Devaluation, Chavez Style

One of the hallmarks of a regime in financial trouble is a complicated regime of "special" exchange rates aimed at getting around the problems caused by financial mismanagement.  The devaluation that Venezuela announced last week may have been a good idea, given the country's recession, and the problems of declining oil revenues.  But the way Chavez has gone about the thing is typically ham-fisted.  By Sunday, he was threatening to deploy the military against . . . shopkeepers who raised prices in response to the devaluation, as if fiat were the main component of import prices.

I doubt that this will work any better than Chavez's earlier attempts at price control and economic management.  The black market will considerably attenuate his power to mandate exchange rates.  Though the move will ease the government's fiscal problems, it will not enable Chavez to keep inflating the level of government spending . . . and as a colleague at the Economist once remarked to me, Chavez's popularity varies pretty much directly with how much social spending he's able to eke out of oil revenues.

This is not to knock Chavez in particular for being left wing.  One can imagine a regime that made some moderate blunders while making real improvements to both economic productivity, and the safety net; in an era of higher oil prices, Venezuela could have diverted a lot of extra government revenue to the poor.  But Chavez managed the oil fields for political gain rather than revenue, and spent every dollar he could find, right up to the very edge of his nation's swelling oil revenues. As he underinvested in oil production and got into a showdown with those who managed the output, he created a situation where falling yields meant that for his political coalition to prosper, the price of oil needed to not merely stay high, but keep rising, forever.  When the oil money faltered and the inevitable cracks appeared in the economy, Chavez has tried to replace the laws of supply and demand with government fiat, which has had the usual results.  The more desperate the measures he has to resort to, the more one suspects that his administration is entering into its senescence.