The Greenback Won’t Save Venezuela

(Bloomberg Opinion) -- Scavenger hunts for food, death by preventable diseases and droves of people fleeing the country — Venezuela’s miseries appear to have no end.

Yet on Sunday, as voters go through the motions of an election that is President Nicolas Maduro’s to lose, a more telling question than who will put the country on a better path is what currency Venezuelans should spend: the inflation-battered bolivar or the U.S. dollar. Political partisans, eggheads, Twitter warriors — just about everyone in the public arena is getting in their five centavos.  

Newly converted opposition candidate Henri Falcon has made dollarization his campaign keynote, enlisting noted Wall Street economist Francisco Rodriguez and a catchy video showing dancing wallets stuffed with greenbacks to flog the point. Maduro and his ruling claque, unsurprisingly, have denounced the idea as a ploy to turn Venezuela into a colony of New York bankers, and have hatched their own harebrained cryptocurrency scheme, the (theoretically) oil-backed Petro.

Maybe this quarrel is a sign of progress: In a land where magical thinking passes for accounting, inflation is racing to 13,000 percent, and the currency is so devalued Venezuelans have taken to weighing instead of counting money, the greenback is already an unofficial surrogate. So why not make it official? “There’s a need for something stable. People through history spontaneously turned to precious stones and gold,” Arminio Fraga, Brazil’s former central bank president, told me.

Yet eliminating the national currency in favor of an imported one is far from a trivial move, takes a pile of hard cash and collateral the country doesn’t have, and does nothing to fix the deeper problems from unpaid foreign debt to collapsing oil production underlying the Venezuelan debacle. “Dollarizing can be a strategy where a state is failing, but it’s no cure-all,” Fraga said.

Latin America has gone down this road before. Late last century, several nations in the region saw their currencies melt away before runaway prices, surging foreign debt and fiscal incontinence. As high inflation turned hyper (running to three digits or more), Argentina, Bolivia, Brazil and Peru experimented with sundry stabilization plans. Stopping short of dollarizing, they typically lopped zeroes off the worthless denominations and minted new ones, all of them pegged more (Argentina’s ill-fated currency board, which backed every peso with a dollar in reserves) or less (Brazil’s successful real plan) to the value of the greenback. A few nations in the teeth of economic crisis or political turmoil — Panama after independence from Colombia, post-civil war El Salvador, and an Ecuador facing banking crisis and spiking inflation — went all the way, forsaking their currency altogether for the shelter of the dollar. Nowhere did swapping the currency alone fix the larger economic mess. None of those that dollarized has managed to restore a sovereign currency.

Dollarizing is a drastic measure. Just as bariatric surgery tries to deliver obese patients from temptation through the scalpel, dollarization aims to restore economic metabolism by depriving terminally profligate governments of the money press, and more broadly —  because only the Federal Reserve can print dollars — of monetary policy altogether.

Yet analysts warn that crisis is a condition but not a determinant of a successful shock treatment. “A long history of monetary instability has led Latin America to experiment with extreme forms of tying one’s hands,” economist and former U.S. Treasury official Brad Setser, now a senior fellow at the Council on Foreign Relations, said in an interview. “Dollarization is no guarantee of financial well-being. It doesn’t solve the problem of inconstant streams of foreign exchange. You have to follow U.S. monetary policy, and you don’t have a domestic lender of last resort.”

Nor does adopting the greenback buy fiscal prudence. After dollarizing in 2000, Ecuador steadied the economy and ended high inflation, but the headstrong Rafael Correa, who was in office from 2007 to 2017, never gave up trying to game the rules. “Correa stopped short of scrapping the dollar,” said Aristodimos Iliopoulos, of the Economist Intelligence Unit. “Instead he co-opted the central bank, forcing it to lend to the government by dipping into foreign reserves, raised social security funds, and introduced electronic money. This worked fine through the oil boom, but that’s over.” El Salvador fared better but still came up short. While the dollar stopped inflation and sharply reduced domestic lending rates, external investors still balked: In the 15 years since the cease-fire, foreign direct investment and overall economic growth both fell by half.

In Venezuela, dollarizing sounds like a Hail Mary. “It might work in the short run; you’d get rid of hyperinflation, pronto,” said Monica de Bolle, of the Peterson Institute for International Economics. “But you need dollars to dollarize and Venezuela’s only source of foreign exchange is oil, and production is dwindling fast. The country is facing U.S. sanctions, China is the only lender, and even they are balking. If all those channels are blocked and dollars don’t come, then what? You’ll only provoke a more massive economic decline.”

And don’t forget the vexing matter of who will be implementing the rescue plan. “You don’t just dollarize when you’re in total disarray. A country has to have a modicum of stability, its balance of payments in order, and decent relations with the international financial community,” former Brazilian finance minister Mailson da Nobrega told me. “In Venezuela you have none of this. No reserves, the public sector is collapsing, the country is in moratorium, and the president is crazy.” There are some problems that no amount of dollars can fix. So if Henri Falcon is fortunate enough to get elected, Venezuelans should hope that he has a Plan B, because the success of Plan D is uncertain at best.

©2018 Bloomberg L.P.