“Cadivismo”: The Ruin of Venezuela’s Economy

By: María Gabriela Díaz - Oct 21, 2013, 4:00 pm

Last Tuesday, President of Venezuela Nicolás Maduro blamed the opposition for the economic crisis, the hoarding, commodity speculation, smuggling, and “Cadivismo” — his new term for the unofficial market of foreign currency.

For the last ten years, the Commission of Foreign Exchange Administration (a.k.a. CADIVI) has regulated all foreign currency transactions. However, over the last few years the fraudulent acquisition of foreign currency at an official rate and its sale at the parallel market rate has become a regular business. After so many years of the government looking the other way, this illegal activity has become unstoppable.

Of course, the conspiracy theories blaming the opposition for destabilizing the country are not new. Maduro’s predecessor used this domestic enemy to unify the chavismo and deflect people’s eyes away from the true problems. Nevertheless, President Maduro has recycled this argument to request the Enabling Law (Ley Habilitante) from the National Assembly. If approved, this legislative instrument would allow him to rule by decree for a year. Even though it was designed to legislate in times of crisis, when quick measures need to be applied, Chávez used it several times for purposes different than the ones he requested it for.

During a three hour speech, Maduro talked about Chavez’s 3R approach (revision, rectification, and boost) to tackle the economic crisis, reshape economic structures, and fight against corruption. It was as if he were foreign to the previous administration, coming to change course and save the day. After making these claims, I wonder: has he forgotten that he comes from that same previous regime?

But what worries Maduro the most is the economic crisis he has inherited, one of the worst in decades. Even though during Chavez’s regime Venezuela experienced the most profitable oil revenues in its history, it didn’t save it from the Dutch disease (“negative consequences arising from large increases in a country’s income”). The main problem now is the Venezuelan economy’s dependence on imports — 70 percent of the goods Venezuela consumes are from imports — and its lack of foreign currency to satisfy its demand.

This year PDVSA (the main government-owned oil company) is supplying the Central Bank of Venezuela (BCV) with 2.6 percent more foreign currency than last year. Nevertheless, companies state that the amount is not enough to satisfy their demand for all the necessary imports, and food shortage levels rose to almost 20 percent, according to the BCV’s own Scarcity Index (which measures the levels of availability of basic food products).

This means that every time a Venezuelan goes to the supermarket, he won’t find one out of five basic food products, such as milk, flour, butter, sugar, or chicken.

Piecemeal Reform Failures

Until last February, the government offered the Foreign Currency Bond Trading System (a.k.a. SITME) as an alternative mechanism to complement CADIVI. It was the only way for many companies to manage their imports. Also, it kept the gap between the official rate and unofficial rate not so stark. The central government then announced the Complementary System for the Administration of Foreign Currency (SICAD), as an attempt to substitute SITME, but it is far from that.

Source: EdoIlustrado

SICAD was presented as a variation of the Vickrey auction, where participants could bid on different exchange rates. SICAD was supposed to generate US$100 million every week, but this hasn’t been accomplished. It hasn’t offered enough to satisfy the demand and has failed to prevent the black market from determining its own rate.

And why aren’t these crafted systems working? The government argues that it’s all due to a big network of corruption that is hoarding the country’s reserves and trying to destabilize the economy. In case this sounds familiar, that’s because it’s the same script for every government failure.

More Imports, Less Production

Currently, the gap between both rates (the official and the unofficial) is more than 600 percent. The unofficial rate determines the price of a big group of products and thus, pushes inflation even higher. Economic analysts state that the problem of the government’s approach is their assumption that demand remains static. The reality is that a fixed price that takes no consideration of supply and demand inevitably diverges from its real value.

In a way, this artificial rate has become a subsidized dollar. The current official rate (6.3 Bs./dollar) is considered way to low for what its worth, so its demand outstrips the available supply. In an import-dependent economy, everybody wants to import at that rate and then sell at the unofficial rate, achieving an exorbitant gain.

Foreign Exchange Tourism

Some people have resorted to alternative and illegal ways to gain from the foreign exchange crisis. One of them has been requesting foreign currency for travel reasons, and then not traveling. Airlines have noticed that all their tickets get sold out for three months in a row, but 30 percent of the passengers don’t get on the plane. Instead, they ask for a refund and keep the dollars released for tourism, or they change the flight and use the same airline ticket to request even more dollars.

The attempt to upend a free market — in this case a flexible exchange rate — has a proved an utter failure. The more the government regulates the economy, the more people find a way to cheat and make their way through it. So how can we stop this vicious cycle? As long as inflation keeps increasing (32.9 percent in 2013), the problem is very clear: the gap between the official rate and the unofficial needs to be reduced. However, Maduro’s request for an Enabling Law, to “solve” the economic crisis and fight this “economic war,” tells me he hasn’t learned the lesson.

María Gabriela Díaz María Gabriela Díaz

María Gabriela Díaz reported from Caracas, Venezuela, and led the PanAm Post internship program. She has a Bachelor of Arts in political science with a focus in international affairs.