Just when most Latin American countries are moving to deregulate their economies, Venezuela finds itself lurching back toward massive state intervention. On June 27, groping for a way to stem a deepening banking crisis, President Rafael Caldera decreed currency and price controls. But he went further than anyone expected and included in his move a suspension of basic constitutional rights such as freedom to travel and protections against arbitrary arrests and property seizures.

Caldera's intervention goes a long way to reverse the market-based reforms launched by former President Carlos Andres Perez in 1989. The 78-year-old Caldera said the actions were temporary measures to cope with the financial crisis, roaring inflation, and a plunge in the bolivar, which he blamed mostly on speculators. But once in place, the controls may become a tar baby Caldera will find hard to shake off. Price curbs "don't control inflation, they lead to higher prices over the long run," says Jorge P. Montoya, president of Caracas-based Procter & Gamble Latin America. "I don't think the government officials realize the complexities they will create."

Moreover, Caldera has shied away from adopting politically unpopular measures to remedy Venezuela's underlying economic problems. These include costly gasoline subsidies, losses by state-run companies, and a budget deficit that could soar to 18% of gross domestic product this year, swollen by $6 billion in bailouts for shaky banks. Caldera watered down a value-added tax that would have narrowed the deficit, and he has rejected a gasoline price hike.

Yet without such reforms, removal of the controls would likely trigger further inflation, which soared to an estimated 10% monthly rate in June. It would also spur a renewed flight from the bolivar. Before the suspension of currency trading on June 23, the bolivar plummeted to 210 to the dollar, from 109 since Feb. 2, when Caldera was inaugurated.

OUTRAGE. The crisis flared with the collapse of Banco Latino, Venezuela's No.2 bank, just before Caldera took office. That triggered a run on the bolivar, and troubles spread to other banks, partly because Caldera didn't act decisively to shore up the system. On June 14, he had to take over eight other banks.

Now, when currency trading resumes on July 6, dollars will be allocated under a two-tier exchange rate system. These controls on currency, coupled with price controls on such services as telephone and electric rates, are likely to turn off foreign investors, including potential bidders in privatizations of state-run companies. Among those scheduled to go on the block are electric utilities, domestic airline Lnea Aeropostal Venezolana, and shares in aluminum and steel plants.

Caldera's minicoup could still meet heavy opposition, particularly from congressional opponents upset by the suspension of basic civil guarantees. Congress, controlled by opposition parties, could endorse the economic measures while overruling the rights infringements. But that would still leave Venezuela with only stopgap solutions to its economic and financial problems. If Caldera casts Venezuela as the lone major holdout against Latin America's tide of reform, its crisis can only worsen.

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