The proposed Constitutional Reform includes three articles that have to do with monetary policy, the Central Bank and international reserves, so that it makes sense to discuss them all at the same time, as I will do in this post. The Articles to be modified are 318, 320 and 321.
Let's start with Art. 318, which has the most extensive modifications. So extensive in fact, that it is not even worth looking at the original article except to note that the current Constitution grants the Central Bank "exclusive, obligatory and…autonomous" power over the country's monetary policy.
In contrast, the new text as proposed for Art. 318 says:
Article 318. The national monetary system has to tend to achieve the essential goals of the Socialist State and the well being of the people, above any other consideration.
The Executive Branch and the Venezuela Central Bank, in strict and obligatory coordination, will fix monetary policy and will exercise the monetary competence of the National Power.
The specific objective of the Venezuelan Central Bank, jointly with the Executive Branch, is to attain price stability and preserve the internal and external value of the monetary unit. The monetary unit of the Bolivarian Republic of Venezuela is the Bolivar. In the case that a currency is established in the framework of Latin American and Caribbean integration, that currency that is the subject of treaties subscribed by the Republic can be adopted
The Venezuelan Central bank is public law entity without autonomy for the formulation and exercising of the corresponding policies and its functions will be subordinated to the general economic policy and the National Development Plan to reach the superior objectives of the Socialist State and the greatest sum of happiness for all of the people.
For the adequate fulfilling of its specific objectives, the Central Bank of Venezuela will have among its functions, shared with the National Executive Power, those of participating in the formulation and execution of monetary policy, in the design and execution of foreign exchange policy, in the regulation of the coinage, credit and fixing interest rates.
Since they are so closely related (and maybe even repetitive), I will also list Articles 320 and 321, underlining what is new:
Art. 320 The state shall promote and defend economic stability, avoid the vulnerability of the economy and watch out for monetary and price stability of the economy, to insure social well-being. Equally, it will watch out for harmony in fiscal and monetary policy for the achievement of macroeconomic objectives (Two whole paragraphs disappear)
Within the framework of his function as administrator of international reserves, the Head of State will establish, in coordination with the Venezuelan Central Bank and at the end of each year, the level of necessary reserves for the national economy, as well as the amount of the excess reserves, which will be destined to the funds earmarked by the national Executive Branch for productive investment, development and infrastructure, financing of the "misiones" and overall, in the integral, endogenous, humanist and socialist development. (The FIEM,
the macroeconomic stabilization Fund disappears)
The first consequence of the proposed reform is that as I mentioned before, the Venezuelan Central Bank will no longer be independent.
What that does mean?
There are roughly two ways of establishing monetary policy: You either have a Central Bank, like most countries do or you have a Currency Board, which is rare. In the Currency Board model, like Hong Kong, the currency in circulation exactly matches the reserves of the country.
The money is "backed" by the reserves, which may include gold, monetary instruments and investments. In the Central Bank model, you have a group of people who establish the policies to intervene in the monetary, currency and interest rate markets.
Central Banks are usually independent. That is, while the Government has representatives on the Board of the Central Bank, they function independently and can make independent decisions. The reason for this is that economic studies have proven that when Central Banks are not independent, the short-term political goals become a priority over the stability of the currency and prices. Thus, most countries have found this to be the optimum, if not perfect solution. As an example, if an election is coming up, the Government may not care if it spends too much, because it makes people feel that things are going well, but in the long run this creates inflation.
Thus, the first negative aspect of the reform is that the Venezuelan Central Bank will no longer be autonomous or independent, but will have to reach all decisions jointly with the Executive branch, allowing politics to get in the way. Of course, this has already happened, since all member of the Board of the Venezuelan Central Bank have by now been named by Hugo Chavez, the Central Bank has not even complained about this change in the Constitution and policy has become less and less independent in the last few years.
In the last few years, economists in the Central Bank have resisted some of Chavez' policies and forcing the Central Bank to implement them, but in most cases Chavez has gotten his way in the end.
However, in the end, the policies set by the Venezuelan Central bank have not been that great or independent in the last few years. Despite the mandate by the Venezuelan Constitution to maintain price and currency stability, the Venezuelan currency has devalued from Bs. 573.25 the day before Chavez took office to Bs. 2,150 (official rate) or Bs. 5,600 (parallel rate). Why? Because monetary policy has been out of control as the amount of Bolivars in circulation has gone from US$ 5.5 billion to US$ 62.5 billion, a factor of 12, while in the same period international reserves have only doubled [editor's emphasis]. That is why the currency continues to drop, to devalue constantly. In some sense, Articles 318 and 320 are repetitive, since some of the goals outlined in them are exactly the same, the goal of price and monetary stability and harmony, which is already mentioned in Article 320. This shows in part the level of improvisation in writing the proposed reforms.
Thus, up to a point, the changes in Article 318 and 321, simply formalize and institutionalize the policies that have been carried out in the last few years, which will simply allow the Government to do what it needs for political reasons, which economic studies have precisely shown does not work in the medium and long term.
These three articles also prove that the proposed reform of the Constitution violates the procedure for changing it, since in these articles everything is secondary to the aims and goals of establishing a Socialist State, something Venezuelans have never voted on. This should require a Constituent Assembly, as Art. 342 specifically says that a Constitutional reform can only be done when the fundamentals and structure of the Constitution are not changed. What could be more fundamental that restricting the country to being a socialist State?
We could also say that Art. 321 could also have been included in either Article 318 or 320. Essentially it incorporates into the Constitution the concept of "excess" international reserves. This concept "invented" by our current Minister of Finance Rodrigo Cabezas, says that once a year the Government will "determine" what is the optimum level of international reserves and any "excess" will be taken away from the Venezuelan Central Bank and given to funds for investment, development and infrastructure. This concept has no economic basis and sealed the progressive devaluation of the currency when it was first implemented. If it was absurd to make it into a law, like it was in 2004, it is simply irresponsible to incorporate this level of detail and precision into the Venezuelan Constitution.
Again, this simply institutionalizes what the Government has been doing in the last few years. For three years in a row, the Government has withdrawn these supposed "excess" reserves and given them to Fonden, which by the way has not really fulfilled its mandate to invest those funds in infrastructure and development.
Additionally, the Macroeconomic Stabilization Fund disappears from the Constitution. That fund, if well managed, could represent the best option for the country to avoid the boom and bust cycles of oil prices, which will certainly repeat one day.
In conclusion, the changes to Art. 318, 320 and 321 of the Constitution, formally remove the independence of the Central Bank which has been somewhat questionable in the last few years anyway and place monetary policy right in the hands of Hugo Chavez. This is exactly the opposite of what economic theory suggests a country should do, it subordinates monetary policy to social and political goals, and bodes badly for the future of inflation and the currency in Venezuela, as even valid structures to dampen the effect of oil fluctuations are eliminated.
Miguel Octavio writes The Devil's Excrement since late 2002 and can be contacted there directly.
A Spanish version of this text will be available soon.