A Café Con Leche? That will be 2,000,000 Bolivars, please.

According to Bloomberg’s Café Con Leche Index, the price of a cup of coffee in Venezuela is now more than 2,000,000 bolivars, up from 1,400,000 bolívars last week. We have not seen hyperinflation this bad since Germany in the 1920s, and it is only getting worse. The annual inflation rate in Venezuela sits at 1,000,000 percent. The economy shrank by 18 percent last year, and is now half of what it was in 2013. Since 2015, three million people have fled the country. What happened?

The majority of Venezuela’s national income and foreign currency reserve comes from the country’s oil reserves, which are the largest in the world. With petroleum making up the preponderance of economic production, government reserves are highly sensitive to world oil demand. When times are good, they’re good. In 2000, oil prices were on the rise, and late president Hugo Chavez held true to his promise to fund welfare programs targeted at reducing inequality. But, when times are bad, they’re bad. Both Hugo Chavez and his successor, Nicolás Maduro, failed tosave up for a rainy day.” When oil prices began to drop dramatically in 2014, the Venezuelan government had only a few long-term investments, either in foreign assets or in education and capital infrastructure, to fall back on.

The production of oil requires significant capital, but the government under Chavez failed to reinvest enough of their windfalls from good years into Petróleos de Venezuela, Venezuela’s state-owned oil company. Many experts in the petroleum industry left while Chavez was in power. “If you talk to experts who have long worked on and followed the oil sector in Venezuela, they will tell you there [had been] significant technical expertise in the past and those experts are just not there anymore,” says Garcia Tufro, Deputy Director of Adrienne Arsht Latin America Center of the Atlantic Council. Oil production has dropped from 3.5 million barrels during the presidency of Hugo Chavez to under one-third of that figure today.

When Maduro took power, Venezuela’s economy was already in trouble. Maduro chose to run fiscal deficits, instead of gutting the welfare programs that Chavez had put in place. When these fiscal deficits led to inflation, food shortages, and mass protests against Maduro’s government, Maduro responded with violence. The United States responded by imposing sanctions against Venezuela in 2014. In 2017, US President Donald Trump effectively locked Venezuela out of credit markets by increasing sanctions that restrict trade in Venezuelan bonds. In February, sweeping US sanctions were announced against Petróleos de Venezuela. US National Security Advisor John Bolton said that turning up the heat on these sanctions would “help prevent further diversion of Venezuela’s assets by Maduro, and will preserve these assets for the people of Venezuela where they belong.” Yet, some people blame these sanctions for exacerbating food and medicine shortages and causing unnecessary deaths.

With Venezuela’s foreign reserves falling from $30 billion in 2013 to less than $10 billion today, and with foreign direct investment from the United States dropping from $600 billion in 2011 to below zero today, Maduro’s government has turned to issuing local currency debt to raise money. With Trump restricting Venezuela from selling debt in the United States, the government has been forced into printing increasing amounts of money to fund imports. The more money it prints, the more the currency loses value, which ultimately led to the 80,000% annual inflation rate Venezuela saw at the end of 2018 .

Venezuela’s ticket out of Dodge will be productive investment of their oil revenues. Many oil-rich countries, most famously Norway, have created sovereign wealth funds to manage investment of their vast oil-generated wealth. Some experts say that “dollarization” can put an end to Venezuela’s economic spiral, arguing that some data shows that countries that officially adopt the US dollar as their national currency produce lower, less variable inflation rates and have higher, more stable economic growth rates than countries that use domestic currencies. Harvard economist Ricardo Hausmann, on the other hand, denounces dollarization as “magical thinking,” and says that data actually shows higher volatility in countries that dollarize. Of the four historical cases of countries adopting the dollar to escape hyperinflation (Peru, Bolivia, Paraguay, and Brazil), half did not achieve the desired effects. Moreover, when a country adopts a foreign currency to gain stability, they lose the ability to control their own monetary policy.

While the policy debate over dollarization continues, it is certain that international aid is necessary to rebuild Venezuela’s shattered economy in the short term. “As soon as we are asked by the legitimate authorities of that country to come in and help, we will come in,”  says IMF managing director Christine Lagarde. “It is going to require significant financing from all the international community.” Whatever policy course is chosen, it is certain that it must be taken soon. The IMF forecast earlier this year that inflation will top 10 million percent by the end of 2019. The more this economic crisis deepens, the greater the urgency for effective government leadership.


Featured Image Source: BBC News

Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty,  or the University of California, Berkeley in general.

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2 thoughts on “Venezuela in Crisis”

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  2. Venezuela, a rustic on the northern coast of South America, may be a beautiful country possessing several amazing destinations. Venezuela is widely known for its business within the petroleum industry, because of the variety of its environment and its natural topographies. It’s considered to be among the top most diverse countries within the world. The six most developed cities within Venezuela are, Caracas (the capital city), Maracay, Maracaibo, Barquisimeto, Valencia, and Ciudad Guyana. Venezuela being one in every of the foremost urbanized countries within the entire geographical area, until tragedy struck.

    The Venezuelan crisis began in April, 1875. This was when the primary oil fields were found in this country. With the massive amount of oil came dreams of wealth and prosperity, which consequently became reality within the 1960s and 70s. Despite the oil bringing in riches, it also came with costs. Unlike agriculture or industry, which usually move with investment and employment, oil requires large amounts of capital and a smaller workforce. This shows that, oil finds the simplest way to naturally distribute riches to the citizens of the country, unlike industry or agriculture, which require an oversized number of labourers (another way of distribution of wealth). Not only did oil hurt the citizens, it began causing damage to other economic sectors. It is explained easily by the word ‘Dutch disease’. This ‘disease’ occurs when one economic sector begins to flourish while causing the opposite sectors to weaken. Therefore, any land cannot have both a national refining industry and a global competitive industry at the identical period. Oil, also when its manufactured without meeting elevated necessities can contaminate waterways upsetting sectors like agriculture. Therefore, when oil industries are moving past large companies, the general public usually see it with bad judgements, especially if they haven’t benefitted from it. The previous president, Carlos Andrés Pérez, nationalized the complete refining industry in Venezuela. This meant that each one of the productions belonged entirely to the state and to nobody else. This way, Pérez believed he could reallocate the wealth to the citizens and keep them pleased.

    Thirteen years later, during the 80s, Venezuela suffered rigorously. The country had seen better days. the full region had well-versed a process of stagnation as their Industrialization by substitution of imports (ISI) policy was an in-depth failure. As a result of the depression within the U.S.A, which relentlessly affected many countries in the geographical area, they came up with the ISI as the simplest way to stop this from happening again. The ISI was an economic and national trading policy made for the country to stop or reduce its dependency on foreign countries, through the assembly of local products. Therefore, the govt tried to interchange all foreign imports with local production. What caused more problems for the Venezuelan economy was their subsiding oil prices.

    During this era, there have been countless social programs in Venezuela, including the subsidizing of oil, which fundamentally was free. In 1989, a majority of those programs were cancelled, because of the country going bankrupt. This caused a severe backlash, and thereby created something called the ‘Caracazo’. The Caracazo were massive protests which were held within the Capital city, Caracas. This resulted within the deaths of nearly 3000 people and caused major divide within the country. As a trial to balance the economy by the President, Carlos Andrés Pérez, was ironically perceived by the citizens as a distant intervention. This led to the idea that the control of the national oil reserves was being given to another country.

    Patiently viewing these issues unfold, was a person named Hugo Chávez. In 1992, he tried to require control of the govt by force (coup d’état), but he was not successful. Despite his failure, he made an affirmative impression on the citizens of the country. Being a youg, fundamentalist leader with a dream of saving Venezuela and assisting it into becoming a successful and sovereign country seemed as a perfect leader of their country. The citizens whose principles of living had been gradually deteriorating for over a decade, finally had someone who could save their nation. Chávez had come from a lengthy line of anti-elitist, fundamentalist Spanish American family, who believed the successful development of their country is led from the govt while using the ideas and policies from the communist wing. The folks that lived in poverty and therefore the youth found these ideals euphonious. Thereby, winning him the elections in 1998 with 56% of the votes. Chávez had big dreams for his country. He aimed for the creation of such programs which distributed the wealth made up of the oil to the people. His quest wasn’t one for that of the event of the country, but it absolutely was more for one in every of justice.

    Chávez had to inherit a drastically damaged government and started his work. He began by making a constitutional reform in 1999 and was re-elected in 2000 winning 60% of the vote. He then started more challenging amendments including the farming reform, fishing reform and most significantly the oil reform. This attested to the complete country that he was dangerous. Predominantly because these reforms were laid with the authorities granted by the new constitution and not with the congress. Slowly the expansion of the opposition began to escalate and so faced a coup d’état in 2002. Its failure had aided the country vastly. This helped the oil prices go from 25 U.S. Dollars to over a 100 U.S Dollars (USD)

    (Graph taken from StockCharts.com. Depicts price of crude oil in Venezuela from 2000 to 2015)

    Chávez had started leading Venezuela to growth. He started numerous programs called Misiones. Since the govt had become increasingly wealthy, he began supporting other friendly governments in geographic region. These included, Ecuador, Cuba, Argentina, Brazil, Nicaragua and Uruguay. He had wasted an absurd quantity of the funds on these countries. Although some disappeared due to corruption, lot was financed on these social programs, some went as contributions to foreign countries and a few were merely devoted towards useless, ongoing schemes. This was the last time Venezuela would see a bright future, as in 2013, Hugo Chávez died because of a sudden and big heart attack. Hugo Chávez had elected Nicolás Maduro as his successor. Maduro had won the vote with only 51%. Many believed that the elections were fixed to favour him.

    Nicolás Maduro had inherited an oversized state, with massive amounts of investments in social programs, however, under this collage, things were very bad. The local production had been suffering for many years, since the policies that were brought up by Chávez severely affected private start-ups. What he had been doing for years was that he started expropriating companies that were laid under “National Interest” which then started lagging in production, nearly to the extent where they disappeared. An example of this can be Café Madrid. This company was expropriated within the year 2009, which had produced over 2 million kilograms of coffee, but today, it produces zero. Since the national production began to fall behind, Venezuela began depending more on foreign imports, and since the dollar was in control of the state, all of the imports were made by the govt of Venezuela and then were sold at subsidized prices. This directly harmed the locally producing industries in Venezuela, and made it perfect for exploitation and corruption which led to the beginning of trafficking to Colombia. This whole policy of falling on the imports actually worked as long as the price of the oil was above. However, this wasn’t to be. In 2014, the worth of oil nosedived and that’s when the crumbling system of Venezuela became known to the general public. Despite severe pressure, Maduro wasn’t willing to manoeuvre.

    Without the financial funds and production, importing food and medicines and other goods became scarce within the country. Maduro blames this on the “Economic war” waged by “Oligarchs” and therefore the opposition. Empty racks and long lines in stores have now become an emblem of the problems faced by the country. Unfortunately, this wasn’t the end as the country was under severe cases of corruption and hyperinflation.

    The economic instability of Venezuela is broken into four big components. These are; debt, the black market, shortages and inflation.

    The black market in Venezuela plays an oversized role in supporting instability of the economy. In early 2016, The Washington Post reported the actual price of state sold petrol was under 0.01 USD per gallon, and therefore the sanctioned state currency rate placed the US dollar at 150th of the black-market exchange rate.

    With regards to the Central Bank of Venezuela, the debt in 2014 to foreign countries is split into four parts; Firstly, Venezuelan public debts which represents 55% of the whole debt and everything that’s owned in terms of internal and external debt bonds, capital receipts and over-drafts from other banks. Second, PDVSA or Petróleos de Venezuela, a state-owned oil and gas company which takes part in production of refining and exporting the oil. The PDSVA’s debt represents 21% of the whole debt. Third, Foreign debt represents 15% of the whole debt, where majority of the financing was acquired through Chinese funding. Lastly, CADIVI or ‘Comisión de Administración de Divisas’ (Commission for the Administration of Currency Exchange) now called The National Centre for Foreign Commerce, is valued at 9% of the whole debt. In November of 2017, the economist had estimated Venezuela’s Debt at 105 Billion USD while its reserves contain only 10 billion USD.

    (Picture made on meta-chart.com. Shows total Venezuelan debt)

    Hyperinflation is out and away the largest and worst problem that Venezuela faces. The inflation rates are expected to succeed in nearly 1 million percent by the fag-end of 2018. This therefore is placed equally with the crises of Germany during the 1920s and Zimbabwe during the 2000s. The government as mentioned before, claims that the country is being affected because of an “economic war” which the most important issues are due to schemes made by the opposition and also due to the sanctions made by America. After the drop of oil prices in Venezuela, it suffered a loss of foreign currency hence making the imports of food and medicine problematic.

    Venezuelan imports have reduced by nearly 50% from one year ago and their earnings is now reminiscent of 1 USD a month, causing basic goods unaffordable within the country by many. Since the products don’t seem to be being imported, the black market has received an opportunity to require over the currency rates. The costs of basic necessities are doubling every 26 days on the average. A survey made in February of 2018 claims that just about 90% of the Venezuelan population are in poor neighbourhoods and under the poverty line. It’s claimed during this survey that above 60% of the population get up hungry as none can even afford to buy food. Apart from that the country doesn’t receive much medicine, causing severe damage within the public health system making all requirements unapproachable to the citizens.

    The citizens of Venezuela are now commencing to exit the country as a result of the economic condition. They’re now one of the biggest niches of migrants inside Latin America. It’s the fastest mounting dislocation of individuals across borders. The citizens are migrating to areas like Colombia, Brazil, Peru, Costa Rica, Mexico etc.

    The politics within the area have led to the downfall of Venezuela, which successively has led to the shifting of their citizens. The countries receiving these immigrants try to manage the exodus, despite the crisis, it seems like the governments within the region are too inattentive by their own internal politics they’re unable to aid Venezuela. While they try and improve the economy, the exodus is ongoing because the days pass, elevating the pressure on the authorities to seek out a sustainable solution to this issue.

    Therefore to deal with the research question of this paper, I have come up with one major solution which could have aided Venezuela and prevented the crisis from engulfing the whole nation. That is that it might have been better to open the country to International Aid. And so, by re-engaging Venezuela, the country’s conceivable and monetary assistance are unlocked hence giving direct aid to the state. Another noteworthy tactic would be to encourage the help of either the International Monetary Fund (IMF) or the World Bank (WB). Like Greece, Venezuela could initiate an in-depth economic plan which after certain negotiations could do miracles for the state. The government would be under plenty of debt, but with IMFs debt reformation plans, Venezuela would be able to flourish and would begin to reduce debt. Within the following five years, Venezuela should be back heading in the right direction to its former monetary status as “one of the richest nations in Latin America”.

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