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Mismanaged Economy at the Heart of the Situation in Venezuela

Tensions continue to rise in Venezuela. According to a Reuters report on Monday by Brian Ellsworth and Andrew Cawthorne, the death toll has reached thirteen. Meanwhile, demonstrations that have their genesis in the death of former president Hugo Chavez have continued to escalate.

Elected in 1999, Chavez brought sweeping social reforms, including nationalization of several industries and an increased focus on welfare spending. Although seen as the man who truly put Venezuela on the political map, his delicate socialist state was and still is threatened by financial and social ruin. Heritage Foundation, a conservative D.C.-based think tank, gave Venezuela an economic freedom score of 36.3 in its 2014 index (on a scale of 100 with the world average at 60.3), placing it at 175 overall, just one ahead of the infamous hyper-inflating Zimbabwe economy. In fact, Heritage has identified the economy as “repressed” since 2004. That being said, Chavez’s charisma was able to mask many of these underlying issues so that a degree of civil order was maintained–his successor, Nicolas Maduro, has not been so lucky.

Following Chávez’s death last year on March 5th, Vice President Nicolás Maduro assumed power and just over a month later won a special election by less than 1%, leading to suspicions of foul play. In fact, a Northwestern student, Venezuelan sophomore Andres Finol, confided in me how his great uncle cast one of those votes for Maduro. The only troubling part of this story is that his uncle has been dead for twenty years; indeed this was not the only case. Yet despite demands for a recount, Maduro was officially sworn in one week later. And so Maduro, a former bus driver who would stumble into politics after becoming involved with his union, found himself at the head of an economically and socially unstable country. Not to call into question the intelligence or ability of bus drivers, but surely they lack some necessary aptitude to take control of a nation, especially one with many state-ran industries. Maduro and his administration are already showing these flaws as they continue to disregard economic common sense, and even worse, human rights.

The riots that have already left 13 dead began on February 4th. Several students from Universidad Nacional Experimental
del Táchira began protesting after law enforcement ignored a recent sexual assault case. The protest was promptly suppressed by local police, but not before two students were thrown in jail, according to Francisco Toro of the New York Times. In response to this oppression the riots have only grown in recent weeks, as the incompetence and brutality of the novice Maduro regime is exposed.

What started as student riots against police brutality, however, has grown to include the mounting discontent with Venezuela’s economic status. Inflation is up to 56%, there are shortages in consumer goods such as milk, flour and medicine, and power outages have become commonplace. In his article, “Cheap Gasoline: Why Venezuela Is Doomed To Collapse,” Forbes writer Christopher Helman explains the greater issue facing the Venezuelan economy: cheaper gasoline prices. One of the world’s largest producers of oil, Venezuela has relied heavily on oil revenue over the past decade. Nationalized in 1976, Petróleos de Venezuela, S.A. (PDVSA) is the country’s premiere oil company and the world’s fifth largest exporter in the industry. Throughout his administration, Chavez used the revenue from this state-owned company to finance his social welfare reforms. One of these was extremely cheap domestic oil prices. As Helman explains, “a gallon of gas in Venezuela costs less than one penny. You can fill up an SUV for less than the price of a candy bar.” These oil subsidies are costing PDVSA, and therefore government revenue, approximately $50 billion per year. This lost annual profit is needed to reinvest in Venezuelan growth through social spending.

Exacerbating this problem is the growing uncertainty over Venezuela’s currency: the bolívar. Although Venezuela maintains a 6 to 1 dollar ratio as the official exchange rate, $1 will get about 87 bolívars in the black market. However, Maduro’s administration continues to ignore the ongoing devaluing of the bolívar, even using the military to force local businesses to lower prices, to the point where storeowners are losing money.

Making matters worse, the increasing pressure of Venezuela’s public debt (up to 49% of GDP) has caused a sharp decline in foreign currency reserves, from $30 billion in 2012 to $20 billion today, according to Helman. Growing debt and lack of foreign currency has encouraged the Venezuelan government to hoard most of the nation’s less abundant U.S. dollars. This has had a devastating effect on domestic business. The volatile bolívar coupled with the lack of U.S. dollars has forced Venezuelan businesses to cut back on imports.

This has resulted in the many shortages the country faces today, especially in the food industry. Helman reports how even Toyota has suspended car production in Venezuela due to their lack of dollars. Even so, Maduro continues to blame domestic businesses for the economic shortages and overall problems. As long as his administration continues to ignore basic economic principles, hoard foreign currency, and keep domestic oil prices unreasonably low, the economic consequences are sure to spread, with no citizen, politician, or industry immune.

Photo Credit: Carbon Visuals, via Flickr

To learn in greater depth about Venezuala’s cheap gasoline prices, I encourage readers to visit Helman’s article in Forbes below:

(http://www.forbes.com/sites/christopherhelman/2014/02/20/cheap-gasoline-why-venezuela-is-doomed-to-collapse)

About Evan Ocko

A junior contributor, Evan is an Economics major from Westchester, NY. Like any ex-high school athlete, he has recently picked up golf and men’s softball to rekindle the glory days.

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