In Venezuela, a halfhearted crisis response

As you may have heard, Venezuela’s economy is in trouble. State price controls, intended to protect the poor from soaring inflation, have helped create shortages of basic consumer goods like butter, coffee, and milk — and the problem is exacerbated by foreign exchange controls that have left importers without scarce dollars to import goods. The good news: There are a few signs that new President Nicolás Maduro knows he has to take constructive action. The bad news: Early signs are that reform will prove too timid to make a difference — and could be reversed with little warning.

Maduro emerged from his April election victory politically weak, which may explain why he hasn’t deviated much from mentor Hugo Chávez’s playbook. He has the same allies and enemies as Chávez, who both championed millions of disenfranchised Venezuelans and ran his country’s economy into the ground. And if Maduro lacks Chávez’s theatrical flair, he has clearly memorized much of the Chávez script. The country’s problems, his government claims, are an illusion created by foreign powers bent on discrediting the country’s Bolivarian revolution.

But Chávez is gone, and Maduro is struggling to explain why the country is now running out of toilet paper.

To try to stop the bleeding, the government has increased prices on a number of staple goods by 20 percent, to encourage production and help resolve shortages after the scarcity index reached an all-time high in April. In addition, Finance Minister Nelson Merentes announced last week that the government will expedite the disbursement of dollars via the country’s central currency authority, and the government announced plans for additional auctions through a new system designed to give companies that import food and medicine an opportunity to buy dollars at a lower price.

But these are baby steps. A 20 percent hike at a time of 30 percent inflation suggests the government isn’t serious about the need for real reform, and the new schemes to ease dollar allocation can’t by themselves resolve the country’s foreign exchange distortions.

Worryingly, the tepid policy response may be a sign of deep divisions within the administration and Maduro’s inability to commit to a coherent economic strategy. The new president seems torn between more pragmatic advisors, like Merentes and Oil Minister Rafael Ramírez, and a more ideological faction led by Planning Minister Jorge Giordani, Central Bank President Edmée Betancourt, and Vice President Jorge Arreaza. Until the president commits to a course, policymaking will probably remain erratic and consist mainly of near-term crisis management.

There are a few encouraging signs of realism from the government. Talks between Maduro and billionaire businessman Lorenzo Mendoza and outreach from Finance Ministry officials to other private-sector players suggest Chávez’s successor understands that he can’t simply saber-rattle his country toward prosperity. There are even signs that Maduro wants to improve relations with the evil empire across the gulf.

But the Chavistas have played this game before, and it’s reasonable to wonder how Maduro’s government will respond if things get worse and Venezuelans begin pouring into the streets. We shouldn’t be surprised if he again turns to familiar friends and reliable enemies — both at home and abroad.

In the meantime, the government just ordered another 50 million rolls of toilet paper.

Risa Grais-Targow is an analyst in Eurasia Group’s Latin America practice. Willis Sparks is director in the firm’s global macro practice.