Blog

Venezuela "Day After" Strategies: Hanke, Hausmann & Jacome

CARACAS -- A foreign-debt restructuring and the privatization of PDVSA were two of the strategies that elicited the most support during a conference on the present Venezuelan economic crisis held in Caracas Tuesday with the participation of economists Johns Hopkins Professor Steve Hanke from the US, Venezuela's former Minister and Harvard Professor Ricardo Hausmann and Ecuador’s Luis Ignacio Jacome.

Dollarization was, ostensibly, the issue of the day during the conference, as Venezuela is suffering under an hyperinflation rate of almost 16,000% (according to Hanke, around 13,000% according to the IMF). But “day after” strategies to “drag Venezuela out of the hole” (Hausmann, a former cabinet minister under the second term of Carlos Andres Perez) soon took over the conversation.

OIL OPENING OR PRIVATIZATION?

Both Hausmann and Hanke agreed on the need to intervene ailing state oil giant PDVSA in one form or another if Venezuela is ever to resume the path of economic growth.

“PDVSA is a complete disaster, the only solution is immediate privatization,” Hanke thundered, in his trademark deadpan, no-nonsense manner through Skype to a crowd of economists and economics students gathered at the Manoa auditorium in Universidad Metropolitana, an elite private university on the outskirts of Caracas.

Hausmann admitted the need for “an oil opening” or an “apertura petrolera” for PDVSA and the whole Venezuelan oil industry, which is producing at levels not seen since 1949: around 1.4 million barrels a day.

Whether it is privatization or “opening” (allowing foreign oil companies to partner with PDVSA in key oil projects), something needs to be done with the oil industry and fast, Hausmann noted.

“As it is, PDVSA is not in condition to deliver any financial resources to the national treasury,” Hausmann said.

Hausmann knows what he is talking about: the end result of the last “apertura petrolera” (which he tried in the 1990s as a cabinet minister and which was continued until Chavez arrived in 1999) was PDVSA boosting production to around 3.5 million barrels a day.

DEBT RESTRUCTURING

The old joke goes that, wherever there are two economists, there will be three opinions and true to form, the speakers did not agree on everything.

While Hanke sees dollarization as the solution to Venezuela’s hyperinflation, Hausmann believes that implementing a dollarization strategy should wait until inflows of investment are at least partially restored into the oil-poor (and once rich-rich) nation and Jacome, which helped Ecuador dollarize in the 1990s seemed to side with his Latino peer.

Surprisingly however, Hausmann and Hanke also agreed on the need to re-structure Venezuela’s massive foreign debt, of around $150 billion ("around" because even the IMF censured Venezuela last week for not submitting any data since 2008) as one of the most priority tasks to “drag the country out of the whole”(Hausmann).

“It is supremely important to generate some sort of financial support and to carry out debt restructuring,” Hausmann said, and at least initially that could come from foreign aid.

Hanke agreed (“debt restructuring, ok!”) but requested fiscal discipline, noting, acerbically, “outside assistance has never saved anyone”.

Hausmann is a firm believer in outside assistance and he has published papers in which he calculates that Venezuela needs at least $60 billion in an immediate “shock treatment”.

DOLLARIZATION

Dollarization, thus, divided the speakers. Hanke obviously feels very strongly about the benefits of dollarization: he has helped governments from Montenegro to Ecuador adopt the U.S. dollar, specifically as a way to counter hyperinflation.

Hausmann (and Jacome) feel a LOT needs to be fixed in Venezuela before dollarization can take place.

“I would rather have a perfectly tailored outfit than being presented with a ready-made perfect suit,” Hausmann noted after hearing Hanke expound the virtues of abandoning one’s own currency (which 33 countries have so far done, to varying degrees), forsaking an independent Central Bank (or not so independent now, after years of Chavez and Maduro) for a “currency board.”

But in a country where hyperinflation is pushing prices up by the hour, and where the minimum monthly wage is only enough to buy two eggs (which Hausmann elicited), Hanke seemed to win the day, arguing that the inflation monster needs to be dealt with swiftly.

“Hyperinflation can’t be forecast, only measured,” said Hanke, talking the way the fishermen in “Jaws” discussed their great white foe. “People in Caracas know that when they go out to buy a hot dog, they need to wheel out a wheelbarrow of cash.”

By Carlos Camacho
Past Blogs

Thoughts Inspired By Steve Forbes On Mone

May 07, 2018

After lunch at the Faculty Club at The Johns Hopkins University campus, Steve Forbes, Elizabeth Ames, and I (Steve Hanke) retired to the library to tape an interview for a one hour documentary, “In Money We Trust,” that Steve Forbes is putting together. The documentary is sparked by Money (McGraw Hill, 2014), a book authored by Steve Forbes and Elizabeth Ames.

more »

North Korea's Economic Crisis -- What Crisis?

May 03, 2018

Much ink has been spilled recently about how economic sanctions have crushed the North Korean economy and brought its leader Kim Jong-un to the bargaining table. Not so fast. For starters, there wasn’t much to crush. Never mind. And, contrary to repeated conjectures by experts in international affairs, whatever there is of a North Korean economy appears to be quite stable.

more »

Venezuela's Hyperinflation And The IMF's Faulty Forecasts

April 25, 2018

When it comes to inflation, I agree with Lord Kelvin. From a lecture the British physicist delivered at the Institute of Civil Engineers on May 3, 1883: “I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science, whatever the matter may be.”

more »

Hanke Weekly Inflation Roundup

April 19, 2018

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black-market (read: free market) for currency and the data are available, changes in the black-market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates—if the annual inflation rates exceed 25%.

more »