For several years now, approximately since 2017, when Venezuela entered fully into a hyperinflationary process, the debate has started on the relevance or not of dollarizing the economy, as a mechanism to solve the hyperinflation and brutal economic crisis hitting the country.

By: Leonardo Arantes – Unidad Socialista de los Trabajadores (UST), Venezuela

Translation: Corriente Obrera Lit-ci U.S.

Bourgeois economists and political leaders of the bosses’ opposition, including former presidential candidates, have proposed to dollarize the national economy. For their part, the spokesmen and leaders of the bourgeois and dictatorial government of Nicolás Maduro had been dismissing the proposal, disregarding it as a possibility.

However, after years of exchange controls, which were a source of corruption and generated the largest capital flight in the history of the country[1]; sanctions for dollar transactions in the parallel market[2] (although bourgeois and bolibourgeois were allowed and were all in the business of the exchange rate differential and capital flight) and rhetoric forbidding the use of the dollar, classifying it as a “criminal” currency used by the U.S. “empire” in its “economic war” against Venezuela, Maduro’s government was changing its position regarding dollarization. A sign of this is Maduro’s statements on 11/17/2019, stating that, the increasing role that the U.S. currency plays in Venezuela’s economy would be like a ” relief valve” in the face of the crisis, contrasting this assertion with all the previous official discursive line.

“I do not consider it bad (…) that process they call dollarization can contribute to the recovery and deployment of the productive forces of the country and the functioning of the economy (…) thank God it exists” (Televen, Program José Vicente Hoy 17/11/2019).

Thus, the hyperinflation that permanently and constantly devalues the Bolivar (national monetary currency), has been imposing the U.S. currency as the de facto currency that governs the real and daily economy of Venezuelans.

A report by the consulting firm Ecoanalítica estimated that transactions in dollars by November 2019 represented more than 53% of the total; while in cities such as Maracaibo, one of the most important cities in the country, they would reach 86% by then. Currently, estimates vary from 55% to 70%.

The truth is that the presence and influence of the U.S. currency in the Venezuelan economy is increasingly growing and decisive, which does not mean that the majority of the population has access to it. The aforementioned Ecoanalítica study indicates that only 35 to 40% of the population has access to dollars.

What are the immediate effects of this situation, what measures have been adopted by the Maduro dictatorship regarding dollarization, what does it consist of and what are the consequences of dollarization for the Venezuelan economy and mainly for the working class? these are the issues we wish to discuss in this text.

The increasing use of the dollar in Venezuela and the increase in inequality

The undeniable increasing prominence of the US currency in the Venezuelan economy, along with the fact that only a minority percentage of the population has access to it, generally via remittances, foreign savings, exports, smuggling, gold and illegal operations, makes life extremely hard for those who continue to rely on bolivars in an informally dollarized economy. Mainly for poorly paid public employees and workers in the informal sector with very low purchasing power; some workers in the formal private sector receive extra payroll bonuses in dollars (paid out in bolivars, at exchange dollar rates), due to the need of private employers to preserve an indispensable part of the labor force, which would otherwise opt for migrating.

Thus, an economic duality is consolidating in the country, expressed in the division of a minority and dollarized segment (those who have access to dollars through the aforementioned means) and another primitive, impoverished and subsidy-dependent majority segment. This situation is similar to that experienced in Cuba with the introduction of the Cuban Convertible Peso, whose value is equal to that of the dollar, and whose use became widespread among tourists visiting the island and benefited Cubans working in the tourism sector, who tend to have a more comfortable position than their compatriots who receive their income in the traditional Cuban peso. In short, Venezuela is witnessing an increase in inequalities and in fact segregation among the population, depending on the currency at their disposal.

An additional element, arising as a consequence of this is the Bodegón economy[3], with its component of geographical discrimination which acts as a differential factor; thus, while the bodegones light up the main streets and well-to-do areas of Caracas, the main capitals and some important cities of the country, in the provinces they suffer shortages, power outages, water, internet, that is, the deterioration of services in general and complete neglect.

Recent advances towards dollarization

After years of rhetoric and hypocritical proscription, the bourgeois and dictatorial government of Maduro currently tolerates, normalizes and even encourages it. Recently he has been making several announcements which, although for the time being do not constitute a formal dollarization of the economy, they move in that direction or at least increase its use in the country’s economic transactions, formalizing and partially regularizing it.

The reasons for this turnaround in the official position are the worsening of the brutal economic crisis; the complete destruction of oil production, and, thus, the decline in oil exports; the flight of capital; foreign debt payments[4]; all this aggravated by the economic sanctions. In this context, Maduro’s government, as a true bourgeois government, responds with the application of a ferocious austerity plan tailored to the needs of businessmen, bankers and local and foreign investors.

After the easing and virtual elimination of exchange and price controls (the lack of resources prevents him from artificially fixing the value of the foreign currency and takes away the ability to import raw materials and maintain regulated prices), followed the 2018 package[5], which among other things included successive devaluations that brought the official dollar to prices similar to the parallel dollar (once “criminal” dollar, an agent of the “economic war” in the officialist and pro-government discourse), further destroying wages. At the beginning of May 2019, a resolution of the BCV [Venezuela’s Central Bank] authorized private banks to open exchange counters to facilitate foreign currency transactions between private individuals.

Afterward, the fixing of prices and extensive use of the U.S. currency was allowed in commerce, and the sale of gasoline in dollars was decreed (some other services, such as household gas is also paid in dollars). Subsequently, the government, through the fraudulent and defunct National Constituent Assembly (ANC) passed the so-called “Anti-Blockade Law”, in order to advance in the privatization of state enterprises and the delivery of mineral and hydrocarbon resources to transnational corporations, for which dollarization is an attractive option[6].

Early this year, the government continued to step on the accelerator towards the de facto dollarization of the economy.

On January 1, 2021, the television network Telesur broadcasted an interview with Maduro, where he declared: “We are authorizing savings accounts, checking accounts in foreign currency and people will be able to pay at the price of the currency in bolivars”. Later, on the occasion of his visit to the National Assembly, recently elected in the questioned elections of last December 2020 and now controlled by Chavismo, for the presentation of his Annual Report and Accounts, the annual administrative report, he made this announcement official, which was accompanied by the intention of “advancing 100% towards a digital payment system in the country”[7]. This, together with the opening of accounts in dollars, will continue to increase the growing influence of this currency in the battered national economy. On that occasion, he also mentioned that a mechanism to implement taxation and tax collection in dollars was being evaluated.

Some private and public banks have already begun to open accounts in dollars, to adjust the so-called “custody accounts”[8] to common accounts, and some have begun to offer the purchase and sale of U.S. currency to their clients; according to Reuters agency, some are also issuing debit cards for the accounts in dollars.

The truth is that with the adjustment plan and the advances in the liberalization (not yet fully formalized) of the use of the dollar, the discredited Maduro government seeks to continue deepening the surrender of the country and to do good business with national and foreign capital, bankers and transnational corporations.

To use the same words of the Venezuelan president, dollarization is therefore “a relief valve”… for investors who buy dollars and benefit from the use of a strong currency and not devalued bolivars, but in no way does this ensure prosperity and welfare for the working class and the poor people in general.

The consequences of dollarization for the working class

Since dollarization consists basically in the adoption by a country, in this case Venezuela, of the monetary unit (dollar) issued by the US government, some experiences indicate that this measure has been effective in curbing hyperinflation and that the country that adopts the foreign currency eventually ends up exhibiting inflationary indexes similar to those of the country issuing the currency.

It is not the purpose of this article to relate such historical experiences or to go into detail on the economic context in which this would be possible, but it is pertinent to point out that this possible positive historical experience is accompanied by elevated costs and heavy consequences for the country’s economy in general and for the working class, which soon appear.

A first effect is that, upon adopting dollarization, the country loses any power over its monetary and exchange rate policy, which prevents it, given the circumstances, from financing the fiscal deficit and public spending through the devaluation of its currency, which is the mechanism that the Venezuelan government has been consistently applying in the face of the bankruptcy of production and the consequent scarcity of resources.

In this way, the Venezuelan government, whichever it may be, would be prevented from adjusting fiscal imbalances and/or the consequences of the recurrent cyclical crises of the world capitalist economy, such as a scenario of falling national income due to the fall in oil prices, or, as in the Venezuelan case, a combination of falling oil production, falling oil prices and falling oil exports. Thus, in order to overcome this scenario, the country is tied to external indebtedness, increasing its dependence on financial institutions and with the consequent burden of macroeconomic adjustments, which end up being unloaded on the shoulders of the workers.

Another element that directly affects Venezuelan workers is the fact that, upon dollarization, the prices of basic services would tend to equalize with international prices (which in some cases is already happening de facto). Thus, prices, for example, of gasoline, gas, electricity, telecommunications, other basic services and many professional services such as private medicine, would necessarily increase to international price levels, which together with low salaries would worsen the hardships for workers and inhabitants of the popular and humble sectors of Venezuela.

All this is particularly serious in a country like ours, with international reserves in bankruptcy, income from exports (mainly and almost exclusively oil) at very low levels, with oil production at its lowest levels since 1947, it is worth asking in this context, where will the resources in US currency come from to pay salaries, pensions, adjust fiscal accounts and guarantee the much-needed imports of goods and services, once dollarization is adopted.

A question to which a bourgeois government like that of Venezuela would easily respond with indebtedness (if it had access to it), with the consequences of increased dependence and macroeconomic burdens previously mentioned.

Dollarization deepens the surrender to imperialism

The national currency is one of the elements that make up the definition of a nation, abdicating its use, its issuance and an independent monetary policy, deepens the country’s dependence on imperialism, in this case U.S. imperialism, since the Venezuelan State renounces to any form of control over its monetary policy, abiding by the decisions of the issuing entity of the U.S. dollar, that is, the Federal Reserve Board. This renunciation to manage the nation’s monetary policy implies the impossibility of autonomously resolving credit and interest rate fixing policies, as well as supervising the payment system and the stability of the national financial system, in addition to renouncing the autonomous issuance of public debt, all functions that would be totally or partially subordinated to the decisions of the authorities of the North American country. All these factors of an economic-monetary nature are accompanied by the element of political submission, incorporating an element of colonial subordination to U.S. imperialism.

Ecuador, inflation control, the continuing crisis

The Ecuadorian government’s formal adoption of the dollar as a means of payment and monetary unit for the domestic market generally achieved effective results in reducing inflation. Indeed, in 1999, the last year of circulation of the sucre, the inflation rate exceeded 53%, falling to around 20% by 2001, despite the immediate difficulties generated by the dollarization process, and since 2002 it has never again exceeded 7%.

The reasons for this result are very simple: since there is no currency issuance other than that authorized and carried out by the U.S. Federal Reserve, the circulating monetary mass in the country was reduced from the outside, and its size was fixed and determined with no possibility of variation. With the money supply thus constrained, prices tended to adjust to it; since the sum of the prices of all goods and services offered in the country tended to equal the size of the existing money supply, and since this could not grow unless authorized by the foreign issuing entity (with generally low inflation), prices could not increase significantly either, thus suffocating inflation.

However, this has not been able to stop the recurrent crises that the country is experiencing, with their consequent hardships for the Ecuadorian working class. The expected and promised foreign investments, offered as a panacea for the problems, have had no such effect, while productivity compared to other similar nations has decreased. Ecuador’s economy is totally commodity-based. Ecuador’s economy is based on natural resources, dependent on the ups and downs of oil prices, and the working class lives mainly on remittances from Ecuadorian emigrants who went mainly to the United States, Spain and Italy.

An example to take into account: the European case

As a historical experience, it is pertinent to note that when the weaker economies of the European Union (EU) adopted the Euro, a currency and policy tailored to Germany and France, the strongest economies, the former, with fewer possibilities to compete in the world market to compensate for the fall of their exports, cover their fiscal and balance of payments deficits, were forced to resort to indebtedness.

As a result, countries such as Greece saw their external debt increase by 80% between 2005 and 2010; Spain, for its part, doubled its debt between 2007-2010; Portugal had to request a financial bailout that increased its debt by 74 billion euros. Cyprus, Slovenia and Ireland suffered similar consequences.

The worst thing is that once their debt possibilities were exhausted, these countries were forced to turn to the banks and international financial organizations, who, in order to recover their loans, imposed all kinds of cuts: austerity programs, privatizations, massive layoffs and elimination of pensions, which they had to and continue to apply.

Our low productive development, added to other elements already mentioned, such as the collapse of reserves and the fall in exports, sound the alarm bells about the effects that dollarization would have on Venezuela, which could be similar or worse than in European countries with weaker economies in that continent, implying higher levels of indebtedness and great added difficulties to reduce the fiscal deficit, which would translate into more hardship for Venezuelan workers and the poor people of the country.

Notes

[1] Studies such as the one by Luis E. Gavazut, among others, affirm that more than $500 billion dollars would have been leaked only in the ten years of CADIVI’s existence, from 2003 to 2013.

[2] Reprisals against ordinary citizens who exchanged a few dollars, extortion and “matraqueo” by police and military officials, accusations against web portals that published the price of the parallel dollar, among other practices.

[3] Stores selling imported goods with prices in dollars.

[4] The government, although without admitting it publicly, in view of the impossibility of continuing to comply with them, suspended payments of foreign debt, entering into a situation of default (or at least selective default). Recently, Maduro summoned PDVSA bondholders to reach payment agreements.

[5] Baptized with the pompous name of “Economic Recovery and Reactivation Plan”.

[6] By virtue of, among other things, the low salaries, which would be paid with a tiny amount of dollars.

[7] Maduro/speech before the National Assembly/12-01-2021.

[8] An alternative mechanism that some private banks offered to businessmen and traders who handle high volumes of dollars, in order to safeguard them, although it was not possible to operate with them.