This article is part of Pandemic, Panic, and Recession an analytical chronicle of the events and consequences that the Covid-19 pandemic will cause in the global political economy. Comments will be published in a subsequent compendium.
Opinions in the key of moral philosophy are not always valid arguments in economic policy, as the structure and trends of the conjuncture tend to obstruct the communicating vessels between the good wishes of policy planners and the desert of the real of the world-economy capitalist. What seems abstractly correct for the general interest is not always what is specifically correct for economies with diverse structural and agencials patterns. The polarized structure of the global economy is stubborn and easily supports competitive discharges among the dispossessed classes.
The economic consequences of the global Covid-19 pandemic have brought to the fore a program of economic policies used by what I often call the “heterodox orthodoxy” to deal with the Great Recession of 2008, from which we never emerged. Expansive monetary policy, low-interest rates, and in most cases – except for the United States due to their status as primus inter pares – fiscal policies not lax at all. As once happened, quantitative easing programs socialize financial losses through mass unemployment. They manage to prevent a sharp drop in profitability and GDP at the cost of sacrificing the stability of the labor market and undermining the ability to grow solidly in the medium term. They centralize state resources towards finances with serious consequences for manufacturing. This is the scenario that we can expect in Europe and the United States.
The peripheral and semi-peripheral countries have their own restrictions both in their historical insertion in the international division of labor and in the macroeconomic management that have caused the global economic turmoil since 2008 that limit their capacity to act to the extreme. Deficit public finances, recurrent current account deficits, inability to access external financing, volatile exchange rates with volatile inflationary, and recessive consequences are common characteristics of Latin American economies. Hence, in Latin America, it is impossible to implement a quantitative easing program. And in the supposed denial of having the conditions to do it, its impact would not be a copy of the European and American experiences.
In Latin America, lowering taxes, granting large subsidies to employers, or expecting a spillover effect from public indebtedness to employers and from these to households, can become a transfer of public money into private hands, without necessarily serving to prevent a recession or mass unemployment.
In the Latin American panorama, the Venezuelan case differs in severity. In Venezuela, the State (Ministry of Finance and Central Bank) gradually lost the status of headquarters of the monetary policy ergo of the accumulation policy. Therefore, continuing with the military simile, the State does not have ammunition with which to face the recession through tax exemption, loose monetary policy, or external or internal indebtedness. To this is added a serious constriction of oil income thanks to both the consequences of international sanctions and the collapse of national production and international oil prices.
In Venezuela, external indebtedness was reduced as soon as the crisis began (2013) until it was fully restricted when it collapsed (2016). Lax monetary policy, through the sale of PDVSA debt notes to the BCV (accompanied by the collapse of imports), resulted in hyperinflation. The fiscal crisis widened as the recession reduced the tax base from which the state could collect taxes and inflation left the state defenseless in the face of the Olivera-Tanzi effect. The elimination of the credit supply as a condition to stop the increase in the exchange rate and eliminate its effect on inflation is a one-way measure that, while it has a severe recessive effect, cannot be lifted from one moment to the next without causing a drastic devaluation that has been contained by the absence of payment methods. Household income has evaporated, in the absence of figures, suffice it to say that the minimum wage is below 10 USD in a country with prices above the Latin American average for basic goods.
The Venezuelan State entered a trap of which it was the great cause with erratic and untimely economic policies that have put it in a position where the only thing left to do is laissez-faire.
In short, quantitative easing is a strategy of the center of the global economy to externalize crises and keep accumulation mechanisms lubricated in times of global turmoil. It strengthens the dollar as a global means of payment as only the “marriage” FED-Wall Street can afford to guarantee global liquidity in these recessive scenarios and only the twin deficit of the US federal government has unlimited monetary capacity. The prudence of Japan and China to undertake stimulus policies is something to keep in mind for the future. The weakness of Latin America, meanwhile, indicates that the macroeconomic gains of the swing to the right of the Polanyi pendulum in the region were nil.
What can be done? Latin American governments must focus their actions on directly helping household income, both protecting employment and granting direct aid. According to ECLAC data, 37.2% of the population in the region is at risk of falling into extreme poverty if they lose the source of income for the breadwinner, and 69.2% run the same risk as all family income is lost. For its part, household debt rose in 2019 to 23.2% of GDP. This figure may be low compared to other regions, but it becomes a focus of concern when viewed from the perspective of job insecurity that prevails in the region. Protecting households directly is the best way to protect the social fund of the economy and with it the economy itself. Likewise, there must be a systemic struggle to access international credit or at most postpone the payment of external debt during the recessionary cycle.
1 Véase CEPAL, Balance preliminar de las economías de América Latina y el Caribe 2019.
Recuperado de https://www.cepal.org/es/publicaciones/45000-balance-preliminar-economias-america-latina-