Hard Currency, Soft Currency and Venezuela

@jeffspross at @theweek thinks he’s figured out Venezuela’s problem:

But as Mark Weisbrot — the co-director of the Center for Economic Policy Research, who has written extensively on Venezuela and Latin America — explained to The Week, the main reason for Venezuela’s troubles is likely a lot more technocratic, and a lot more banal: Namely, their currency exchange system is a mess.

He’s on to something, but it isn’t a clean “either-or” situation.

Venezuela has a currency with an official rate and a black market rate, and the two are in serious divergence.  It’s little wonder it cannot import much of anything under these conditions.

Old Soviet hands will recognise this as a “soft currency” situation.  Because of the government’s policies regarding the bolívar, it has become a “soft currency” as opposed to a “hard currency” (the dollar or even the euro with its present woes.)  Venezuelans can “stockpile” (to use Spross’ delightful term) dollars and buy things, but the system in general doesn’t work.  (Having hard currency in hand was a big deal for foreigners in the last days of the Soviet Union; the need for hard currency was the genesis of the Soviet/Russian sale of nuclear technology to Iran.)

Spross tells us that one of the faulty theories behind Venezuela’s problems is that it’s run by socialists.  But soft currencies are hallmarks of socialist regimes.  One of the goals of Marxism was to make money simply a medium of exchange based on the value of what was being bought and not the currency itself being a commodity.  But that didn’t work out in the Soviet Union (the Chinese have progressively hardened the renminbi) and it’s not working out for Venezuela.

Floating the bolívar is not popular because, as Spross points out, “moving to a unified floating exchange system is unpopular with the Venezuelan public, precisely because it would involve a one-time but very big drop in the official value of the bolívar against the dollar.”  When the USSR broke up, the Russians ended up doing just that, with results that were often painful and sometimes hilarious.  But there aren’t many other ways out for Venezuela, especially when the alternative to expensive stuff is none at all.

It’s interesting that the Venezuelans push back against a massive currency devaluation to set things straight when the Greeks pine for it while the Germans block the way.

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