The book of Jonah tells of ancient sailors threatened by a mysterious and terrible storm. In desperation, they throw their precious cargo into the sea in hopes of somehow saving their vessel. Time and again this same type of panic has likewise gripped those in positions of national leadership and time and again they have thrown their precious cargo overboard.
No doubt, inflationary spirals do pose an existential threat to any political system. They foment an atmosphere of insecurity and frustration as skyrocketing prices roil the lives of ordinary citizens. And yet, in seeking to ameliorate the effects of inflation, or else distract their citizens or reapportion blame regimes often find themselves making things a good deal worse. To save the ship of state from the tempest of monetary malaise they end up throwing away their economic futures.
Take Venezuela. Despite sagging popularity and whispers of dissention within the monolithic United Socialist Party of Venezuela, President Nicolás Maduro was recently able to cajole a supine national legislature into empowering him to rule by decree for one year, ostensibly to handle the growing inflationary crisis. Thus emboldened, Mr. Maduro ordered shops around the country to slash their prices by more than half while announcing that as many as a hundred “bourgeois managers” would be imprisoned for usury, corruption and profiteering — a seemingly fitting fate for those the president has decried as “barbaric, capitalist parasites.”
In this vein, the Venezuelan government has overseen thousands of surprise, sometimes theatrically televised price inspections across Venezuela, accompanied by several high profile seizures of electronics and other goods that were subsequently redistributed to the public. While these policies have been roundly decried by domestic and international critics, the government has been able to convert these giveaways into a brief uptick in popularity just in time for recent municipal elections, where the regime lost ground, but less than expected.
Some analysts have compared Mr. Maduro’s use of such techniques to Robert Mugabe’s catastrophic 2007 anti-profiteering push in Zimbabwe. And yet the tactics actually have a far older provenance, Iran under the Shah in 1975. There too, the autocratic ruler of an oil-rich nation, consistently undermined by hyperinflation, turned the power of the state upon the Bazaar. While this resulted in the creation of many new enemies for the regime, it did nothing to curb inflation.
Between 1973 and 1974, when regional instability led international oil prices to soar, the resultant increase in revenues led the Shah to abandon the country’s original Five Year Plan. Instead, he ordered a doubling or even tripling of national expenditures on many projects and set aside funds for ambitious new ones, including nuclear energy.
Yet, the steady flood of petrodollars pumped into the national economy soon pushed inflation to as much as twenty-seven percent in 1977 according to official statistics. In an effort to respond to public outcry, the government spent some $1 billion per year subsidizing the cost of cereals, meat, sugar, and fruit. When the problem persisted, the Shah tried a new tactic, his own “War on Profiteers.” Across Iran, shopkeepers and bazaar merchants were arrested by the thousands, with many more being fined or sent off in exile.
Inflation barely budged. What did move were Iran’s business elites and merchants. Once among the prime beneficiaries of the Shah’s oil boom, they quickly became the primary ideological and financial supporters of the nation’s hyper-conservative clergy, forging an alliance that would spearhead the coming revolution.
Karl Marx once warned that history repeats itself: first as tragedy and then as farce. Mr. Maduro’s actions have at once echoed and overtaken the Shah’s war on profiteers. Bolstered by the greatest petroleum boom in history, Venezuela’s revolutionaries have sought to translate easy petro-cash into electoral victories, financing a host of inefficient projects. These expenditures have in turn led to a currency inflation rate that has crossed the fifty percent mark in just a year. Far from subsidizing only basic necessities and foodstuffs, the government subsidizes gasoline, energy drinks, alcohol and even consumer electronics – a veritable laundry list of conspicuous consumption.
Moody’s, which this week downgraded Venezuela to a Caa1 rating, deep within junk bond territory, has claimed that Venezuela’s national reserves have reached “perilously” low levels. A crisis looms, and the ship is fast taking water. Perhaps, as was the case for Jonah’s crew, the solution lies less in throwing goods overboard and more in expelling Mr. Maduro from the vessel. If so, best start selling whales short.
Daniel Lansberg-Rodriguez is a fellow at The Comparative Constitutions Project and a columnist for the Venezuelan newspaper El Universal. He can be reached at firstname.lastname@example.org. Marvin Zonis is Professor Emeritus at Booth School of Business and can be reached at email@example.com.