Professor McLeod was Lehman Brothers' lead economist for Venezuela and Mexico from 1995-1996, a very difficult period for both countries. In 1998 he was part of a Inter-American Development Bank (IADB) mission which recommended labor market and tax reforms. Later he supervised Latin American group at Wharton Econometric Forecasting Associates (WEFA) where he worked with Juan Pablo Fuentes, the economist who was covering Venezuela. You can check out the interview below.
While at Lehman Brothers you and John Welch prepared a comprehensive economic recovery plan for Venezuela emphasizing privatization, flexible labor markets, a market based on exchange rates and transparent management of oil revenues to encourage private investments. Why do you think your plan was not implemented?
The main reason the plan failed was because of the change in government. Once Hugo Chavez took power in 1999, many foreign, and especially U.S. companies, were viewed with suspicion and the government began to cancel or renegotiate contracts with PDVSA for example, whose ambitious investment plan was key to Venezuela’s future. Many of us saw the need for redistribution and better government, which Chavez promised, but over time most of my colleagues became disillusioned with heavy handed intervention and political repression that characterized the new regime.
In your opinion, what government policies have been responsible for the country's economic downturn?
First, it is somewhat ironic that many other Latin American countries have benefited from Hugo Chavez regime more than Venezuela. The sharp turn to the left in Latin America in 1999 struck fear into Latin America’s elite and they took steps to redistribute income and economic power in part to prevent a Chavez style regime in their country. Chavez did create many programs to help the poor and other countries followed Venezuela’s lead. The key difference is the policies used to redistribute income.
There are two ways to help the poor and redistribute wealth. One is to provide cash subsidies to the needy. The other and more problematic way is price controls to make goods cheaper for the poor (and the middle class). The second method can create shortages: firms cannot profitably supply or import the needed goods so store shelves are empty: people have money but there is nothing to buy. So the main problem with Chavez and Maduro style regime is not that they redistribute wealth, but unintended consequences of poorly executed social policy.
The rationing of dollars and multiple exchange rates is another chronic problem, that fuels inflation and creates economic uncertainty, reducing private investment even further. Venezuela now has the highest inflation rate in the world, but to its credit it reports price increases accurately (unlike Argentina). Since I focus on poverty data, I find it strange that SEDLAC and the World Bank do not report income data after 2006 (though the UN CEPAL does). I am not sure if this is data reliability or a political disagreement, reliable data and transparency also helps encourage investment and creates confidence in a government.
What do you think about the recent wage increases? Will this resolve some of the economic problems in the country?
Ideally it should, but it won't be of much help if the people have more money if there is nothing in the stores to buy. The problem is not having money, but the fact that key necessities are not available to buy at official prices. Easing price controls to end shortages is necessary to restore real purchasing power, raising wages is not enough.
What policies should the government set forth in order to alleviate the problem?
First the government must restore macroeconomic stability. They can do this by unifying the foreign exchange rate, setting up a sovereign wealth fund, and loosening their grip on the market. Oil price is low, so their external debt may need to be restructured. The may also need to find partners to invest in the oil sector as Mexico is doing. Once these reforms are credibly in place tax revenues should increase as well as private investment.
Addressing the crime problem in Caracas is also essential. After ending these fundamental insecurities and uncertainties, they can return to the labor maker and pension reforms our IDB mission recommended just before Chavez took power. People need jobs and goods and services to buy, it is that simple.
In a recent speech, president Nicolas Maduro referred to the practices of the International Monetary Fund as "financial terrorism". What are your thoughts on this?
The IMF has made some fundamental errors in Venezuela, mismanaged food and fuel price increases in 1989 for example that led to “IMF riots” or Caracazo and many deaths. However the IMF has learned from its mistakes and had recently emerged as an unlikely opponent of austerity and is now a strong advocate for debt relief in Greece for example. And with oil prices this low, Venezuela may need some temporary loans. Venezuela may be able to get loans from Russia or China, but these will not come with the certification, monitoring and credibility that the IMF can provide.
The Maduro government needs to convince its own people, in Caracas and Miami, that Venezuela has a bright future again. Other left leaning regimes in Brazil, Bolivia and Ecuador have managed to encourage private investment and reduce inequality, Venezuela should follow their example. Better economic policies would help everyone, not just the poor and the current government.
Interviewing Prof. McLeod made me realize that most of the issues that the country is facing today were foreseen many years ago. Had the government followed the proposal at the time, the country would be in a much better economic situation and less dependent on oil prices. Notwithstanding, it is not too late for Venezuela to revisit some of these recommendations to come up with a viable solution.
A big thanks to Darryl McLeod, PhD. for taking time from his busy schedule for our chat!
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