Weak Bolivar

4 January 2008



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Venezuela’s New Currency is Cosmetic Change

On New Year’s Day, Venezuela launched a new currency that President Hugo Chavez has dubbed “the strong bolivar.” Basically, it lops three zeroes off the plain bolivar. This will make some daily transactions a bit easier, and the accountants will love not having to put those extra “0”s on spreadsheets. But beyond that, this is a cosmetic fix for a badly managed economy.

President Chavez has achieved economic growth in 2007 of about 8.4%. That isn’t a bad result, but most of the growth stems from the high price of oil (which accounts for about 33% of GDP), which has allowed his government to spend the found money on social programs. At a societal level, that is a positive, but for an economy, it is better that the money be earned through manufacturing of goods or the provision of services. Spending oil wealth is rather like selling off the family silver to pay bills – a short-term fix at best.

As a result of his social spending, he remains popular with the poor, but he has also diminished the spending power of the bolivar. Inflation last year ran at 20% -- not quite a Zimbabwean level, but high enough to be noticed by those with limited means.

A sure sign that there is underlying trouble is the black market exchange rate. Reuters reports “while strong bolivar’s official exchange rate will be fixed as 2.15 to $1, the black market rate has hovered around the equivalent of 5.60 to $1 recently.” With an overvalued official rate, the Chavez regime is merely storing up trouble for itself.

What Mr. Chavez must do (and what this journal seriously wants him to achieve) is to use Venezuela’s oil wealth to create an economy that can run without petroleum exports if need be. Venezuela is tropical in the north, and thanks to mountains in the south, a variety of climates. Social spending can increase literacy and numeracy, establishing a much more talented workforce. The price of oil isn’t going down any time soon. He has a golden opportunity to build his nation’s future, and thus far, he hasn’t. Lopping three zeroes from the currency won’t get it done.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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