Outdated reform states and the issue of devaluation: Venezuela’s reaction to 1997-98 exogenous shocks

ABSTRACT Having just completed its second consecutive “lost decade”, the Venezuelan case confirms that there are no short cuts to sound political economic management in the era of high capital mobility and securitized capital flows. The maintenance of a muddling-through exchange rate strategy has triumphed, at least for the time being, and enabled an elite executive-level coalition to prevail in pursuing a less than optimal macroeconomic policy. The author argues that Venezuela has avoided a full-blown Mexican or Brazilian-style devaluation by virtue of the Central Bank’s ability to effectively manage the exchange rate. However, this has been the only pocket of modernization, as policymakers throughout the rest of the state bureaucracy have rejected the kinds of market reforms that will be necessary to reverse the country’s highly mediocre performance. While high oil prices since 1999 have afforded politicians and policymakers the “luxury” of being a reform laggard, Venezuelan leaders seem determined to learn the hard way that international trends could again swing against them on a moment’s notice.