In 2003, Chávez’s government established an exchange control regulating the value of the dollar and reserving the power to grant foreign currency for the state. Soon he created criminal laws strictly controlling all foreign currency transactions. Naturally, a parallel market for the dollar soon emerged; the government controlled imports, and a public organization, the Commission for Foreign Exchange Administration, was placed in charge of nearly all foreign trade.
These measures were imposed for two reasons. First, they prevented the dollar’s rise from affecting Venezuelan imports. By fixing the dollar and imposing strict price controls on about 500 products, Chávez managed to artificially maintain purchasing power at a time when he wanted to expand his political base. Secondly, by controlling all foreign exchange operations, the state subjected local enterprises to strong pressures, controlled the supply of raw materials to the media, and exercised total vigilance over the economic activities of individuals.
Temporarily this worked quite well for the government, giving a false impression of success. While prices were controlled, oil revenues rose in a sustained and truly impressive manner. Venezuela was able to demonstrate indexes of positive economic growth, and Chávez won several elections, managing to stay in power.
However, the situation has changed and the economy has weakened. With obvious political motives, the government has issued huge quantities of local currency and has lavishly spent money on ineffective social programs to boost international support. Additionally, the state has failed to invest in infrastructure that could facilitate development. As a result, businesses, burdened by multiple controls and constant threats to private property, have reduced their investments to a minimum and barely remain operational.
All this has led to a large disparity between the official dollar (worth 2.15 bolivares) and the parallel market dollar (around 4 bolivares), creating a situation that becomes less sustainable every day. Venezuela has previously experienced similar, though less intense, problems. In both 1989 and 1996, it became necessary to eliminate exchange and price controls to prevent hyperinflation and clean up fiscal accounts. Now, however, Chávez, who presents himself as a champion against so-called “neoliberalism,” will avoid adopting those necessary measures. After losing the referendum in December, it has become harder for him to advance the principles of socialism.
We can only foresee that the next several months will bring increased inflation, more shortages, and greater internal strife within Chavismo. Social malaise will surely rise, weakening political support for the government. Without a doubt, the legacy of Hugo Chávez is in serious trouble.
Carlos Sabino is an adjunct fellow with The Independent Institute and a visiting professor and researcher at the Universidad Francisco Marroquín Foundation in Guatemala.