The stakes are high in Venezuela with presidential elections approaching May 20, which is shaping up to be one of the most important races since the election of Hugo Chávez in 1998. Could Henrí Falcón, the leading—and only major—opposition contender bridge Venezuela’s political divide?
Unlike prior opposition candidates, Falcón recognizes Chavismo as a legitimate tendency within Venezuelan politics. However, he has also promised that he would extend amnesty to all alleged political prisoners, further an economic policy that involves dollarization and the imposition of IMF measures in the country. This raises concerns about what kinds of trade-offs would have to occur in the event of a Falcón win.
The context of the elections is puzzling: after pushing for early elections for most of the past few years, the United States and its Venezuelan allies have deemed the elections “illegitimate” before they’ve even happened. Before announcing the elections, the main opposition body, the Democratic Unity Roundtable (MUD), had negotiated preliminary agreements on a number of key points with the government, including reform of the electoral council and the inclusion of international electoral observers. But the process broke down in the eleventh hour—which the government claims is due to U.S. pressure. As a result, the MUD withdrew from the race. But Falcón broke ranks and decided to run independently as an opposition candidate. Yet of late new allegations of U.S. involvement in the elections have surfaced. The Trump administration has purportedly said it will consider financial sanctions against Falcón if he does not join the opposition boycott.
Regardless, the government asked a range of international bodies, including the UN, to observe the elections and, at the request of Falcón, agreed to postpone the elections until May 20, originally slated for April, to allow him more time to campaign. With the range of checks built into the Venezuelan system and the ability of statistical methods to uncover tampering, any fraud would be fairly transparent. In the most recent elections, the 2017 regionals, there were credible allegations of fraud against the victory of one governor in a very close race that need to be investigated. However, Chavista candidates won 17 out of the 23 other races, in victories most of the opposition accepted. This does not stand out in comparison to the often blatant and sometimes more widespread or decisive fraud in other Latin American countries.
Indeed, the real reason for the U.S. rejection of the elections no matter the outcome seems to come from the threat of another Chavista victory. Following a sharp fall in popular support from their high watermark in 2012, the number turning out to vote for the United Socialist Party of Venezuela (PSUV) seems to have levelled. What has changed is the number of opposition voters abstaining. A serious proportion of the voters the opposition won over in the 2015 assembly elections abstained from voting in the 2017 regional elections, which the PSUV swept. Judging from this win, it is clear President Maduro has a strong chance of being re-elected—made even more likely by the MUD and U.S.’s call for a boycott. However, Falcón is currently ahead in some polls, and may still be able to clinch victory depending on voter turnout. As a result, the race is currently too close to call.
Risk of More Political Violence
In the event of a win for Falcón, could a change in government increase instability in the country? The last few years have seen a rise in the use of political violence in Venezuela and a change in government could worsen the situation. In neighboring Colombia, paramilitary groups work in tandem with state security forces to repress progressive activism; labor leaders, leftist politicians and human rights advocates are targeted with impunity. There are already signs of growing right-wing paramilitarism in Venezuela, with security forces little able to hold them in check. This started in the Venezuelan countryside: paramilitary groups with presumed links to landowners and similar but more established groups in Colombia have assassinated 300 peasant organizers since 1999.
In the last few years, political violence has become more apparent in urban centers since a wave of protests in early 2015, which continued into 2017 but have subsided somewhat since. This has resulted in deaths of members of the pro-government and opposition camps. There have also been an increase in political assassinations, including the murder of a PSUV National Assembly deputy. Political unrest has seen suspected Chavistas lynched and even burnt alive. Unlike those unjustly killed by security forces in the protests, these victims have received little coverage in the international media.
There is a danger that a change of power will mean that this violence could increase. Often, when a right-wing government replaces one from the Left, a wave of repression targeting the previous government’s social base follows. For example, in Honduras since the 2009 coup, state repression has accompanied targeted assassinations of activists, Indigenous leaders, and journalists. There are similar signs in Brazil, where security forces have stepped up repression of social movement groups like the MST and the recent murder of Marielle Franco, a campaigner against police violence and socialist politician. It would be catastrophic if Venezuela were to follow such a path. Given President Trump’s talk of a “military option” for Venezuela, former Secretary of State Tillerson’s seeming advocacy of a military coup, and the appointment of the ultra-hawks Mike Pompeo and John Bolton, this is unfortunately an increasingly likely scenario.
To his credit, Falcón has tried to lower the stakes of a change in government. His defense advisor has signalled that a Falcón administration would maintain the current Defense Minister’s position. This resembles the transition of power in Nicaragua in 1990 from the Sandinista Liberation Front (FSLN), when Humberto Ortega remained head of the armed forces despite the election of Violeta Chamorro to the presidency. This arguably prevented the Contras, responsible for thousands of human rights violations during their U.S.-backed war against the Nicaraguan government, from turning on the popular classes. Importantly, the FSLN continued to mobilize as an opposition party, maintaining control of many municipalities and returning to the national government in 2006.
However, to be credible to sympathizers of Chavismo, Falcón must distance himself from his extremist former allies. He just tapped former presidential candidate Henrique Capriles as his Interior Minister, in charge of the police. This would be an ironic appointment; when Mayor of Baruta, Capriles used the local police to illegally detain the previous occupant of the post as part of the 2002 coup attempt. Currently, Falcón is also claiming he will free all “political prisoners,” a category that includes Lorent Salah, who was caught on tape conspiring to blow-up liquor-stores and discos, and Iván Simonovis, a Caracas police chief who ordered his forces to shoot unarmed civilians as part of the attempted 2002 coup against Hugo Chávez. These are far from isolated incidents. There is a grave danger that a right-wing government will give such figures an across the board amnesty with no judicial oversight, which sends the wrong message.
Economic Crisis—Is Dollarization and the IMF the solution?
The key crisis facing Venezuela is the economy. Since 2012, inflation has continuously accelerated due to both external factors—a sharp fall in oil prices—and internal factors, notably Venezuela’s dysfunctional exchange rate regime. The most credible available estimates, from Torino Capital, show an acceleration of inflation in 2017 to almost 3000%, and reaching 16,000% this year, passing the hyperinflationary threshold.
Francisco Rodríguez, who heads Torino Capital’s Venezuela team, developed Falcón’s economic policy. However, his solution to the macroeconomic crisis—dollarization—would quickly reduce inflation but carries unnecessary downside features. In making the U.S. dollar Venezuela’s national currency, the country would give up its ability to use exchange rate policy, and much of monetary policy, to stabilize the economy or promote economic development. Historical experience shows that once a country dollarizes, it is generally politically impossible for it to move back to a domestic currency.
Changing Venezuela’s currency to the U.S. dollar would damage the country’s long-term growth prospects. The pressing economic challenge for Venezuela is stabilization, but it must also structurally reorient its economy away from its current reliance on oil rents. This means developing the country’s productive forces. The most successful examples of this in recent decades have been in China and Vietnam, which both used exchange rate targeting and moderately expansionary monetary policy to support the industrialization and development of their economies.
If the history of hyperinflation tells us anything, it is that such episodes can end quickly with the right policies. Bolivia’s hyperinflationary episode in 1985 ended in just 10 days, without changing the national currency. Jeffrey Sachs, who advised the then Bolivian government, argues ending the depreciation of the currency on the black market was key to the stabilization package. In fact, the currency regime put in place—a managed float—has proven remarkably stable and compatible with the socialist policies of President Evo Morales’ government. It could be even easier to implement in Venezuela because, the government, overwhelmingly the biggest seller of foreign exchange, would gain significant rents if it devalues the official rate. By raising the price of dollars in bolívares, the government would raise important revenues; this would lessen the need for fiscal tightening to reduce deficit spending.
All hyperinflations are caused by a sharp deterioration in a country’s external accounts. In Bolivia, the primary cause was the precipitous decline in the price of tin. Venezuela’s hyperinflation is distinct in that Venezuela’s external position actually improved over the course of 2017, when the price of oil increased by 50%, driving a 15% rise in export value. By denying Venezuela access to international capital markets, the U.S. sanctions imposed in 2017 prevented Venezuela from taking advantage of this rise and made it nearly impossible for the government to arrest the descent into hyperinflation. Countries usually roll over their debt, and are able to pay only interest owed. By denying access to international capital markets, sanctions force Venezuela to pay down the principal. This has forced Venezuela to generate large current account surpluses by continuing to cut imports, with disastrous effects. Despite paying off billions in principal during its long depression since the end of 2012, Venezuela has delayed most recent bond payments and ratings agencies classify it as being in selective default.
The majority of the opposition has supported sanctions, even as they have stymied chances for economic recovery. In fact, some signs point to the opposition hoping the situation will worsen further so more would turn against the government and thus support the opposition and its strategy of regime change. Remarkably, support for the Venezuelan government has held up to a far greater extent than for governments in neighboring countries facing much less severe economic situations. Meanwhile, economic sanctions have lent credence to government arguments that blame the crisis on “economic war.”
Before becoming Falcón’s advisor and tapped Finance Minister, Rodríguez was sharply critical of sanctions for denying Venezuela access to capital markets and markedly deepening the crisis. This contrasts with Falcón’s muted criticism of the sanctions, who perhaps hopes to bridge the gap with the United States and the extreme opposition. Meanwhile, Rodríguez, in sharp contrast to his previous position, is now calling for opening of a line of credit with the IMF. Unlike bonds that influence policy indirectly, IMF credit comes with conditions. The IMF only lends if governments pass policy packages that often involve cutting social spending, decimating labor rights and other reactionary policies, some of which generally hinder rather than help recoveries.
An Alternative Policy Package From the Left?
Recently, the government has outlined a way to circumvent the sanctions by creating a crypto-currency called the Petro. This has purportedly raised $5 billion from investors, but is perhaps unlikely to be a long-term source of credit. China has consistently been one of the most important creditors of Venezuela but support has recently dried up. Given that sanctions limit access to private capital markets, and alternatives like the IMF could be socially destructive, the Venezuelan government should work to reopen access to Chinese credit. Meaningful reform of the exchange rate regime could improve Venezuela’s position as a creditee.
Venezuela must also reform its subsidies system. Its overvalued exchange rate is designed to subsidize consumption by making it cheaper to import goods, which worked reasonably well in the boom years, but was even then inefficient. Since the onset of the crisis, the government has dramatically scaled back the quantity of dollars available on the official market, pushing down import flows and causing the parallel black market to become ever more important in setting prices. Facing these quickly rising prices, the government has intensified price controls on goods, but does not have the institutional capacity to enforce them effectively.
When I lived in Venezuela in 2015, one could only buy goods at official prices in state stores, where supply was limited and queues were long. In addition to its inefficiency, the price difference with the black market creates a huge incentive to move goods from the official market to the unofficial, further limiting the supply of goods available at an affordable price level. A potentially more efficient form of direct subsidies has emerged in the last few years. Food subsidies administered by “CLAPs,” local committees linked to the participatory democratic Community Councils, give out direct monthly handouts of a basket of basic goods, currently reaching six million households. The government should double down on this form of subsidizing consumption and remove distortionary and dysfunctional price controls.
There are clearly elements within the Venezuelan government that recognize the need for reform. In 2014, then-Finance Minister Rafael Ramírez’s efforts to reform the economy were stymied and he was side-lined by the government. It is not clear that his failure to get his plan implemented was due to internal ideological opposition or political reasons. As one of the three most prominent Chavistas, he remains a potential rival to President Maduro.
But since the beginning of the year the government has taken steps toward reform. Prominent government voices are calling for further action, including exchange rate unification to displace the black market for currency. A new term in power could shore up the government, giving it the political breathing space to take the steps necessary to advance a recovery.
Since taking power, the Bolivarian government has improved literacy, access to healthcare and, more given working class, poor, and marginalized people increasing power over their own lives. In recent years, the government has overseen one of the most ambitious house building programs in world history. Two million homes have been built and delivered to poor Venezuelans since 2011; in per capita terms, this is higher than the peak period, 1950-1955, for council house building in England and far higher than the number built under the New Deal in the United States. For Venezuelans previously living in ranchos or shacks, the quality of life difference is immense.
All of this is at risk if the government falls, or continues its current mistaken macroeconomic policies. Many of these reductions in poverty have been reversed and shortages have worsened healthcare indicators. Fortunately, the economic pain of stabilization has largely already been paid through the contraction in imports. A policy change should quickly show positive results, including a marked improvement in the fiscal balance and a slowing or reversal of capital outflows.
The social legacy of former President Chávez helps explain the continued support for the PSUV, despite the government’s missteps and mistakes. Falcón is the least bad opposition figure, and—his win, if recognized, could give the Left a chance to regroup and recover power in the future—so long as certain guarantees ensure that popular sectors are protected from political violence.
The real danger comes from the unholy alliance of the United States and the extremist wing of the Venezuelan opposition, or surrounding countries allied with the United States. The Right’s ascent to power via regime change, especially since they have given up even the pretense of following the democratic route, would not only mean the decimation of the social programs but would also likely unleash a wave of political violence, jeopardizing the ability of progressive forces to present an effective challenge for many years to come.
Joe Sammut holds an MPhil in Latin American Studies from the University of Oxford and is about to begin a Ph.D. project investigating the causes and character of the Venezuelan Crisis at Queen Mary's College, the University of London. Between 2014 and 2015 he lived and worked as a researcher in Venezuela.
