Hugo Chavez: Circling the Drain?

President Obama, whom lots of folks are disappointed in and who many now think is no better than his predecessor, has problems beyond Massachusetts. However, "El Presidente" Hugo Chávez of Venezuela has far worse problems, at least for now. And so does Venezuela.

This gets it about right:

Like the emperor in the fairy tale, the Chávez administration now stands naked before the world and is finding it increasingly difficult to cover up the disaster it has created with its ill-named 21st century socialism.

There is a trend in Latin America, and it favors free market capitalism rather than "Bolivarian socialism." As suggested in previous articles (here, here, here, and here), Chávez's ship is on the rocks, getting clobbered by twin storms, and may soon be crushed.

On January 8, Chavez announced a substantial devaluation of the Venezuelan currency (the bolivar fuerte). His stated purpose was to reduce Venezuelan reliance on imported goods, and thereby to stimulate the economy. As with so many of his schemes, the effects will be counterproductive and very unpleasant for most of the people living in Venezuela.

Venezuela's official exchange rate had been 2.15 bolivars to the dollar. Due to the January 11 devaluation, the bolivar trades at 2.6 to the dollar for priority transactions and 4.3 to the dollar for other transactions:

The higher rate doubles the paper value of oil earnings when converted to local currency. Oil accounts for about half the budget, but that income has been squeezed by lower world oil prices and declines in output in the past year.

The president ... said the adjusted currency rates aimed to boost the economy by encouraging local manufacturing of items such as clothing and shoes, which Venezuela mostly imports.

"This is going to generate greater productivity in Venezuela!" Chávez said in his televised speech.

Chávez also stated:

Last year we imported 90-million pairs of shoes, for the love of God. ... We can make all of that ourselves!

That certainly is a lot of shoes for a poor country with a population of 26,814,843 -- roughly 3.4 pair for each man, woman, and child, imported in one year. Imelda Marcos must be living incognito and very happily in Venezuela.

The 4.3 BF to the dollar rate applies, among other things, to imported vehicles, telecommunications goods, computers, appliances, alcohol, and tobacco. It also applies to substantial portions of the raw materials imported by local manufacturers. However, it does not apply to whale sperm, pickles, and the pain reliever codeine, which will be considered essential goods. (Whale sperm is allegedly a good hair conditioner.) Currently, the informal (black market) exchange rate is at 5.80 BF to the dollar; it will probably get worse.

Finance Minister Ali Rodriguez acknowledged that the devaluation should add 3 percent to 5 percent to inflation this year. That is almost certainly a low-ball guesstimate, and inflation in Venezuela is already the highest in Latin America and the highest of the seventy-eight countries tracked by Bloomberg. On January 15, Chávez announced a twenty-five percent increase in the national minimum wage (10 percent in March and 15 percent in September, coinciding with the September national elections) to blunt the estimated "3 to 5 percent" increase in inflation over 2009 which was "only" 25.9 percent. Not great, but better than Zimbabwe, where prices double daily.