Think about going to a shop only to find that nothing has a price label on it. Instead, you take it to the cashier and they calculate the price. What you pay could be twice as much, or more, than an hour earlier. That’s if there is even anything left in stock. This is the economic reality that underpins Venezuela’s current “political crisis” – though in the truth that crisis has been going on for years. Venezuela’s economy was once the envy of South America. Blessed with the largest oil reserves in the world, the country had a steady stream of USD revenue and immense per-capita wealth but, is now marked by a daily life with an annual inflation rate of 1,000,000%.
Technically, Wikipedia defines the Venezuela crisis as “A socio-economic and a political crisis that began in Venezuela during the presidency of Hugo Chávez and has continued into the presidency of Nicolás Maduro. It is marked by hyperinflation, escalating starvation, disease, high crime and high mortality rates, resulting in massive emigration from the country.” Alarming fact: About 3 million Venezuelans – a tenth of the population – have already fled the country. This is the largest human displacement in Latin American history, driven by shortages of everything including food as well as the Maduro regime’s oppressive treatment of dissent!
Let’s break this down simply for better comprehension. How did the things got so bad for Venezuela? Let’s address it.
What we pay for goods and services reflects not only their cost of production but also of the value of the currency we buy them in. If that currency loses value against the currency the goods are sold in, the price of those goods goes up. By 2014 the value of Venezuela’s currency, the Bolívar, and the prosperity of the Venezuelan economy, was highly dependent on oil exports.
More than 90% of the country’s export earnings came from oil. These export earnings had enabled the government headed by Hugo Chavez from 1999 to 2013 to pay for social programs intended to combat poverty and inequality. From subsidies for those on low incomes to health services, the government’s spending obligations were high. Then the thing that was feared the most happened, the global price of oil dropped. Foreign demand for the Bolívar to buy Venezuelan oil crashed. As the currency’s value fell, the cost of imported goods rose. The Venezuelan economy went into crisis. The Venezuelan crisis, however, just got worse as the oil price continued to fall, compounded by other factors that reduced Venezuelan oil output. International investors began looking elsewhere, driving the value of the Bolívar even lower. In these conditions, printing more money simply made the problem worse.
Circumstances like these quickly make saving money in the local currency nonsensical. To protect themselves, Venezuelans started to convert their savings into more stable currency, like the US dollar. This lowered the value of the Bolívar even further. The government responded by issuing currency controls. It set a fixed exchange rate, to stop the official value of the Bolívar dropping against the US dollar, and made it difficult to get permission to exchange bolivares into US dollars. The idea was to stabilize the currency by effectively shutting down all currency transactions.
US dollars were still available on the black market, however. As the crisis deepened, more and more Venezuelans looked to switch their bolívares into US dollars.
By August 2018 the Venezuelan currency was worth so little that it was more prudent to use cash for toilet paper rather than buy toilet paper.
The government tried to get on top of this situation by issuing a currency devaluation. Maduro devalued the bolívar by 95%, the largest currency devaluation in contemporary world history. He also tied the new currency to the price of oil, an economic experiment designed to show the Venezuelan economy had solid foundations.
By bringing the bolívar’s value into line with the reality of what people thought it was worth, and showing it was backed by something valuable, oil, Maduro’s government hoped Venezuelans would believe in their currency and not exchange it for dollars. This would help stabilize the economy overall- but it certainly didn’t.
What Does Public think? Let’s recollect.
A September 2018 Meganalisis survey found that 84.3% of Venezuelans approved of a multinational foreign intervention on the condition that the coalition provides food and medicine. David Smilde from the Washington Office on Latin America said that “In November 2018, I worked with Datanálisis, one of Venezuela’s most respected polling companies, to add several questions about military intervention and potential negotiations to its nationwide tracking polls. When asked whether they would support “a foreign military intervention to remove President Maduro from his position,” only 35 percent said yes.
After Maduro took over the position from President Chavez, in full crisis, mismanagement increased. Other arenas started falling: employment plummeted, salaries became a fraction of what they were, inflation rose, the ATMs went empty. Even the gas stations are empty in Venezuela. Everything collapsed. The consequence of that was a humanitarian crisis and a refugee crisis that we see today.