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Shock Therapy or Sanctions

In today's election Venezuela's opposition offers only two paths: further strangling of the economy or dire shock therapy.

Henri Falcón, former Chavista, heads the Venezuelan opposition challenge in this election. (AFP)

Days before the May 20 presidential election, the Canadian government took the unprecedented step of barring some 6,000 Venezuelans living in Canada from voting.

Officials told the publicly-funded CBC that Canada would not allow voting to take place at Venezuela’s Embassy and consulates, but said Venezuelan President Nicolas Maduro “is to blame for failing to allow his people to freely express their democratic rights.”

Canada’s Minister of Foreign Affairs, Chrystia Freeland was among the delegates in the recent meeting of the so-called Lima group, where participating countries vowed to ramp up sanctions against Venezuela if the election went ahead.

Like other nations in the Venezuela-focused outfit, Canada has been echoing cries from one section of Venezuela’s opposition who have called for a boycott of the vote. Led by jailed politician Leopoldo Lopez’s Popular Will party and other prominent leaders within the Democratic Unity Roundtable (MUD) coalition, this wing of Venezuela’s historically-fractured opposition has also been pushing for an intensification of economic and diplomatic pressure in order to drive Maduro from office.

Another part of the MUD has thrown its lot behind the main candidate running against Maduro Henri Falcón, the ex-governor of Lara state and a former socialist, who has promised to rescue Venezuela’s economy through the most radical set of liberalizations put forward by any mainstream politician in recent memory.

Venezuela certainly faces the most significant economic crisis since Hugo Chávez came to office and ushered in the Bolivarian Revolution. Despite the gravity of the situation, Maduro’s foes have once again failed to unite and have instead opted to present Venezuelans with two possible outcomes: either a further strangling of the country’s beleaguered economy, or dire economic reforms that could push the country further towards the brink.

Sanctions and Squeeze

Maduro, the former transport trade unionist who succeeded Hugo Chávez following his death from cancer in 2013, has had a difficult ride since assuming the presidency.

His administration has faced various bouts of opposition-led street violence and escalating hostilities with the US, including a range of sanctions against the country and top officials as well as the Executive Order by President Barack Obama classifying the South American nation as an “unusual and extraordinary threat” to US national security.

Yet the difficulties with managing the economy following the steep drop in oil prices have certainly been his toughest challenge. For the opposition, the self-fulfilling prophecies of shortages and catastrophic inflation have finally come to fruition. While the country has historically registered high inflation, some estimates now suggest a five figure annual inflation rate, and exorbitant prices of non-subsidized goods have become a reality for most Venezuelans.

Detractors have predictably blamed socialism, while some left critics have charged that there has been a lack of it. Others still have focused on certain policies such as the exchange rate system adopted and modified a number of times under Maduro. Whatever the merits of the arguments around which internal factors have led to the current state of things, there is little doubt that external factors have contributed significantly to it.

The 2016 closing of Venezuela’s foreign currency accounts by Citibank was a sign of what was to come, but also a peak behind the curtain of had already taken place for some time. Maduro’s administration has seen its credit ratings drop and the spectre of default has periodically resurfaced despite Venezuela servicing its debt religiously. Even Falcón’s policy head Francisco Rodriguez has acknowledged that while Venezuela has “proven to be one of the best countries to lend to,” avenues for investment and lending have been increasingly closed off to Caracas.

The Trump administration escalated hostilities by placing further sanctions on Venezuela’s ability to issue bonds, effectively limiting the country from accruing debt and access foreign currency for imports. The sanctions extend to Venezuelan subsidiaries like the state-owned oil company, Petroleos de Venezuela SA, or Pdvsa.

Long before the presidential elections were called, opposition leaders such as National Assembly head Julio Borges have been telling investors and lenders to stay away from Venezuela in order to squeeze the country’s struggling economy. The MUD coalition also supported Trump’s sanctions and suggested that the “international community” take similar actions.

Borges recently ended another international tour to denounce the May 20 vote as a “fraud,” and to press opposition-friendly governments to not recognize results. As a result, Lima group countries “issued a final call on the Government of Venezuela to suspend the general elections,” and threatened “a series of actions they could take collectively or individually in diplomatic, economic, financial and humanitarian spheres after May 20.”

“The measures that are undertaken will be complemented by the Ministries of Finance,” Mexican Foreign Minister Luis Videgaray said following the meetings in Mexico. Borges and his comrades argue that there is not electoral option and have dismissed their former ally, with some have gone as far to call Falcón a “traitor.” “Falcón has become the ‘official’ opposition,” said Borges. “He is doing it for his own personal benefit.”

For hardliners in the opposition camp, Falcón’s previous affiliation with the United Venezuela Socialist Party (PSUV) raise suspicions about him being a “fifth column” in their ranks. The irony is that Falcón has been more transparent than previous opposition candidates about his plans to obliterate the Bolivarian Revolution.

Shock and Desocialization

The central pillar of Falcón’s pledge to revive the economy and deal with hyperinflation is his proposal to ditch the bolivar in favor of the US dollar. His campaign maintains that this will be a quick fix to the inflationary pressures that have made most goods impossible to buy for many.

Based on previous experiences with dollarization in the region, the measure may in fact deal with the current inflationary situation, but there is no guarantee that this will resolve the problem of scarcity nor that it will improve the situation for Venezuela’s poor.

“It would put an end to inflation, probably after a transition period, and assuming scarcity of goods did not continue to get worse,” said Albert Berry, Professor Emeritus Munk Centre for International Studies Economic at the University of Toronto.

According to Berry, a harsh liberalization could actually make scarcity worse. “So the market price of food will stay high until there is more foreign exchange, which will depend on how the economy rebounds and how foreign countries treat a new government. If the market is allowed to work, the poor cannot help but suffer.”

Yet market orthodoxy is exactly what Falcón is promising. Once dollarized, the opposition candidate is proposing a $75 per month minimum wage — around 22% of the average minimum wage in the rest of Latin America. Depending on where a bolivar-US dollar exchange rate lands and with prices reflected in US dollars, it is difficult to see the consumption power for many Venezuelans improving.

Dollarization will also discipline the state’s fiscal spending, as there would be no ability to print currency to cover budgetary holes as the Venezuelan state has been doing for decades. In addition, Falcón promises broad privatization, including returning expropriated companies to their previous owners. According to the Venezuelan Confederation of Industrialists, the Bolivarian government expropriated and intervened 1,322 companies between 2002 and 2015.

The opposition candidate has maintained that this extensive plan for privatizations would not apply to state oil giant Pdvsa, which also owns Citgo and billions in assets around the world. However, this could still be a possible outcome of another major plank of Falcón’s program — debt restructuring with Venezuela’s creditors.

With the elimination of currency controls, mass privatizations, severe (and rigidly institutionalized) cuts in government spending among other measures, Falcón’s plans are a virtual checklist of “shock doctrine” policies.

While the comparisons to the economic policies under Pinochet’s Chile are tempting, a Falcón presidency might look more like decommunization in Eastern Europe, which also included major currency reform in some countries.

As is acknowledged by some of those who took part in the sell off of the former Socialist Bloc, the sharp turn to liberalization and dismantling of social supports exacerbated the immiseration of the population and introduced numerous social ills such as human trafficking on a scale that was not seen in that region.

The signs are that proposals such as these have left Venezuela’s opposition unable to capitalize on the palpable frustration even among Chavistas at the state of the economy. Meanwhile, the election campaign has further exposed divisions among its factions and leaders.

But if they were to win power in the near future, Falcón’s proposals show that a replication of the chaos and theft seen in Eastern Europe is not out of the question. Even more troubling is the possibility of repression that would dwarf any thus far seen in order to press for these reforms, given the certain resistance they would face.