Venezuela: an economic tragedy

Venezuela: an economic tragedy

Imagine you need immediate medical attention. You arrive at the emergency department and there is a three hour wait to see a doctor. When you finally get to see someone, the doctor says you need penicillin, but they don’t have any. The hospital doesn’t even have running water. All the doctor can do is tell you what you need, and it is up to you to find it. This is life in Venezuela, which in 2001 was the richest country in South America.


Venezuela’s economic tragedy can be traced back to the election of socialist revolutionary Hugo Chávez in 1998. Chávez campaigned on a platform to end corruption, pledging to be a voice for Venezuela’s poor. He won by a great margin in 1998, when oil was US$100 a barrel. Once in office, he solidified his hold on the presidency by increasing the length of presidential terms, and abolishing a cap on the number of times a president could be re-elected.


Venezuela’s oil reserves are among the world’s greatest. In the late 1990s to early 2010s, the economy boomed. Chávez spent the country’s oil windfalls on welfare, education programs and food subsidies. The country was so oil rich that it exported little else. Why grow your own food when you can import it with oil money? Consequently, all Venezuela’s eggs were in one basket, which would ultimately have tragic consequences.


In 2003, oil workers went on strike and production halted. Chávez moved to prevent an economic crisis by fixing the exchange rate between the USD and the Venezuelan bolivar. To change money people had to get government approval, and the price was fixed. This measure kept the country afloat, but was not removed when the oil strike ended. This is the trap that Venezuela laid for itself.


Chávez died in 2013, and his right-hand man, Nicolás Maduro, became president. Maduro lacked his predecessor’s charisma, but was an unwavering follower of Chávez and his cause. In 2014, oil halved in value over six months, and Venezuela’s economy began to unravel.


Other countries had been saving their oil money, but not Venezuela. Suddenly the government had less money. Remember the 2003 policy, where only the government could exchange money? Suddenly, a decade on, they were reluctant to exchange money and people needing cash to import goods were being refused. Prices exploded. By the end of 2014, inflation hit 68%.


What happens when you can’t get your hands on something you want, like drugs or US dollars? You get it through the black market. These emerged all over the country, selling USD at extremely high prices.  The government nevertheless insisted on selling USD at the old rate, far lower than the black market.


This is pure arbitrage, a phenomenon we are told in finance classes can never truly exist. Buy one item cheap, and sell the same item high. A professor at NYU told NPR’s Planet Money that a scam evolved that Venezuelans called ‘el raspao’: ‘the Scratch’. This involved Venezuelans buying plane tickets to America, and asking the government to trade their bolivars for USD for use abroad. But the planes were empty. Airlines sold out of seats but carried no passengers, because of just how lucrative the USD trade was for those who could sell dollars on the black market. People made so much money trading USD on the black market that it covered the cost of their ticket, and still made a profit.



Source: Trading Economics


The government responded by setting different exchange rates for different items. This enabled more scams. Panicking, the government printed more money, and prices skyrocketed to the point where the government stopped reporting inflation. Company profits were capped to halt rising prices. Companies went out of business and people started to go hungry.


By May 2017, infant mortality had risen to 30%, twice the rate in war-torn Syria. Everyday thousands protested in the streets of the capital, Caracas, calling for an early presidential election and thr resignation of President Maduro. In August, Reuters reported that at least 125 people had died since demonstrations began.


Today inflation is over 700%. Nick Casey, a New York Times reporter on the ground in Caracas, spoke to a man who bought his house a few years ago for the same amount it now costs to buy a phone. The murder rate in Venezuela is now among the world’s highest. The Venezuelan Violence Observatory estimated that in 2016, homicide rates reached 91.8 per 100,000 residents. Comparatively, the murder rate in the USA is under five per 100,000 residents. Planet Money spoke to a surgeon who left a hospital because he felt he could no longer help people. Surgeons, he said, were performing surgery using light from mobile phones when power in the hospitals went out.


President Maduro’s response to ongoing protests is to resort to propaganda, claiming that there is nothing wrong in Venezuela. His videos call protestors ‘fascists’ and claim their numbers are small. Millions of Venezuelans aren’t buying it. In August of this year, an election was held in Venezuela to set up a constituent assembly to draft constitutional change. The assembly has the power to shut down Venezuela’s congress, which is led by the opposition and democratically elected. Maduro has claimed that the assembly has been formed to promote peace, but his critics argue that the election result was fraudulent, and orchestrated by Maduro to solidify his power. Opposition leaders Leopoldo López and Antonio Ledezma called for boycott of the vote and encouraged protests. In early August, both men were removed from their homes and imprisoned.


The US initially responded to Maduro’s actions by freezing his and his affiliates’ US assets. However this seemed of little concern to Maduro. Recently, Washington imposed more severe sanctions on Venezuela, banning the government from entering into any new US debt agreements, which will make refinancing difficult for the corrupt, state-owned oil company PDVSA. Idriss Jazairy of the UN Human Rights council, warns that sanctions will hurt Venezuelan people who are already suffering hugely from the actions of their government. President Trump has also announced that steps will be taken to add Venezuela to his Administration’s controversial travel ban, but this is yet to take effect.


Forbes’ contributor Steve Hanke has written that the only solution to Venezuela’s crippling inflation is to drop the bolivar and convert the whole economy to US dollars. Such action would require real leadership, a characteristic the Venezuelan government has lacked for years.


Protestors may determine whether Venezuela becomes a failed state. Its people have access to weapons, and may use them if they are not given a voice. Journalists are being barred from entering the country as the government fights to keep control. The situation festers,  and all the while the Venezuelan people are left to try to survive in a society now on the brink of collapse.