Venezuela’s Maduro faces hard choices

Posted on Saturday, 03.01.14

IN MY OPINION
Andres Oppenheimer: Venezuela's Maduro faces hard choices
BY ANDRES OPPENHEIMER

Venezuelan President Nicolás Maduro's disastrous government is in much
bigger trouble than most people think, not because of the student
protests that have already resulted in more than 16 deaths, but by a 56
percent annual inflation rate — the world's highest — that may soon turn
his country ungovernable.

Most economists agree that no country can maintain a 56 percent
inflation rate for several years. History shows that when countries
reach that inflation level, they either take draconian austerity
measures to curb inflation, or they fall into hyper-inflation, and
economic and political chaos.

In other words, it would be almost impossible for Maduro to stay in
power until the end of his term in 2019 without stopping the
inflationary spiral, putting an end to food shortages, and preventing an
economic meltdown.

Here are his available options:

• A traditional IMF-supported austerity package. Much like bankrupt
Greece did recently, and many Latin American countries have done, Maduro
could ask the IMF to rescue Venezuela with emergency loans and a package
of austerity measures. That would require, among other things, massive
cuts in public spending, reversing nationalizations, lifting price
controls and restoring the independence of the central bank.

Of course, all of this would be diametrically opposed to everything
Maduro and his mentor, late President Hugo Chávez, have been preaching
over the past 15 years. And, if he took these austerity measures, Maduro
would most likely need to form a coalition government or reach a deal
with the opposition to prevent the ongoing street protests from getting
bigger, and bloodier.

• A self-imposed austerity package. Maduro could try a self-imposed
package of belt-tightening measures, without IMF assistance. Much like
Mexico did recently with its Pact for Mexico, in which all major
political parties agreed on long-term economic reforms, Maduro could
call the opposition to sign a national economic salvation plan.

But the opposition would most likely not go for it without a coalition
government that would restore a separation of powers, create an
independent central bank, and call for early elections.

• Dollarizing the economy. Much like Panama, Ecuador and most recently
Zimbabwe have done, Maduro could stop the inflationary spiral by
adopting a basket of major currencies, which in effect means the U.S.
dollar.

That would help restore confidence in the country's economy. But it
would not only be embarrassing for Maduro, who claims to be an
"anti-imperialist'' revolutionary, but would result in the same
draconian public spending cuts as an IMF package. It would be hard to
enforce without a coalition government or a political agreement with the
opposition.

• A Chinese bailout. Much like Cuba did with the former Soviet Union,
Maduro could ask oil-hungry China to bail out Venezuela in exchange for
virtually taking over the country, and turning it into a Chinese
satellite state.

Problem is, the Chinese are prudent business people, and they are
already worried about the more than $20 billion in outstanding loans to
Venezuela. Last year, Venezuela asked for a $10 billion loan from China,
but only got half of that with stronger conditions attached.

Now, with greater political uncertainty than last year, China will be
even less likely to bail out Venezuela, says Evan Ellis, a professor
with the Center for Hemispheric Defense Studies in Washington D.C., and
a top expert on China-Latin American ties.

When I asked Ellis whether China would not be tempted to run greater
economic risks in exchange for controlling oil-rich Venezuela, he said
that's unlikely. It would require a level of Chinese control and
supervision that would infuriate the United States, he said.

"Every commercial and strategic opportunity that the Chinese pursue in
Latin America, they do with one eye to the reaction of the United
States," Ellis said. "China doesn't want to turn the United States, its
biggest trade partner, into an enemy."

My opinion: It's hard to say which of these options Maduro will choose,
but it's clear that doing nothing is not an option for him. Praying for
a new hike in world oil prices won't work, because virtually no serious
economist is forecasting a major rise in world oil prices anytime soon.

Maduro will have to make massive cuts in public subsidies, which he
cannot enforce by himself in a deeply divided country without triggering
more — and larger — social protests. Barring an unlikely Chinese
bailout, he will need a political agreement with the opposition leaders
he now insults every day.

http://www.miamiherald.com/2014/03/01/3966897/andres-oppenheimer-venezuelas.html