By Francisco Toro of CaracasChronicles

Venezuela’s increasingly restrictive foreign currency exchange control system is becoming a key instrument in the Chávez government’s bid to establish hegemonic control over Venezuelan society. By giving the government a stranglehold over the country’s economic life, currency controls have become a prime mechanism in crafting a new economic elite fully subservient to the governing clique.

Venezuela’s economy is uncommonly vulnerable to interference via currency controls. Of course, threatening long jail terms against those who sell foreign currency at market rates would be a strong tool for authoritarian control in any setting, but nowhere more so than in Venezuela’s “port economy” where most consumption goods are imported and paid for with the proceeds from oil exports.

In a country where, for instance, most staple foods are imported, giving the government the ability to decide who can and who can’t buy foreign currency, when and at what price, gives it unprecedentedly fine-grained control over who grows rich and who goes bust.

The reason is that Venezuela’s official exchange rate is extravagantly overvalued. According to economists the country’s “equilibrium exchange rate” – the rate at which the bolivar would likely settle if it was allowed to float freely against the dollar – is perhaps at twice the level of the official exchange rate.

Another way to say that is that the government deeply subsidizes the purchase of foreign currency, but only to the favored few.

And with the cut-rate dollars that only they can access, the favored few are able to import consumption goods and sell them on at prices that Venezuelan producers could never match. The result is a kind of backwards-dumping dynamic, where government policy systematically favors foreign-made goods over their Venezuelan counterparts.

One consequence of this is deindustrialization: the wholesale hollowing out of Venezuela’s light manufacturing base. Another is that favored importers – which includes the government’s own food distribution network – reap huge windfalls, while those without access to cheap, subsidized dollars languish.

It is lost on no one, of course, that political loyalty is the number one requirement for those obtaining those covetted cut-rate dollars, making the entire system a powerful mechanism to enforce political allegiance to the government on the part of a new class of crony importers.

Those without favored access to dollars – a category that includes all those so much as suspected of political independence – are forced instead into the now illegal “parallel market”: in effect, a black market where traders face lengthy jail sentences and heavy fines for helping others to finance  imports or save in hard currency.

The system criminalizes activities that would be routine throughout the rest of the region. Trying to save in foreign exchange is now a crime, as it is to take your gold jewelry with you on a trip and sell it for convertible currency abroad. Even citing the real (i.e., non-controlled) price of dollars in domestic currency is now a crime punishable with a fine worth up to Bs.55,000 – some $12,790 at the official rate, much less at the “Voldemort” rate. (It is, of course, illegal for me to tell you what the real going rate for dollars is.)

Illegal currency traders are nothing if not resourceful: they have set up and maintain anonymous websites to share reference prices, and communicate actively to keep the market operating.

Secure smartphones – particularly Blackberries – have become the tool of choice in enabling the market to operate. Still, insecurity runs deep: trading in this way is now technically punishable with up to 7 years in prison.

Of course, as with any illegal market, Venezuela’s unregulated currency market seems a magnet for organized crime. A market where contracts are not enforceable through the courts tends to turn into one where contracts are enforced through the barrel of a gun. Already, stories of drug traffickers turning to illegal bolivar trading as part of sophisticated money-laundering operations are widespread. Everyday people and legitimate businesses barred from the regulated currency control system are increasingly drawn into contact with these criminal elements merely to carry out the kinds of necessary trades that would be routine anywhere else in the hemisphere.

And, of course, by criminalizing the kinds of business transactions that legitimate businesses need to carry out routinely to remain in operation, the government could well arm itself for a broad crackdown on the private sector down the road.

With dozens of companies now technically in violation of Currency Control laws, much of Venezuela’s private sector has been forced into a semi-clandestine position, permanently one investigation away from shut-down and the arrest of its top executives.

Charges, if they do come, will be technically “correct” – in the same way the charges against Rosa Parks were technically “CORRECT” under Montgomery, Alabama’s existing ordinances on bus-ridership.

Keynes once famously wrote that “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” Surely, no currency is more debauched than that which cannot be legally traded.