Venezuela: inflation slows down – but there's no cause to celebrate

In recent months, we have witnessed a noticeable deceleration of inflation. In February and March, we saw the prices of many goods and services remaining relatively stagnant, or even falling briefly. The behaviour of prices in June has been similar, coinciding with a seasonal period where several items (such as cheese, various vegetables, and some fruits) tend to be produced in greater quantity than during the rest of the year.

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According to a report published in May by the polling firm Hinterlaces, the inflation of basic goods in April stood at 61.4 percent; while in May, it was at 44.8 percent. Bourgeois economist Luis Oliveros, director of the firm Ecoanalítica, recently said:

"(...) We estimated that for the month of June inflation would finish at 26 percent, the lowest of the hyperinflationary cycle that began at the end of 2017."

This last estimate for June contrasts with the price increase in January, recorded at 196.6 percent, according to the Venezuelan Central Bank (BCV).

According to the above figures, the government is clearly slowing down inflation. However, faced with what should in theory be good news, we must ask ourselves: at what cost and in what way is this slowdown of inflation being accomplished? Should we feel at ease? And more importantly, are the workers the true beneficiaries of this slight improvement?

In our article published on 4 September 2018, in which we analysed the set of measures in the then-recently announced Plan for Recovery and Economic Prosperity, we noted:

"The chorus of bourgeois economists has not stopped insisting on the need to apply ‘severe fiscal adjustments’ (austerity measures) and ‘restrictions on the printing of money’, as the only formula to curb hyperinflation. These economists propose a return to ‘rationality in the economic policy’, which, in the framework of a society based on private ownership of the means of production and competitive anarchy, only translates into losses, sacrifices and disgrace for the poorest layers of Venezuelan society (...) the Bolivarian leadership and its intelligentsia, buried in the swamp of class collaboration, are seeking to open up the economy – although not at the pace demanded by the capitalist class – following this limited and unpopular bourgeois logic."

Following on from this, we will explain how the subsequent development of the government’s orientation has only confirmed our suspicions.

Clearly, a severe, undisclosed fiscal adjustment has been carried out, which is reducing both public spending and the size of the state, along with a strict monetary diet to reduce liquidity at the cost of strangling the level of consumption. The Bolivarian government, subject to multiple internal and external pressures, has chosen to accelerate its movement towards deregulation and liberalisation of the national economy, through means that inevitably unload the weight of the crisis on the shoulders of the workers and the oppressed.

Restriction of monetary liquidity

Hyperinflation and the economic crisis that Venezuela is facing arose as a result of the collapse of oil prices in 2014, which triggered the fiscal deficit (higher expenditure than state revenues) to rise to very high levels – at one point, as high as 20 percent. To cover this deficit, the government decided to undertake an expansionary monetary policy that was not backed up by increases in national production or international reserves. The subsequent decline of oil production from three million barrels per day in 2015 to one million today, according to official data (secondary sources suggest that Venezuelan oil production stands at 770,000 barrels per day) only worsened the critical situation. Immediately after, the harsh sanctions issued by the White House on finance (which prevented the renegotiation of foreign debt) and oil (which have made it difficult to export crude oil) pushed the national economy into a sort of comatose state.

Today it is undeniable that one of the main causes of hyperinflation in Venezuela lies in the excess of circulating money supply, which the government increased by more than 60,000 percent between 2012 and mid-2018. This coincided with the collapse of domestic production – according to the BCV, GDP has contracted by 52 percent in the last six years – and the supply of goods in general (with a decline in imports of more than 80 percent in the last six years). The importation of food, medicine, consumable goods, and machinery into the country decreased severely because the government, in an excessive (and illusory) effort to generate confidence in international markets, prioritised payment of foreign debt over the fundamental needs of the population. With everything that has been paid due to "international commitments" since 2015, it would have been possible to import food for six years at the value of the amount destined for 2013 food imports.

For the Bolivarian leadership, the economic crisis is to be dealt with using any means but revolutionary ones, like nationalising the commanding heights of the economy under control of the workers / Image: Lucha de Clases

The situation of scarcity, caused in large part by the factors described above, coincided with a period of unprecedented growth in the money supply. A lot of money circulating, plus the high speed of circulation itself (to avoid inflation as much as possible, people choose to spend or invest their money quickly instead of saving it) led to a growing shortage of goods and services, resulting in constant price hikes. Although commercial usury is a well-known practice, this was strengthened by scarcity, which, faced with a growing cash circulation ( a pressure of demand), gave vendors an objective advantage over consumers. Such economic distortions partly explain why price control policies failed. How could it be any other way when the laws of the capitalist market impose their dictatorship, which is unrelenting as long as bourgeois property relations to sustain it?

Given the past situation, the government resolved earlier this year to apply a legal reserve rate of 57 percent and a marginal rate of 100 percent, which implies that the country's banks are obligated to keep a certain percentage of their total deposits in reserve, reducing the funds available for credit to companies and individuals, and with this, restricting the monetary supply. This, combined with the profound impoverishment of wages (the minimum wage currently stands at just under $6 per month) and less-frequent (and pyrrhic) wage increases, have generated a contraction in consumption. This means that, based on the hunger of the workers, it has been possible to reduce the pressure of demand, which, faced with the situation of scarcity, pushed prices up more rapidly.

Cendas estimated the cost of the basic family goods basket in May at 2,552,836 bolivares, 32.7 percent higher than was registered in April and with a variation of 115,865 percent between May of 2018 and 2019. According to these calculations, one would require 63.8 times the minimum wage of 40,000 bolivares to cover the cost of all basic family goods. These numbers show the current situation of the Venezuelan workers. Only this data can explain the departure of almost four million Venezuelans to neighbouring nations in recent years, in search of an income higher than the lowest salaries in the region, and possibly the world.

For the Bolivarian leadership, the crisis is to be dealt with by whatever means, except revolutionary means: nationalising the commanding heights of the economy under genuine, democratic control of the workers and the organised masses. Those who attempt to justify the unjustifiable assert that reducing hyperinflation is the supreme economic objective, given the impediments it creates to an anxiously awaited economic recovery. Certainly, inflation is not rising to the levels of 2017 or 2018. However, the attempt to reduce the liquidity of the economy, in the way it is being carried out, is compromising any possibility of future economic growth, despite the sacrifices to which the poor masses are subjected.

The restriction of bank credit, as a direct consequence of the reserve rate policy, can only lead to greater disinvestment in the actual economy and the sustaining of the existing capacity in industry, to replenish stock in the commercial sector. A deeply unlikely dream is that it will lead to the increase of national production (something that the bourgeoisie stopped doing since the 1980s). More shortages, more closures of companies (which have been increased by the bourgeoisie in the last period), more unemployment, and in short, a greater collapse of GDP. This could be the price that the workers and the poor will have to continue paying because of the inability of the Bolivarian leadership to complete the revolution in the face of the fruitless setbacks being undertaken.

It is worth saying that even from the bourgeois point of view, the government tries to abate inflation at the expense of the rest of the economy. The fact that inflation is not increasing to previous levels does not mean that the economic crisis in general is waning. The current monetary policy is a more harmful antidote than the disease itself.

The exchange factor

Hyperinflation in Venezuela was also driven by multiple depreciations of the bolívar, resulting from the serious distortions that our economy has suffered in recent years. Once again, the need to pay off foreign debt – to the detriment of national interests – caused international reserves, which backed the bolívar, to fall by 63 percent since 2014. On the other hand, the flight of capital abroad, which several studies estimate at more than $300 billion, bleeds the country dry and hands it over to the corrupt and voracious bourgeois, bureaucrats, and military. The ruin of the state accounts, which produced a shortage of foreign currency, unable to supply national demand, coincided with an economy full of bolívares and a public eager to get rid of them, which devalued our currency countless times. Faced with the disproportionate dependence of our economy on imports, the devaluation of the bolívar has had a huge impact on the behaviour of prices.

To mitigate the constant rises in the price of foreign currency, as one of the driving factors of inflation, the government decided to resort to the gradual elimination of foreign exchange controls, first with the repeal of the Foreign Exchange Law, allowing the fixing of the official price of currency to that of the parallel black market (or occasionally above), and finally with the abolition of the DICOM (semi-floating exchange rate mechanism) and establishment of the Money Exchange Tables. The latest measure was possible after the White House issued sanctions against the BCV on 17 April, which made direct foreign exchange auctions by DICOM unfeasible and led the executive to accelerate the liberalisation of the foreign exchange model that was already being carried forward. This fact shows how the US pressures have not been entirely in vain. In response to every coercion of imperialism and the right wing, the Bolivarian leadership has made greater concessions to the bourgeoisie, who have been calling for the elimination of exchange controls since 2003. Without major legal and formal extenuating factors to continue the flight of foreign currencies (apart from the fact that today the state does not have enough foreign currency to transfer income as in the past) and with the liberalisation of prices – which even bourgeois economists recognise – the ruling classes have managed to impose part of their interests in economic policy over the interests of the working masses.

With the aforementioned measure of increasing the bank reserve rate as a mechanism to reduce liquidity, the government also sought to reduce the pressure on scarce foreign currency, because if people have less money, in turn, they will demand less foreign currency, goods, and services. Although these measures have not been able to stop the growth of the foreign exchange rate, at least they have slowed it down, which undoubtedly reduces the strength of inflation.

Undisclosed fiscal adjustment

In keeping with a course that, to a greater or lesser extent, all the bourgeois governments in the world follow, the national government has been pursuing serious efforts to cut public spending and reduce the size of the state. At first, this situation was happening de facto due to hyperinflation. The constant rise in prices resulted in the real value of state spending to plummet by more than 70 percent between 2015 and 2018. This means that the grand-sounding government announcements of increases of investments in health and education, among other areas, always corresponded to simple nominal increases, which in national currency were quickly eroded by the repeated devaluations and the resulting inflation. In fact, such announcements could not conceal austerity from the eyes of the masses. To get an idea, it is enough to note the deplorable state of public services, infrastructure, education and health.

Venezuela is experiencing unprecedented economic counter reforms, resulting from the effects of hyperinflation, the crisis in general, and a government that has its back turned on its social base / Image: Lucha de Clases

With a high fiscal deficit, which is covered with the printing of money (which has no solid base in the economy), the government, under the pressure of teams of Chinese and Russian economic advisers, decided to start putting the state accounts in order, to the detriment of public workers and the working class in general. The government gave the go-ahead to the levelling down of wages to the level of the minimum wage in the public administration. They used the little-known Memorandum-Circular 2792 of the Ministry for the Social Process of Labour as a battering ram to carry out this equalisation. The disregard for collective agreements signed before the implementation of the Recovery and Economic Prosperity Plan, coupled with the Memorandum-Circular, allowed the suppression of any contractual socio-economic benefits that would raise wages above the level of the minimum wage, in the state and private sector, as well as the violation of the right to strike. By means of cheapening the state payrolls – apart from the new favours given to employers, the government tries to reduce the fiscal deficit as one of the engines of inflation.

Trampling the rights and gains made by the working class, the executive accelerates the reduction of state spending, combined with the evident ease of layoffs in both the public and private sectors. As for the crisis of decaying capitalism (which the Bolivarian leadership is determined to save, in its own contradictory way) the incredible pulverisation of wages in the country, currently one of the lowest in the world, has not been enough. The crisis has also impacted the reduction of the size of the state in the following way: due to the miserable salaries, there has been no end to the plethora of resignations and abandonments of jobs in the state administration. Although we do not have reliable figures to quantify that phenomenon, it cannot be ignored as it is clear for all to see. Emigration and the search for better incomes in the informal sector point to causes, typical of an economy holding a sign that says "save yourself if you can". Nor can we forget how the current privatisation policy falls within this regressive and ominous atmosphere.

All these elements show the execution of an aggressive process of unprecedented economic counter reforms, which results from the effects of hyperinflation, the crisis in general, and the permissiveness of a government that has its back turned on its social base.

The revolution must be completed

Against all forms of manipulation and historical distortion, we must point out that the catastrophe we are currently experiencing is not the result of the establishment of socialism in Venezuela, which was never the case except in the febrile imagination of the right-wing verbiage and the demagogy or ignorance of the Bolivarian leadership. What failed in Venezuela was a model of regulation that did not sufficiently advance the construction of a new society, but which also did not allow the development of the capitalist market.

Certainly, controls (on foreign exchange and prices) were introduced to the normal functioning of the economy, which, although at one point they represented advances, within the framework of capitalism were condemned to become their opposite. With Chávez at the head, an important policy of nationalisation was developed (where later the bureaucracy intervened to prevent workers' control and dismantle the companies). These elements, combined with the revolutionary fervour of the masses, frightened the capitalists, which worsened the flight of capital and the investment strike that the bourgeoisie has been carrying out for several decades. What was missing was to move towards the final taking over of the commanding heights of the national economy to plan the production and distribution of resources to serve the majority. The attempt to sustain all the social progress achieved, while preserving bourgeois property relations, could only lead to chaos.

The great lesson to be learned by the revolutionaries of the world is that a revolution cannot be carried out halfway. It must be carried through to the end by demolishing bourgeois property relations and the capitalist state. The consequences of not implementing this idea are well-illustrated in Venezuela today.

Despite the current fateful context, the working class and public sector workers have not been defeated definitively. Multiple scattered initiatives for discussion and organisation are being developed throughout the country at the vanguard level. The present moment demands the confluence of all these instances to bring together all the forces of the consistent left, prepare a defensive struggle against all the setbacks that are being carried out, build a revolutionary alternative from below, and finally to give a new leadership to the entire workers' movement, one determined to unrelentingly defend the interests of workers.

The only way out of this quagmire of misery and corruption is to build a planned economy based on the nationalisation – without compensation – of the monopolies, large estates (latifundios), banks and insurers, and the formation of a state monopoly of foreign trade, under strict democratic control of the working class and the organised masses. Obviously, the success of this programme depends to a great extent on the destruction of the bourgeois state apparatus and its replacement by a workers' state made up of the organs of working-class struggle and power (workers' councils, peasant councils and communes), which we must strengthen today to advance in their necessary maturation.