Venezuela: Dollarization takes central stage
Dollarization is not the panacea, but is a first step, insufficient without doubt, but necessary to restore credibility
There is a national consensus on an integrated monetary reform as the only way to escape from the hyperinflation Venezuela is submerged in. Some, like the government, are trying to implement this reform without admitting it publicly by testing with heterodox methods such as the Petro.
However, an overwhelming majority of economists focused their recommendations among well-known methods. Namely, to continue with the same currency and impose fierce fiscal and monetary discipline; such as with a currency or monetary board or dollarization.
In the last few days, however, due to the country’s degree of deterioration, the idea that the solution is a dollarization like the one implemented by Ecuador – certainly a drastic measure–, has gained particular strength. Recognized economists that, until recently, were opposed to dollarization have changed their minds or are getting near to considering it as a serious option.
Two events have probably sped this new consensus.
First, at the people’s level, what the citizens (meaning voters) are feeling is that, “everything is dollarized except salaries”, which is not entirely true, but this is the feeling of those who earn a monthly minimum wage, including bonuses, of $7 at an uncontrolled currency exchange rate. Or of $35 at the official DICOM rate this week.
Second, the financial advisor of the only presidential candidate of the ‘opposition’ is considering dollarization as his government’s economic plan; that dollarization is the best, and maybe the only, way stop hyperinflation once and for all.
In the words of professor Steve Hanke, who advised Ecuador and Montenegro, among others, in their dollarization processes: “dollarization solved the problem, end of the story. It’s literally the solution from one day to the other.” He added: “Essentially Venezuela is dollarizing spontaneously, and the next logical step is to make it official.”
Dollarization is not the panacea, but it is the first step. Insufficient without a doubt, but necessary to restore credibility to the financial system. Without it, it’s almost impossible at this point to solve other problems, such as removing price controls, restructuring debts, withdrawing PDVSA from insolvency, restoring the rule of law, and guaranteeing ownership rights.
Dollarization strength lies in removing the monetary authority for the BCV (Venezuela’s Central Bank) to print unbacked currency, and it acts as a straitjacket for any future expensive plans of a ruling political class.
Other methods recently considered as less ‘clean-cut’ had the weakness of keeping the Central Bank’s authority, believing that it’s going to be managed overnight by vestal virgins, free of political or social pressures. Because this is far from happening, there is a risk of a failure to stabilize the currency due to lack of credibility, bringing with it even the probability of another round of hyperinflation.
Those who oppose dollarization will continue arguing that it diminishes room to maneuver when facing a drastic drop in trade. But this largely depends on what level of moderation surplus-revenue spending is managed during times of prosperity.
Critics also claim that over time, after years of great economic growth, Venezuela could fall again into currency overvaluation, dubbed as “Dutch disease”, something that also is not necessarily true.This is evident if we reflect on Ecuador’s experience, also an oil-rich country. They went through dollarization in 2000 and held steady through the 2015 drop in oil prices, despite having their own problems, it’s true. But, what country weathered that storm perfectly? Is there someone that believes their living standard from that moment until now is worse than ours?
The answer is obvious to those thousands of Venezuelans that fled and continue to seek refuge in dollarized countries, and in the 95% of approval dollarization has among the remaining citizens.