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Finworld: Part 3: Venezuela

Venezuela, a country with the highest oil reserves in the world and what once used to be the fastest-growing economy in Latin America, is now crippled under the world’s highest debts. Hyperinflation, starvation, no access to medicines and healthcare and currency rendered almost worthless are some of the major problems faced by the economy. The people of Venezuela are on streets protesting against the government of Maduro for over a year now. The situation is the worst economic crisis in Venezuela’s history and the worst facing a country that is not experiencing war since the mid-20th century. In comparison to historical crises, it is more severe than that of the United States during the Great Depression, of Brazil’s 1985–1994 economic crisis, of Zimbabwe’s 2008–2009 hyperinflation crisis or that of Russia, Cuba and Albania following the collapse of the Soviet Union.

So what really happened in Venezuela and what can be done?

BACKGROUND: The economist argues that the economic crisis started during the presidency of Hugo Chavez, first elected in 1998. The economy of Venezuela is highly dependent on the exports of oil reserves (95% of exports). It has the largest oil reserves in the world which, in 2014, had 298 billion barrels of proved oil reserves. During the presidency of Hugo Chavez, the price of oil reached a historic high of $100 (in 2000) a barrel. Leading to a growth in the economy that was never seen before. In order to continue remaining in power Chavez started many welfare programmes for the poorest of the poor and spent billions of dollars on these programmes. Poverty was cut more than 20 per cent between 2002 and 2008. The Missions entailed the construction of thousands of free medical clinics for the poor, and the enactment of food and housing subsidies. A 2010 OAS report indicated achievements in addressing illiteracy, healthcare and poverty, and economic and social advances. The quality of life for Venezuelans had also improved according to a UN Index. Teresa A. Meade wrote that Chávez’s popularity strongly depended “on the lower classes who have benefited from these health initiatives and similar policies”. However, Venezuela began to face economic difficulties due to Chávez’s populist policies and on 2 June 2010, he declared an “economic war”.

According to Corrales and Penfold, “aid was disbursed to some of the poor and, more gravely, in a way that ended up helping the president and his allies and cronies more than anyone else”.

Chavez programmes were based on the assumption that the prices of petrol would continue to remain high, therefore when it started to fall the around 2008 the subsidies provided by the programmes became unsustainable. For an economy which was completely based on petroleum exports, the socialistic approach of government crippled its production capabilities in other sectors, ultimately leading to shortages, inflation and starvation.

MADURO’S PRESIDENCY: Shortly after the death of Chavez in 2013, Maduro took over as president and continued with most of the economic policies that his predecessor had started. Foreign Policy stated that whoever succeeded Chávez would “inherit one of the most dysfunctional economies in the Americas—and just as the bill for the deceased leader’s policies comes due.” By 2014 the economy had entered into recession with inflation of about 69% and as of the data available for 2019 Venezuela faces hyperinflation of 10,000,000% (April 2019 estimates by IMF).

Hyperinflation in effect destroys purchasing power and encourages hoarding of goods, as people and businesses anticipate further price increases. Just to understand how bad is the situation consider this a resident of Venezuela has to pay 14m bolivars for just one chicken. The value of bolivar falls by the time a person receives it and decides to put it in the bank.

The Maduro’s government continue to blame the foreign factors to have caused this “economic war” in their country. In 2019 this led to conflict about the presidency of the country. So in 2017 when Maduro came back to power the elections were considered to be flawed as most of the voters were the Maduro’s loyalist the opposition leader Juan Guaidó declared himself acting president on 23 January 2019. Since then there has been a bitter power struggle between the two leaders, US and EU and some other countries recognising Juan as the president whereas China and Russia supporting Maduro ( who happen to continue financing Maduro’s government, one of the major factors he continues to remain in power). Within the country, the military continues to remain loyal to Maduro and the lawmakers to Juan.

CURRENT PROBLEMS: Apart from current political turmoil and inflationary trends, the country is also facing a humanitarian crisis. An investigation by the Venezuelan Observatory of Violence (OVV) revealed that at least 16,506 violent deaths were recorded in 2019 with a homicide rate of 60.3 per 100,000 inhabitants. Violence in Venezuela is twice as high as in countries like Colombia or Mexico, which have a homicide rate of 25 and 29, respectively. The migration problem continues to grow between 2016 and November 2019, more than 4.6 million men, women, and children have left Venezuela in search of a better future, according to data from the United Nations High Commissioner for Refugees (UNHCR). This mass migration has led to a brain drain of about 3 million skilled workers, without them reviving the economy seems like a distant dream.

More than 70% of Venezuela’s food is imported. The government imports most of the food the country needs, it is controlled by the military, and the price paid for food is higher than justified by market prices. Venezuelans were spending “all day waiting in lines” to buy rationed food, “paediatric wards filled up with underweight children, and formerly middle-class adults began picking through rubbish bins for scraps”, according to Al Jazeera.

In March 2019, The Wall Street Journal reported that the “collapse of Venezuela’s health system”, once one of the best in Latin America, has led to a surge in infant and maternal mortality rates and a return of rare diseases that were considered all but eradicated.

The banking crisis in Venezuela is one in which banks do not lend and depositors do not save. The current situation can only be reversed via deep reforms of both monetary policy and banking regulation. However, the government has not only failed to enact reforms but its latest decisions regarding the sector show a lack of understanding of how to (as well as little interest in) reversing the sector’s diminished state. The long-standing caps on interest rates have discouraged the potential investors in the hyperinflationary environment it has led to extremely negative interests.

During the 1990s The Carcass Stock Exchange was 602% the second best performing stock. But the same stock completely crashed in 2017 (by 50,000 points). The BVC has experienced a severe decline since the mid-1990s due to the declining economy. In April 2007, 60 companies were listed on the BVC, with less than half being traded regularly. The frightened investors have started stock migration by buying more ADR’s (American Depository Receipt), corporate takeovers with a concomitant reduction in the number of shares available for trade and an increasing country risk that has frightened investors, particularly foreign investors. The trading volume in stock has reduced to less than 1 million since 2000.

The US sanctions and the failed attempt to introduce the new cryptocurrency Petro have further intensified the problems and the people of Venezuela have completely lost faith.

WHAT CAN BE DONE?: The economists suggest that “shock therapy” may be the only way out for the economy to revive. Based on recent economic history, can include ending price controls and government subsidies, instituting higher tax rates and lower government spending to reduce budget deficits, devaluing the currency to boost foreign investments and selling state-owned industries to the private sector. Venezuela will have to transform its current scheme of restricting foreign investment in order to fund the restoration of the energy sector, as well as its infrastructure, including the country’s roads and bridges and the power grid. Besides foreign investment, Venezuela will likely need help from multinational institutions such as the World Bank, the Inter-American Development Bank and the Development Bank of Latin America in order to fund the infrastructure development.

However, in order for IMF and World Bank to give loans, it requires a legitimate government in the country which is only possible once the power struggle between Maduro and Juan comes to an end. The U.S. government has indicated it would offer both investment and credit to the country, but only after regime change to a democratic government.

Venezuela will also have to develop a new professional class through steps including the reformulation of its education system, which will take years to accomplish. The demand for loans is inexhaustible, but the bank’s capacity to make loans has not kept up. Under current banking regulations, to increase lending capacity banks must constantly increase their equity, a difficult task given limited profits and shareholders’ unwillingness to make capital contributions. With the sector shrinking in real terms banks cannot generate the volume necessary to generate profit, capitalise and create credit. The outlook for the sector remains bleak. Recent government policies show little interest in reversing the sector’s decline and unlocking its role in a functioning and healthy economy.

So in conclusion, what can be understood is that a country with the potential being one of the richest economies in the world, the political power struggle within the country and the geopolitical factors or rather a competition between few world leaders have left millions of Venezuelans starving to death. In this complex web of the crisis faced by the people, who should be really held accountable?

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1 Comment

  1. Shivam

    Love the way u have written. Interesting.

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