How to fix Venezuela

Andres Velasco writes:

In the last couple of years, the decline has accelerated to dizzying speeds. Now that the printing press is the only available financing tool, the International Monetary Fund is forecasting 1,000,000% inflation in 2018; the contraction in GDP  those of the Great Depression, the Spanish Civil War, and the recent Greek crisis; 87% of Venezuelans live in poverty; and untold millions have left their country.

A larger contraction that the Great Depression takes some effort.

Restoring property rights and reforming this web of controls and regulations will be a colossal legal and political task, more akin to the transitions in Eastern Europe and the former Soviet Union than to previous episodes of Latin American stabilization-cum-reform. Yet one lesson of the region’s market reforms of the 1980s and 1990s seems relevant: privatization must be accompanied by genuine competition. Otherwise, the result may be economic stagnation (monopolies can make fat profits while failing to innovate) and political backlash (voters who see that happening get very upset, quickly).

Likewise, the crony capitalism typical of many post-communist economies must be avoided.

Best way to avoid crony capitalism is issue shares to every citizen.

Another priority for the leaders of post-Maduro will be to ensure that the state does what it is supposed to do. The Venezuelan state has nearly three million employees and, by one count, more than 4,200 institutions, yet government fails miserably at its most basic tasks, such as providing education, health, and security.

Three million employees providing basically no public services,

Take health: public hospitals and clinics are crumbling and largely devoid of medicines (imports of which are barely one-third the level in 2012). One survey found that 79% of facilities did not even have running water. These precarious conditions have allowed the reemergence of long-dormant diseases such as malaria, diphtheria, measles, and tuberculosis.

Or consider security, which has collapsed, placing Venezuela on the verge of becoming a failed state. Vast swaths of territory are so lawless that the police – and in some cases even the army – dare not enter. In large urban centers, the murder rate has shot up, putting Venezuela at the top of the world homicide tables, behind only El Salvador and Honduras and far ahead of Brazil, Colombia, and Mexico.

In 1998 their murder rate was 19 per 100,000. Today it is 56. And that was in 2016. They may be top of the world by now.

A plan that enables Venezuela to import and function more or less as a normal economy again should have at least three components. First, the international community should recognize upfront the need for large debt reduction, rather than kicking the can down the road for years, as it did with Greece. Second, the International Monetary Fund will have to provide emergency balance-of-payments, through a program not too different in size from the one that Argentina just signed. And, third, a grant component, estimated by Venezuelan experts at around $20 billion, will be needed both to meet emergency humanitarian needs and to avoid Argentina’s mistake of allowing foreign debt to accumulate too quickly just after debt reduction.

Developed countries will have to bail them out with loans and grants. Otherwise they will become a failed state which destabilises the region. But this can only happen once there is a different Government with different policies.

Venezuela’s government has been waging war on its own people. The least the world can do is to stand generously on the victims’ side. In doing so, it would help prevent full-scale state failure, thereby minimizing the impact of the country’s humanitarian crisis and massive refugee outflows – not to mention rampant drug trafficking and money laundering – on regional and global stability.

NZ should help, once there is a Government capable of being helped.

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