President Hugo Chavez, struggling to stem an outflow of dollars and rein in a budget deficit, has adopted a multiple-tiered exchange-rate system that fueled corruption, food shortages and inflation in the 1980s.
Shoppers in Caracas lined up over the weekend to buy imported televisions, DVDs and refrigerators on concern prices will soar after Chavez on Jan. 8 devalued the 2.15-per dollar exchange rate by as much as 50 percent. He set a rate of 2.6 for imports of items such as food and medicine, a rate of 4.3 for “non-essential” products and committed to defend the bolivar in the unregulated market, where it traded last week at 6.25.
The three-tiered rate system mirrors the failed policy the South American country implemented after a collapse in its biggest export, oil, led to a devaluation in 1983 that Venezuelans call “Black Friday.” Chavez, who said the weaker currency will stimulate economic growth, runs the risk of creating an inflation surge and swelling corruption, said Harvard University’s Ricardo Hausmann.
“Latin America learned in the 1980s that policies like this do not work,” Hausmann, who runs Harvard’s Center for International Development, said in a phone interview. Hausmann served as planning minister in the 1990s under Carlos Andres Perez, the president who dismantled the multi-tiered rate system of the 1980s. “It’s too easy a game to steal money through a multi-tiered exchange rate. You make a bundle just on the exchange differential.”(…)
In 1983, President Luis Herrera Campins devalued the bolivar and established a multi-tiered exchange system, known as Recadi, after oil prices plunged. Inflation soared to 40 percent in 1987 from 7 percent in 1983 as capital flight led Herrera Campins’s successor, Jaime Lusinchi, to devalue the currency further.
By the time Perez replaced Lusinchi in early 1989, the system had collapsed — the country was running out of foreign reserves and food shortages were mounting. Perez eliminated the multi-tiered system, unifying the currency at the free-market rate, and lifted price controls. Consumer prices soared 21 percent in one month alone, leading to the “Caracazo” riots that killed hundreds and spurred Chavez, then an Army officer, to accelerate his coup plans.
Segura said Latin America’s debt defaults and recessions in the “Lost Decade” of the 1980s were caused in part by these government controls over markets.
The risk “is corruption and bureaucracy,” Segura said. “You’re going to have exporters under-invoicing exports, importers over-invoicing imports. I’m thinking about Latin America in the 1980s and it was a mess.”
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