The Worst Economic Policy Ever Imagined

There are two countries currently applying foreign currency controls in Latin America: Venezuela and Argentina. In both countries, as is the case every time these policies are imposed, results have been disastrous.

Foreign currency controls are nothing but a restriction imposed by governments on any acquisition of foreign currencies — mainly the US dollar — the sale of which is barred from banks and currency exchanges. Importers must ask the government for the dollars they need to purchase goods, and exporters are forced to sell the money they receive to the central bank or some other agency created to that end, at a government-set rate. In all but a few cases, governments resort to these measures when they record severe reductions in the volume of foreign-exchange reserves at their disposal, or, occasionally, when they detect significant outflows of dollars. There are also cases in which governments with totalitarian leanings — communist models or similar — impose controls on foreign currencies to restrict the citizens capacity to travel and to save.

In the cases in which the level of reserves gets too low or in which citizens rapidly convert their assets into a foreign currency (in Latin America, the US dollar), that currency’s price tends to go up. This boosts inflation, due to increased prices for imported products, which is what governments try to avoid. They are unable or unwilling to understand that the appreciation of the US dollar relative to the local currency takes place because there is too much of the latter in the country: as is the case of any good or product of which there is oversupply, depreciation against the dollar is inevitable.

In Venezuela, Chávez’s government imposed controls of this type ten years ago, fearing the country’s instability would lead to a significant flight of capital. They also sought to control, while they were at it, the movement of people. Since then, constituents have had to resort to the government for dollars, or to exchange them in what is known as the “parallel market,” where the price of the currency is free to fluctuate based on market forces.

This led to a situation in which the same item, the dollar, has two different prices: the official price, lower, and a second price, the parallel price, which represents the dollar’s true value. The difference between the two prices was not very large at first in Venezuela, because the Government could more or less keep the dollars needed by the people flowing, but as time went by and the chavista model implemented its absurd policies, the difference started to increase at an alarming rate.

The Government of Venezuela has gone through a shocking share of its income — manly derived from the high price of oil — in gifts to other countries, in broad, vote-buying social policies, and in extreme corruption and waste. To face those expenditures, the government has printed Bolívares Fuertes, the local currency, at an astonishing rate, while its foreign-exchange reserves continued to fall. The result of these measures and of the uncertainty the country is mired in is that the Bolívar Fuerte, which could be traded at 4.30 Bsf. per USD a year ago, had to undergo a drastic devaluation, to 6.30 Bsf. per USD.

However, the truly important aspect is that the price of the parallel dollar, which shows the real state of the economy and the citizens’ expectations, has gone in the same period from 8.20 Bsf. per US dollar to a breathtaking 43.00 Bsf. per US dollar. As people find it impossible to get their hands on “official” US dollars, the Bolívar Fuerte’s value has gone down several times in a single year, creating several problems for the citizens: inflation, a severe shortage of basic products that include food, medicine, and all kinds of mechanical parts, and de facto restrictions on trips abroad.

What can President Nicolás Maduro do in this situation? Actually, very little. If he keeps the foreign exchange control the way it has been until now, the scarcity and the decay now dominating the Venezuelan economy will continue to worsen, creating a potentially explosive level of unrest. If he opens the foreign exchange market partially, he will only manage to appreciate the parallel dollar, as this would amount to telling the population the economic situation is in fact as bad as everyone thinks it is. If he opens the foreign exchange market all at once, there will be an inflationary escalation, whose consequences are impossible to predict. Thus, trapped by his own policy, Maduro is now in a dead-end street and facing a threat to his own political survival.


A similar problem, though not as intense, is the one faced today by the president of Argentina. She allows mini-devaluations in the official exchange rate, which never manage to capture the value of the parallel (or “blue,” as they call it there) dollar. In sum, in an attempt to control the flow of foreign currencies, the governments that resort to these restrictions create situations that lead to serious devaluations and only manage to make the problem worse. Don’t you think that this, in practice, is the worst policy imaginable?

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