ears of financial mismanagement are coming to a head in Venezuela.
The economy that has all but collapsed thanks to pervasive crony-ism and corruption that has seen the wealth generated by the world’s largest oil and natural gas reserves squandered. Now, with world energy prices at 12 year lows, the government faces crisis as years of generous subsidies become unaffordable.
It’s people find themselves chronically short of almost every essential good, violence has spiked as the local currency, the Bolivar (B), has become next to worthless. Despite a change of government after elections in December 2015, it appears that economic collapse may be inevitable. Foreign currency reserves have been exhausted.
Over this past weekend a wave of violence, looting and demonstrations has rocked the country over the weekend.
In a statement on the 30th of April, the Government admitted that it may only have 15 days of food and essential goods, including medicine left.
Tipping Point
This announcement follows a surge in civil-disobedience after the government enforced blackouts across the country that have lasted up to 4 hours a day.The current situation is dire: prices continue to climb daily for essential goods with most super-markets empty thanks to the scarcity of essential goods. It has become normal for citizens to line up for hours as all supplies have become rationed by the government.
“Imports of [toilet paper] and other products have been really backed up, so to speak. Even food staples, things like rice, beans pasta, things the government controls the price of, have become more scarce” said analyst Reggie Thompson of Stratfor, a geopolitical analytical group.
A damning report released by the International Monetary Fund (IMF) predicts that the economy may reach highs of 720% inflation by the end of the year, placing it in the “hyper inflation” bracket.
Speaking to the Miami Herald, Robert K Rennhack, the IMF’s Deputy Director for the Western Hemisphere, warned that based on to modelling undertaken by his team, he’s been able to compare Venezuela’s current situation to similar periods of hyper inflation in other South American countries such as Argentina, Brazil and Bolivia. His conclusions are dire: “total economic collapse of the economic system” within 12 and 18 months if drastic changes to the economy aren’t undertaken.
No government in South America has been able to survive the storm of hyper-inflation in the past.
Who’s to blame?
At it’s heart, the economy’s woes are as much based on a poor foundation as poor management. Hugo Chavez created what he called the “Chavismo” economic model which has been widely considered to have run the country into the ground. Despite having the world’s largest proven reserves of oil, most of the profits were expended on populist social policies that were poorly thought out and actually created the crisis that has pushed the country to the brink.
Chavez introduced subsidies across almost every sector of the economy and price controls that limited how much a good could be sold for. A strong opponent to the market economy, his policies were aimed at helping his large support base composed of the poor. Unfortunately, over the long-term, he has actually made their situation worse.
While setting a ceiling for the price of bread or gasoline may sound like a good idea, it actually provides a huge disincentive for producers. Suppliers are ultimately unwilling to provide for goods if they don’t see a profit in it, and so Venezuela has found itself in an increasingly acute shortage of just about everything.
Of course, even as he touted how “being rich is bad”, Mr. Chavez was busy squirrelling away state funds for his own use, as well as awarding lucrative roles to his friends and allies. Billions were siphoned out of state coffers during his reign as corruption exploded across almost every level of the economy. His daughter, Maria Gabriela Chavez made it into Forbes magazine for the more than US$3.6 billion she inherited after her father’s death.
The surge in violence and demonstrations comes as the country’s official currency continues to breach all time lows in valuation. It has lost 81% of its value over the last twelve months, devaluing past 100B for 10 US cents in January and continuing to slide. Exacerbating their problems is the fact that the Central Bank continues to print money, further undermining the Bolivar. According to Credit Suisse Group AG, the country may be faced with a US $38 billion shortfall in revenues by the end of the year.
How Venezuela allowed itself to reach such an extreme point is of course a complicated combination of factors, however some economists believe it is yet another victim of the so-called “Resource Curse” also known as the “paradox of plenty”. Despite having an abundance of natural resources such as minerals and fuels, Venezuela has been unable to translate that bounty into meaningful economic growth, instead spending the profits on populist social policies that subsidized almost every aspect of Venezuelan life.
The Economist also explains that a big factor when a country hits resource boons such as oil, the immediate effect on the economy can actually be negative as all the non-energy sectors such as agriculture and manufacturing become less competitive due to the sharp appreciation in value of the domestic currency. For developing countries, this is often presented as the state having two choices – either to to embrace a free market and allow multi-national corporations to extract the resources, thereby seeing the vast majority of profits flow overseas, or to nationalize the industry and risk the majority of profits flow to a minority of elites which is a big factor in corruption.
In the national congress, the Socialist Party lost its majority in January with the opposition taking power for the first time in 15 years. The relatively right-winge Democratic Unity Round-table (MUD) took 112 of the national Assembly’s 167 seats during the December elections.The new government may not be making things better however. Their policy objective is stated as increasing the amount of food and basic goods produced domestically, rather than de-regulating the markets and opening up to free-trade.
Even if the new government succumbs to public pressure and begins the arduous journey to a freer-market, it will face stiff opposition. The ghost of Hugo Chavez still looms large: Before losing their majority, the Socialist party appointed a number of political friends to the Supreme court which can block moves by the Congress, and it also removed Congressional oversight of the Central Bank, which would prevent the new government from ending the disastrous policy of quantitative easing.
