The riots in Venezuela have once again put international debt on the front pages. For years we have been warned that the declining living standards and mass unemployment in the debtor nations would eventually undermine their political stability, reversing Latin America’s democratic trend and perhaps radicalizing much of the hemisphere. Now it seems as if the warnings are starting to come true, and editorialists are telling us that Venezuela’s crisis shows the need for coordinated debt relief.
Yet matters are rarely as simple as we would like them to be. The case of Venezuela is not a morality play in which a poor nation is being crushed by its debt burden. Instead, the Venezuelan story illustrates the ambiguities and dilemmas that have paralyzed international debt strategy.
Despite the extensive press coverage of the Venezuelan story in recent weeks, few of the stories have pointed out a key fact: Venezuela is by far the least deserving of the debtor countries. No other country has borrowed so much money to such little purpose; no other nation is as completely a victim of its own policies.
Let’s start with the question of how the money was used. International borrowing is supposed to finance capital formation: A country that borrows heavily from foreign banks is supposed to use that money to supplement domestic savings, allowing a high rate of investment in productive capacity. In practice, there is always some leakage: At the same time that a country borrows abroad, some of its domestic residents will be acquiring assets outside the country as a hedge against political and/or economic uncertainty. It is generally inevitable that some foreign borrowing will effectively finance capital flight instead of domestic investment. In a well-managed economy, however, capital flight is a minor concern.
In reality, the fraction of Latin America’s debt buildup that was dissipated in capital flight was substantial. A major part of Mexico’s debt, and most of Argentina’s, went to finance capital flight rather than domestic investment.
Venezuela, however, is unique. Venezuelan citizens have more assets abroad than those of any other debtor nation, and all of Venezuela’s foreign debt buildup was used to finance capital flight. Over the past 15 years the overseas assets purchased by Venezuelan residents have actually exceeded the country’s foreign borrowing by about $20 billion. In other words, if the Venezuelan government could lay claim to all the New York bank accounts and Miami condominiums owned by wealthy Venezuelan citizens, it could pay off the foreign debt and still have funds to spare.
Now the Venezuelan government cannot, of course, lay its hands on these assets. The point, however, is that Venezuela’s debt is a monument to domestic mismanagement rather than a burden somehow imposed from outside. Capital flight from Venezuela resulted from the consistent unwillingness of the government to follow sensible policies on trade, public spending and, above all, exchange rates.
Venezuela has maintained an absurd exchange rate policy, in which exporters have been required to surrender their foreign exchange earnings at a price in bolivars (the local currency) that is far below the free market rate. Privileged users are then offered foreign exchange at still lower prices, while other users of foreign exchange have been obliged to pay huge premiums. At times the spread between the lowest and highest rates of exchange has exceeded seven to one--a situation that wildly distorts incentives and is tailor-made for corruption.
Despite the evident unsustainability of these multiple exchange rates and pleas from the International Monetary Fund for reform, Venezuela’s government has refused to establish a unified exchange rate, instead defending this system through ever more elaborate regulation. Among debt experts and negotiators at the key institutions that make debt policy--the IMF, the World Bank, the Federal Reserve--there has long been intense exasperation and anger at Venezuela, even among those who are highly sympathetic to the problems of other debtor nations.
Add to this the fact that Venezuela is still the wealthiest major nation in Latin America, and it seems easy to make a clear case against debt relief. Why should Venezuela--which borrowed to allow its own elite to get rich, discovered that it had borrowed too much, then refused to take responsible action--be let off the hook? If Venezuela gets debt relief, how can one refuse to give at least as good a break to other countries that have behaved much more responsibly? These include Chile, Colombia and even Mexico, which had irresponsible leadership before 1982 but has shown a remarkable turnaround in recent years. Yet if there is universal debt relief, who is to pay for it? Surely the allocation of debt relief should involve some reward for good behavior and some penalty for irresponsibility.
So don’t expect Venezuela to receive a sympathetic hearing when it demands debt relief; no country has a weaker case.
Yet the case for helping Venezuela cannot be dismissed quite that easily. Venezuela’s ruling elite has grossly mismanaged the economy, creating a completely unnecessary debt crisis. But however unnecessary the economic crisis may be, it is still real. Per-capita income has fallen 12% since 1981. Real wages have plummeted, while unemployment has soared. The suffering of ordinary people in Venezuela is just as real as that in more deserving debtor nations such as Mexico. Unfairly, it is the ruling elite, which is ultimately responsible for the crisis, that is least hurt--after all, who owns all those overseas assets that were purchased with borrowed money?
Nor is the political crisis imaginary. The observation that reasonable economic policies could have avoided the current situation does little to help the current government, which must now cope with the consequences. Should the sins of the past be visited upon the present, precisely at the moment when a new government is trying, at last, to behave responsibly? And wherever the ultimate responsibility lies, the stability of Venezuelan democracy is something we want to protect if we can.
I have said that Venezuela is unique. Let me now qualify that. Venezuela only shows in an extreme form a story that recurs in most of the debtor nations: a largely self-inflicted crisis that is nonetheless real, and an agonizing conflict of objectives. Think of the Philippines. Its debt crisis, like Venezuela’s, has its origins mostly in mismanagement and corruption--but should the people of the Philippines and the administration of Corazon Aquino pay for the sins (and greed) of Ferdinand Marcos? Or Argentina: The mismanagement of the generals left a hard legacy, admittedly made worse by President Raul Alfonsin’s mistakes, but shouldn’t the restoration of democracy be supported?
Of course there are no easy answers--an easy thing to say. My guess is that there are no answers at all. By this I mean that no formula will ever be found to allocate debt relief fairly and efficiently. Debt relief is coming, simply because the countries will not pay. The U.S. Treasury seems finally to have recognized this fact: It now apparently advocates using IMF and World Bank resources to buy off debt instead of lending money to buy time. But debt relief will probably go to each nation according to its ability to bargain toughly with its creditors, not to each according to its need.