Venezuela Needs A Bailout. What Happens If China Gives It To Them?
Why the most attractive option for beleaguered Venezuelans won’t, in the end, serve them well
Venezuela’s most recent presidential election, which took place on Sunday, May 20, is just the latest example of democracy being wielded as a weapon by tyrants, rather than as an answer for political victims.
Nicolás Maduro, who has been president since the passing of former President Hugo Chavez in 2013, may have received more votes than his rivals on Sunday, but the record-low voter turnout is widely seen as its own form of protest against his increasingly oppressive socialist regime. So as long as Maduro’s government controls the voting process, his opponents will continue to advocate elections boycotts to try to erode the legitimacy of his regime.
The true challenge to Maduro’s regime will not come from elections, but rather the growing threat of a coup. While the political heir to Chavez has managed to keep the military loyal by allowing them to profit from cartelizing vital supplies, the continuing deterioration of the nation’s economy has sparked growing rebellion and desertion among the ranks. As Maduro’s government has continued to double down on the same failed socialist policies that created one of the world’s gravest humanitarian crises, action by the military is increasingly seen as inevitable — including by the leaders of neighboring countries.
Of course the destruction of Venezuela is not the result of a single man, and the issues plaguing the country will not simply disappear with his removal.
So the question is what options realistically exist for a post-Maduro Venezuela, and what would those ramifications be for both its people and the rest of the world?
A few years ago I looked at what the 20th-century economist Ludwig von Mises would recommend Venezuela do, drawing inspiration from his writings on post-World War I Austria. There’s a speculative component to this exercise, sure, but it is instructive as a means of pointing out just how far Venezuela has gone in the direction of unsound economic principles.
So what would von Mises do? Projected policy recommendations would include, first and foremost, condemning wholesale the socialist ideology that has played the biggest role in destroying the country. Also: mass-privatization of the economy, abandoning the bolivar, and abandoning all trade restrictions.
Doing the above wouldn’t transform Venezuela into a classical-liberal paradise, but it would be a step toward reconstruction in the face of socialist ruin.
Yet it’s possible some of these destructive tendencies would remain.
This is demonstrated by the sad reality that the leading opposition parties, including Justice First, Popular Will, Democratic Unity Roundtable, and Democratic Action are a reaction to the violent crackdown and growing unconstitutional authoritarianism of Maduro’s government, rather than socialist ideology itself. In fact, all but Justice First still explicitly make socialist appeals in their political campaigns.
The continued appeal of socialism among the public is so great that Henrique Capriles, a leading oppositional figure, called for a socialist coalition as the best strategy to take down Maduro.
So if the public will does not exist to embrace true market reforms, what options exist for the country?
The first issue Venezuela faces is transitioning away from the bolivar. Thanks to Maduro’s hyperinflationary policies, the Venezuelan currency has become worth less than World of Warcraft currency.
The best recent example of transitioning away from such monetary chaos is Zimbabwe, which stopped printing its own worthless currency in 2009 and transitioned to using the U.S. dollar at an exchange rate of $1 for Z$35,000,000,000,000,000.
It’s possible that Venezuela could make a similar move — especially as U.S. dollars are already circulating in what few markets still function in the country.
Unfortunately this may not work quite as well in today’s Venezuela.
If the Venezuelan people are not prepared to completely discard the personality cult of the late Hugo Chavez, a full embrace of the American dollar may face complications — in part due to the U.S.’s militarization of financial markets in recent years.
While the pros may still outweigh the cons to formally adopting the dollar, there may be another option with unique appeal to Venezuela: the Chinese yuan.
Will China Bailout Venezuela?
Even during the peak of the oil boom, Venezuela’s socialist economy relied greatly on the Chinese government. China is already Venezuela’s biggest lender, and has already been forced to restructure payments with its largest investment in Latin America.
Of course, Venezuela is going to need more than debt restructuring to stabilize its financial situation. Given its aggressive desire to expand its global economic footprint, China may see potential in a broad Venezuelan bailout package — one that could include the country formally adopting the yuan.
In 2015, the Mugabe government of Zimbabwe tried to make a big deal out of adopting the yuan as a legal currency in exchange for debt cancelation. The problem is that the announcement ignored that the yuan had already been legal currency dating back to 2009, and the debt-forgiveness package was largely “a mirage.” This is understandable. Zimbabwe is of modest value to China outside of its use in projecting a growing global Chinese influence — with its tobacco industry the most lucrative trade the African nation has with its Eastern benefactor.
Venezuela’s oil reserves, on the other hand, have long interested China’s Communist Party — and Maduro’s government already prices it in renminbi as a way to get around the U.S. dollar.
What if China offers a bailout package — including perhaps skilled workers to replace those who have fled the government-operated Petróleos de Venezuela, S.A. (PDVSA) — dependent on Venezuela receiving oil payments made in the yuan? Given how vital the oil industry is to Venezuela’s economy — making up 50 percent of GDP — renminbi would likely begin to quickly circulate through the Venezuelan economy in a way that hasn’t happened in Zimbabwe markets.
China would benefit from this arrangement in ways beyond its own energy consumption. A formal adoption of the yuan would give the country its strongest foothold in Latin America to date, a new partner to its “One Belt, One Road” initative, and would offer the most significant challenge yet to the dollars’ hegemony in energy markets due to the sheer size of Venezuela’s reserves.
Since Chinese officials have made it clear that they want to reduce global dependence on the dollar in the future, this could be a strong power play — particularly given the back and forth on trade we’ve seen between President Xi Jinping and the Trump administration (which could construe this action as a 21st-century violation of the Monroe Doctrine).
Of course, Venezuela’s hyperinflation is really a consequence of the country’s larger economic evils: the destruction of economic productivity due to the nationalization of industry and an expensive welfare state.
The rise of China is itself a testament to what even modest steps to market liberalization can do for a previously socialist economy. If Chinese support comes with stronger property rights than we see under Maduro — whose government recently nationalized a Kellogg plant — then this too would represent a positive step forward for Venezuelan citizens, even if it would reduce the country to more of a vassal state of China.
China Can’t Save Venezuela
While a Chinese bailout of Venezuela could offer desperately needed relief to the country, this third-way approach can’t go on forever — and China itself may end up being an illustration of this.
For years now analysts in the West have written about China inevitably surpassing the United States as the world’s largest economy, with some even going as far as to say it’s already happened. A closer looks shows that the dragon’s strength may be a vastly overstated.
For example, any broad analysis of the Chinese economy relies on government numbers, which have proven to be overstated in recent years. Recent recent satellite analysis suggest this continues to this day. In fact, for all the talk about the dangers posed to the US in engaging in a Sino-American trade war, as Dr. Daniel Lacalle and others, China’s economy is even more dependent upon American markets than we are them.
One of the main reasons for this is China’s own reliance on debt to keep its economy growing. While lacking the massive welfare programs of Chavez and Maduro, China has been indulging in a decade-long debt binge with massive government spending on everything from infrastructure, industry, and island creation.
While the strength of China’s government gives it significant power in kicking the can down the road, global officials — such as the Reserve Bank of Australia — are starting to get alarmed.
The threat to China stems from the same source that makes it attractive to a future Venezuelan government: their shared socialist ideology and belief in central planning. While China has long departed from the communist policies in Mao — even if Xi aspires for his degree of power — its continued reliance on government-centric five-year plans and bloated state-run firms has created its own form of Keynesian nightmare.
In the words of Dr. Per Bylund:
The Chinese economy obviously relies very heavily on state-sponsored, state-planned projects such as these constructions of buildings. It probably wouldn’t be much of an exaggeration to say that the Chinese economy is a Keynesian jobs project of outrageous scale, which also means that is as removed from real value creation as any Keynesian undertaking. …
What China teaches us about economics and economic policy is the lesson that is generally not provided in college classrooms: the important distinction within production between value creation and capital consumption. The story of China’s economic development is to a great extent one of unsustainable, centrally planned growth specifically in terms of GDP — but a lack of sustainable value creation, capital accumulation, and entrepreneurship.
Of course Keynesian economists have a history of overstating the strength of such centrally planned economies. Paul Samuelson, author of the most popular economics textbook of his day, infamously predicted the Soviet economy to surpass America’s at almost the exact date the U.S.S.R. collapsed.
In conclusion, while my wish is to see the Venezuelan people be rid of the vile Maduro government as quickly as possible, the country is haunted far more by its continued loyalty to socialism than it is the actions of a particular government leader.
While the realities of modern Venezuela — combined with the global ambitions of China — could make a deal between the two countries a logical outcome, the Chinese model is not one that will bring prolonged prosperity.
True hope for Venezuela, and the rest of Latin America, must come from rejecting the inevitable failures of Marxism and embracing a free-market understanding of economics.
In other words, Menos Marx, Mas Mises.
