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Capital flight and exchange controls in Venezuela

By Gustavo Coronel

November 7, 2004 - Laws are being passed almost every month in the Venezuelan National Assembly, with little or no discussion and total lack of respect for the views of a minority that equals almost 50% of the legislative body. Now still another law appears in the Venezuelan horizon, one designed to punish possible violations to the exchange controls imposed by the government of Hugo Chávez more than two years ago. The reason given for this new law by his promoter, chavista deputy to the National Assembly Elvis Amoroso, is that "capital flight increases distrust in the government of the country." In the Venezuela of Chávez everything seems to be upside down. I had always understood that capital flight was a result of lack of trust in the capacity of the government to keep the country well managed but Amoroso tells us the opposite. He claims that capital flight obeys "selfish interests of some Venezuelans." It should be stopped, he says, because the country "is highly dependent on oil exports," a piece of wisdom that the revolutionaries are apparently just coming to discover.

If I could sell my house in Venezuela, which I have been trying to do for two years now, without having one single offer since everybody is also selling, I would immediately take the money and buy dollars. I would not leave this money in a Venezuelan bank, earning interest significantly below the inflation rate, losing value every day that the current government stays in power. I guess that doing this would convert me into one of the "selfish Venezuelans" mentioned by Amoroso in a not so loving manner. The revolutionaries seem to think that Venezuelans should keep their savings money inside the chaotic country while they pilfer, waste and take the public money out of the country, just as the worst of the corrupt of the past have done.

Capital flight in Venezuela has been a constant problem for the last 25 years. It is estimated that during the period 1970 to 1998 some USD $80 billion left the country, never to return. This happened at a time in which governments were trying to attract foreign investment, prompting a foreign businessperson to comment: "How can Venezuela expect to attract foreign investors when their own people are taking their money out of the country?" The fundamental reason for capital flight has always been lack of trust in Venezuelan governments and institutions. As trust declined capital flight increased. It is as simple as that. Of course, it is also true that much of the money leaving the country was stolen from the nation by corrupt public officers. The cases of government corruption during the AD-COPEI years fill several volumes and became one of the reasons why Venezuelans wanted a radical change at the top. However, as the members of the Chávez regime started to behave in similar ways to those of the worst members of the Lusinchi government, capital flight increased abruptly. In 1999 $7.2 billion left the country. In 2000, $8.7 billion were "exported." The figure again increased to $9.8 billion in 2001. In 2002, after $8.5 billion had left the country the Chávez regime took the decision to impose exchange controls. This decision was based on panic and revenge. Panic, because the government felt they would soon be left without reserves if they did not act quickly. Revenge, because exchange controls in the hands of the government meant that many of the "enemies" would not be able to receive the foreign exchange they required. Chávez said it time and again: "not one dollar for the coupsters and the traitors." Who were the traitors? All who Chávez defined as such.

Exchange controls have been in existence for more than two years. During this period the international reserves of Venezuela have increased to over $20 billion and are constantly being coveted by Chávez, who wants the Venezuelan Central Bank to hand to him what he defines as "excess reserves," in open violation of existing laws and regulations. Such a high volume of international reserves, of course, has produced a lowering of the country risk, since there are little chances of the country not paying its debts. On the other hand, the national debt has kept on the increase and is today almost twice as large as it was when Chávez came into power, in spite of the very large oil income of the last three years.

Very large international reserves, however, are not necessarily a good thing if they have been accumulated at the expense of strangling the private sector. During the period of exchange controls, thousands of small and middle-sized Venezuelan businesses have disappeared since they have been deprived of foreign currency for their imports. Much of the companies hard hit were owned by those opposed to the government. Exchange control became a tool for political retaliation. Chávez has recently said that controls will not be eliminated since he is more interested in power than in economic development, especially at a time in which oil prices are so high. Today only the State has dollars, only Chávez has dollars.

Exchange controls have become both a political weapon and a strategy to concentrate economic power in the hands of the government. This is temporarily acting in favor of the regime while it hurts true national interests. It is one more example of the crimes being committed by a revolution that is destroying the country in the name of obsolete ideologies, led by people driven by resentment and complexes of inferiority.

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