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Venezuela: Bad Disease, Worse Cure


Business Outlook: LATIN AMERICA

VENEZUELA: BAD DISEASE, WORSE CURE

When 78-year-old President Rafael Caldero took office on Feb. 2, after the impeachment of market-reformer Carlos Andres Perez, Venezuela's economic outlook was not good. Caldero inherited a recession, the failure of the No.2 bank, a swooning currency, and 48% inflation. Since then, eight more banks, totaling 28% of the nation's deposits, have failed.

Unfortunately, Caldero's reaction to Venezuela's financial crisis only worsens the outlook. His wish for lower interest rates amid rising inflation, for example, led to the central bank president's resignation in April and the loss of the bank's independence, the last hope for inflation control. Since then, the Venezuelan bolivar has plunged 41%.

All in all, new government controls on prices, wages, interest rates, and foreign exchange--enforced by the suspension of basic civil rights--have badly shaken an already fragile economy. Real gross domestic product fell 1% in 1993, and plunged another 3.4% in the first quarter of 1994. The projected drop for all of 1994 now ranges from 2% to 5%, with hopes fading for a recovery in 1995.

The biggest loss will be in private investment. The controls, plus the government's need to keep interest rates at 70% or more to stem capital flight, are forcing firms to delay new projects or close operations outright.

Inflation will also remain a problem. Consumer prices rose 9% in June, the most in five years, led by costlier imports and domestically-produced foods. Annual inflation is now 55.9% and could head into triple digits (chart). To try to hold the line on inflation, the state on July 11 froze the prices of 81 types of food and drink, along with related packaging and raw materials, at levels lower than those existing before the controls. On the same day, the government fixed the bolivar's exchange rate at 169.59 per U.S. dollar, as it reopened the currency markets it had closed two weeks earlier. Black markets should thrive.

Longer term, Venezuela must deal with its overdependency on oil revenues and its huge public sector. Oil is 22% of GDP and 80% of exports. Higher oil prices are a boost now, but the economy is vulnerable to oil-price shifts. Meanwhile, the public sector makes up about half of GDP, squashing any national consensus for market reform--an action undertaken by Venezuela's more successful Latin American neighbors.JAMES C. COOPER AND KATHLEEN MADIGAN


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