization of trade with a flat 20% tariff on imports; (3) reduction of fiscal deficit mainly via an increase—or elimination of subsidies— of public sector prices, especially oil; and (4) a massive tax reform to broaden the tax base and increase government revenue.[40]Another factor that Jeffrey Sachs does not mention is the partial privatization of state-owned enterprises via the government’s capitalization program. Broadly, through this program, the government selected private investors through a public competitive bidding process to invest money and management skills in the companies for a 50% share ownership “as well as administrative and operating control.”[41]By 1988, this mechanism had raised over US$ 1.6 billion for the Bolivian government, a substantial amount, especially given that the country’s GDP was roughly US$ 3.8 billion at the time.[42]

In 1986, after prices stabilized in the country, and after rigorous, tense negotiations, the official creditor community and the IMF acknowledged that if Bolivia’s foreign debt was to be repaid, it would put at risk the economic and political stability that the country had reached. Based on the country’s successful stabilization efforts, the IMF agreed for the first time to grant a program in which “thedebtor country was not obliged to pay interest to the banks and to clear interest arrears.”[43]Shortly after, the banks did not have any U.S. government or IMF support, and, in fact, U.S. regulators were forcing write-downs of Bolivian debt in the banks’ books. As such, banks did not have any incentives to hold onto Bolivia’s debt, and in two years, a debt buyback was arranged. With the buyback, the government was able to repurchase half of its debt for 11 cents per dollar of face value.[44]The money to purchase this debt came from the generous donations of foreign governments. Regarding the other half of the debt, the IMF supported a gradual process for Bolivia to pay it back at a similar price that the first debt buyback was agreed on.

Thanks to the debt buybacks and renegotiations, the Bolivian government, although having undergone fiscal austerity, had regained enough credibility to maintain a moderate fiscal deficit and debt levels averaging 5% and 55% of GDP respectively in the decade of 1985-1995 (see Figure 14). Government spending played a pivotal role in providing the necessary stimulus to the post-crisis economy, allowing a speedy recovery (See Figure15). Consequently, with the stabilization program and international support, the outcome for Bolivia was outstanding: it ended hyperinflation and “restored economic growth to the country for the first time in almost a decade.”[45]

  1. Conclusion

After shedding light on several ways in which Venezuela can get hyperinflation under control and solve the current crisis, we have made several things clear. Firstly, that regime change and a transition to democracy is necessary for any of these three paths to work. Secondly, that each path carries its own potential benefits and risks. While establishing a currency board or dollarizing the economy can bring immediate price stabilization benefits, and the latter eliminates any possibility of a currency crisis and balance of payments crisis in the future, these alternative monetary systems expose the economy to new risks by relinquishing monetary policy autonomy. This was the case of both Argentina and Ecuador in the face of new external shocks, which resulted in the collapse of convertibility and the weakening of the dollarization regime, respectively. Furthermore, although the credibility brought by a currency board or dollarization may make the servicing of debt cheaper and less risky, the government can still accumulate large, and potentially dangerous amounts of debt. It should be noted, however, that the risk of irresponsible fiscal policy exists in each of the three paths. The only solution to this problem is good governance.

Bolivia serves as a prime example that hyperinflation can be controlled in a short period of time without resorting to a currency board or the dollarization of the economy. This case also shows that economic stability can be rapidly achieved, only insofar as privatization measures, and proper monetary and fiscal policies are supported by the generous help of the international community. Still, it should be noted that the international community can only help so much in the case of Venezuela once the magnitude of the external debt is taken into account: whereas Bolivia’s debt at the time of the buyback was around US$ 4 billion, Venezuela’s debt today stands around US$ 90 billion. Nonetheless, international help in the Venezuelan case is just and necessary. If Bolivia was able to learn and recover from its worst economic crisis in history and maintain the autonomy of the central bank, as well as sound fiscal and monetary policies until the present, Venezuela should be able to do so as well. Still, in Venezuela’s case, it may be valuable to consider both the establishment of a currency board or dollarization as a vow of credibility in addition to negotiating partial debt relief. In this way, monetary and fiscal reform would work together, as relinquishing monetary policy autonomy would be complemented with active and responsible fiscal policymaking, rather than blind austerity measures.

All in all, no matter which path or combination of paths is taken, the new Venezuelan government will need to partially, or completely privatize its state-owned enterprises, take convincing measures to balance its budget deficit, and will need the help of the international community to renegotiate its debt so the debt servicing does not completely consume the extra revenues generated by sound fiscal and monetary policies, thereby allowing the country’s economy to recover more rapidly.

SEE WORK CITED:

The Venezuelan Crisis (Work Cited – PDF doc)

*The opinions published herein are the sole responsibility of its author.*