Harvard Economist Says Dollarization Won't Fix Venezuela

(Bloomberg) -- Venezuela faces famine if it can’t reverse its collapse in output, and ditching the currency won’t do anything to help, according to Professor Ricardo Hausmann, a Harvard economist who served as the nation’s planning minister in the 1990s.

Hausmann denounced as “magical thinking” proposals to adopt the dollar, made by the leading opposition presidential candidate. This would require currency reserves that the country doesn’t have, he said.

“Venezuela’s problem is the spectacular collapse in output,” Hausmann said Friday, in an interview in Cartagena, Colombia. “If you don’t recover output quickly, Venezuela will die because there aren’t the calories, the proteins and the medicines to have 30 million people survive in the country.”

Venezuela’s economic disaster is driving more than a hundred thousand people a month to leave the country, often crossing into Colombia on foot and then seeking to get to Chile, Panama and elsewhere. This exodus is likely to gather pace as the establishment of Venezuelan communities across the region makes it easier for new arrivals, Hausmann said.

The adoption of the dollar would mean the government would have to renounce the so-called “inflation tax”, whereby it finances its deficit by creating more money.

“I want to know how it is that the week or the month after dollarization you are going to pay the wages, the pensions and so on,” Hausmann said. “You can tell me the inflation tax is bad, bad as compared to which alternative?”

Hyperinflation

Opposition presidential candidate Henri Falcon has proposed the adoption of the dollar, with his economic adviser Francisco Rodriguez arguing that this is “fully guaranteed to stop hyperinflation in its tracks, precisely because the government cannot print dollars.”

Rodriguez said in a phone interview that hyperinflation had contributed to the collapse in government revenue, via the so-called Olivera–Tanzi effect, whereby the time lag between the generation of tax revenue and its collection slashes its value.

“I think that Ricardo doesn’t take into account that a great part of the fiscal problem in Venezuela is the result of hyperinflation,” he said, adding that the country wouldn’t need billions in reserves to back its own currency if it used the dollar.

Hausmann said that Venezuela is unlikely to be able to restructure its bonds without regime change, and that the country won’t attract investment unless it can disconnect oil projects from the “bankrupt” state-controlled oil company PDVSA.

“People might invest in Venezuela, but not with that partner,” he said.

--With assistance from Patricia Laya and Andrew Rosati

To contact the reporter on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net.

To contact the editors responsible for this story: Matthew Bristow at mbristow5@bloomberg.net, Philip Sanders

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