Venezuela needs capital controls

Some of you guys might be following the drama unfolding
in Venezuela from day to day.

I am.

You might be interested in this,
posted today on a Venezuelan website, see
http://www.vheadline.com/readnews.asp?id=1075
also included below.

Trond Andresen
Norway

****************************************************
To: editor@vheadline.com

EXCHANGE CONTROLS ARE NECCESSARY FOR VENEZUELA

Dear editor,

One should perhaps be careful with giving advice when far away from the
place where events unfold, but here are my views -- for what they are worth
-- on a crucial matter for the success of Venezuela's attempt to choose a
better and different path.

This letter was inspired by the following news notice on your website:

>http://www.vheadline.com/readnews.asp?id=988
>
>VENEZUELAN BOLIVAR HITS RECORD LOWS IN EXCHANGE MARKETS
>
>The Venezuelan bolivar has hit record following the announcement Wednesday
>that privately owned bank workers will hold a two day strike on Thursday and
>Friday.
>
>........(snip).....
>
>The bolivar has now lost nearly half of its value since it was allowed to
>float freely in February last year.

When holders of domestic currency are allowed to freely exchange it for
foreign currency, any country will always be hostage to the seemingly
unbeatable alliance of international financial banks and institutions, the
U.S., and the domestic rich. A government cannot break the stranglehold
that this alliance has on the economy, and will have little freedom to
choose alternative policies to the advantage of the poor and the public
sector. The threat of capital flight is always there, and in Venezuela's
case it is not only a threat but by now actual fact. When bolivar holders buy
dollars, the exchange rate falls. And this has dramatic consequences for
the middle class. I quote from an article on

http://www.zmag.org/content/showarticle.cfm?SectionID=45&ItemID=2546

>WHY VENEZUELA'S MIDDLE CLASS (FOR THE MOST PART)
>OPPOSES CHAVEZ
>
>by Gregory Wilpert
>October 27, 2002
>
>...(snip)....
>
>2002 was and still is a difficult year for Venezuela. The currency devalued
>50% in the first six months, inflation skyrocketed from 12% in 2001 to 35%
>or more in 2002, and unemployment jumped from 13% to 17%. Contrary to what
>many people in Venezuela seem to believe, these economic trends have
>affected the middle class much more than they affected the poor. That is,
>the currency devaluation has a greater negative economic impact on the
>middle class because the middle class tends to purchase more products that
>are denominated in dollars, whether it is cars, computers, real estate, or
>vacations to the U.S. Suddenly they can no longer afford these purchases
>because their income is worth half as much as it was before the devaluation.
>
>Also, while the devaluation causes a general inflation of prices, since
>Venezuela imports over 70% of its consumer goods, inflation is more acute
>among the products that the middle class consumes because they tend to
>purchase more imported goods than the poor do. Another reason why inflation
>affects the middle class more than the poor is that the middle class depends
>on a salary that is fixed at the beginning of the year. The poor, who are by
>and large employed in the informal economy, however, can more easily adjust
>their income to match inflation, simply by immediately charging more for
>their products and services - they do not need to wait for the annual salary
>increase. Finally, the poor tend to have more of a social net that softens
>the impact of inflation, in the form of larger extended families and
>communities that help each other out and in the form of free public
>services, such as health care and education. The middle class, however,
>tends to rely on private education, and private health care, which is of a
>better quality, but which have to be discontinued as soon as the prices for
>these service rise too much for their income.
>
>...(snip)...

This analysis seems reasonable to me. So what can one do? It is late, but
not too late -- and there is a way.

FOLLOW MALAYSIA'S EXAMPLE

Malaysia did it on 1 september 1998: The Central Bank introduced exchange
control(s) (also called capital controls, currency controls). From then on
and till this day, four and a half years later, this "temporary" measure to
counter the effects of the South East Asian crisis on Malaysia has been a
resounding success. It has enabled the country to implement its own policies
at the same time keeping their exchange rate stable, and not having to sell
off their domestic industry at fire sale prices, as happened to a large extent
in South Korea. And the pundits in the western banks, financial press,
the IMF etc. have later on been forced to retract their dire predictions at
the time, about what would happen due to this terrible interference in the
working of the oh-so-efficient finacial market, and admit that Malaysia's
exchange control(s) has done the job with flying colors.
So what do this reform consist of? I quote from an article that I have made
available on my own website, see

http://www.itk.ntnu.no/ansatte/Andresen_Trond/dwnl2/nl-malaysia.htm

>THE GATHERING WORLD SLUMP AND THE
>BATTLE OVER CAPITAL CONTROLS
>
>By Robert Wade and Frank Veneroso
>New Left Review
>September/October 1998
>
>...(snip)....
>
>The exchange controls slapped on at the end of August [1998] in effect
>withdraw the ringgit [the Malaysian currency] from the international
>currency trading system. Exporters are now required to sell their foreign
>exchange to the central bank at a fixed rate; that currency is then sold for
>approved payments to foreigners, mainly for imports and debt service. This
>system makes the ringgit convertible on the current--or trade--account, as
>before, but not on the capital account--it prevents buying of foreign
>exchange for speculative purposes. Residents cannot transfer ringgits to
>foreign bank accounts, and can take only a limited amount of foreign
>exchange for purposes of foreign travel. Non-residents can convert ringgits
>into foreign currency only with the approval of the central bank. Sellers of
>Malaysian securities can only convert their ringgits into foreign exchange
>once they have held the security for 12 months. Holders of offshore ringgit
>accounts have until 1 October to repatriate their ringgits, after which
>repatriation is illegal. With this last move the government ensures that the
>imposition of exchange controls, far from generating the always threatened
>punishment, capital flight, yields a short-term debt-free capital inflow.
>
>Malaysia has not turned away from all forms of foreign capital. The controls
>are aimed specifically at short-term flows. They do not extend to foreign
>direct investment or the repatriation of interest, dividends and profits.
>Current account transactions remain convertible; Malaysia remains committed
>to free trade. The Malaysian stock market rose in the days following the
>exchange controls.
>
>...(snip)...

The exchange control system is slightly changed since 1998, but the crucial
mechanisms are still in place. For technical details, see Bank Negara
Malaysia's
website (the country's central bank),
http://www.bnm.gov.my/feature/ecm/index.htm
Venezuela and Malaysia resemble each other in the sense that both economies
have strong export sectors, and are then both (not today but potentially, in
Venezuela's case) able to defend a reasonable exchange rate through exports
compensating for imports and debt service. A stable exchange rate, basically
decided by real-economic factors such as the long-term trade balance, and
not by financial speculators and even capital flight as an instrument of
warfare against a government, is the neccessary and fundamental means to win
(back) a country's middle class.

CHAVEZ (AND LULA!), CALL MAHATHIR!

Make a phone call to the Malaysian government, and ask them to send a
delegation from their central bank, to help set up an exchange control
system for Venezuela. They have demonstrated for four and a half years that
they have the succesful recipe.
And have a talk with Lula about it. He is now, and will remain, hostage to
the unholy financial alliance if Brazil does not follow Malaysia's example.
If not, Lula's government will be gradually destabilized just as they are
close to achieving in Venezuela now.

all the best,
Trond Andresen
Trondheim
NORWAY
Received on Fri Jan 10 17:41:52 2003