Memorandum on the Situation in Venezuela

Memorandum on the Situation in Venezuela

To: President Donald J. Trump

CC: Michael R. Pence

From: Daniel J. Lavigne, Secretary of State

Date: March 30, 2018

Subject: The Situation in Venezuela

Context

          In 1998 Hugo Chavez was elected President of Venezuela, after a failed coup d’état earlier in the decade. As a four-term president of Venezuela he implemented many social programs encompassing food, healthcare, housing, and education. All were designed to help the country’s poor. Many of these programs were financed through oil revenues. In 2013 Nicolas Maduro was elected president by narrow margins. He has continued the same economic policies as his predecessor, despite lower government revenues from the fall in oil prices. This has led to hyperinflation, shortages in food and medicine, and increased violence across the country. 

Task

          The Trump Administration should be tasked with helping the people of Venezuela in normalizing their economy. It is in the best interest for the consumers of the country for the reduction of inflation, which is currently eroding the value of their currency. Inflation is making goods more expensive to purchase, lowering the standard of living in many areas. The markets do not have staple goods available for sale and lines que all over the country to obtain these goods. Basic medicine is not available. The economic situation in the country is producing high levels of violence, such as kidnapping, due to the lack of high paying jobs. Similar things are occurring in medical facilities. Security forces are also overwhelmed with the constant stream of protest. 

Solution

          To address the shortages of needed goods in the country, there needs to be a shift in economic policy at the national level. Inflation is eroding the purchasing power of the Peso, leaving many without the means to purchase the necessary goods. Medical staff are leaving their profession to find other work that has better pay. This leaves many of the hospitals understaffed. Kidnapping has increased, and law and order is faltering. The country is need of economic shock therapy. This includes issuing a new currency, ending government price controls on many goods and services, reducing government spending, and privatizing industry. Reinstituting economic stability will help alleviate these secondary effects.

         

Evidence

Shock therapy is not a new economic restructuring policy in the region. It has been tried in Chile, Argentina, and most notably Bolivia. Shock therapy for Venezuela should be based on the Bolivian model as the set of policies occurred within a democratic setting. According to former president of Bolivia Gonzalo Sanchez de Lozada in his interview for PBS’ Commanding Heights he saw the implementation firsthand. He stated that this started with the “...famous decree, 21060, that stopped hyperinflation in Bolivia [in] three weeks [covering] 220 articles” (PBS). Leading Economist from the Kennedy School of Government, Jeffrey Sachs suggested a policy outline on “.... what he felt should be done -- liberating controls; controlling... fiscal variables; spending what you had; [and] not spending what you didn't have” (PBS, 2002). He advocated for austerity measures. Often the policy of shock therapy gets criticized in the country in which it is implemented due to the forces in Washington. Bolivia is an example where this did not occur. Sanchez de Lozada clarifies this detail stating, we “...were totally alone, because the World Bank had closed its office, the [Inter-] American Development Bank was still here, and the IMF had pulled out its representative, and the American government and other friendly nations wouldn't answer the telephone, so we had to do all this alone. We were considered a basket case” (PBS, 2002). No one from the international arena had the political will to help so Bolivia had to do this on their own. Domestically Bolivia liberated all prices, unfroze payrolls, and slowly increased wages in the public sector, including education, health, army, and police in accordance with what they could offer with their tax-base.

Failed Solutions

          Shock therapy must be implemented swiftly and completely to work effectively. Shock therapy was attempted in Russia in the early 1990’s where it did not achieve the desired results. These type of programs, if not implemented fully, lead to greater inequality between the rich and the poor. The oligarchs extracted resources from the state, (a problem still visible today) while pensioners see their Rubles evaporate in the inflation. In summary Jeffrey Hays provides three reasons why it did not work in Russia: “1) inexperience of Russia in acting under honest and civil ‘"capitalist rules of behavior"’; 2) lack of consensus in Russia about how to approach the country’s future; 3) Russia's massive size and the difficulty of making change in a place so vast” (Hays, 2008). Officials in Russia and the people had trouble understanding how western markets functioned, and had difficulty implementing these ideas. The size of the country also made this difficult.

Implementation

          In May of this year there will be presidential election in Venezuela. Depending on the result in elections, and if they are accepted by Maduro, the country may descend into further chaos. The United States should extend a hand and all available resources to implement these much-needed economic reforms. This includes sending our brightest academics and skilled policymakers to Caracas to work at an official capacity to carry out these details. The long-term goal is to stabilize the economy. It is our hope that the next President of Venezuela looks favorably to the U.S. for trade and investment. This will be a fundamental change of policy since the implementation of recent sanctions. At the regional level this will demonstrate a sense of goodwill which has been missing for over a decade, considering that U.S. interest have shifted to other parts of the globe.

Summary

          The people of Venezuela are suffering. Violence has erupted in the streets due to the rapidly declined economic situation caused by generous social spending and declining oil revenues. Many essential goods are unavailable for purchase. To improve the situation in the country, reform is needed. What is required is the use of shock therapy to restart the economy encouraging the Government to bring spending to sustainable levels, while reducing inflation. This will help normalize prices over the long term. Additionally, these reforms need to be followed through, otherwise Venezuela may end up like Russia, where high levels of corruption exist.

Works Cited

Pbs.org. (2002). Commanding Heights : Shock Therapy | on PBS. [online] Available at: http://www.pbs.org/wgbh/commandingheights/shared/minitext/ufd_shocktherapy_full.html#gonzalodelozada [Accessed 1 Apr. 2018].

Hays, J. (2008). SHOCK THERAPY AND ECONOMIC POLICY UNDER YELTSIN | Facts and Details. [online] Factsanddetails.com. Available at: http://factsanddetails.com/russia/Economics_Business_Agriculture/sub9_7b/entry-5168.html [Accessed 1 Apr. 2018].