Venezuela's worst economic crisis: What went wrong?
Country sitting on world's biggest oil reserves is
now region's poorest performer in terms of GDP growth per capita.
Venezuela is
experiencing the worst economic crisis in its history, with an inflation rate
of over 400 percent and a volatile exchange rate.
Heavily
in debt and
with inflation soaring, its people continue to take to the streets in protest. President
Nicolas Maduro announced the highest
increase in the minimum wage ordered by him - 65 percent of the monthly income, and
recently announced the creation of a new popular assembly with the ability to
re-write the constitution.
International
concern raised, with Chile and Argentina among the countries expressing worry.
The Venezuelan opposition says the move further weakens the chances of holding
a vote to remove Maduro.
But
backing has come from regional leftist allies including Cuba. Bolivia's
President Evo Morales said Venezuela had the right to "decide its
future... without external intervention."
The
country sits on the world's largest oil reserves, but, over the past decade, it
has been the region's poorest performer in terms of growth of GDP per capita.
Since
2014 the government has not made any economic data available making it
difficult to track. But what went wrong?
Venezuela
depends heavily on its oil. It has the largest oil reserves in the world which,
in 2014, had 298 billion barrels of proved oil reserves.
Oil
revenue has sustained Venezuela's economy for years. During the presidency of
Hugo Chavez, the price of oil reached a historic high of $100 a barrel.
The
billions of dollars in revenue were used to finance social programmes and food
subsidies. But when the price of oil fell, those programmes and subsidies
became unsustainable.
The
government is also running out of cash. According to the Central Bank of
Venezuela, the country has $10.4bn in foreign reserves left, and it is
estimated to have a debt of $7.2bn.
According
to International Monetary Fund (IMF) figures, in 2016, the country had a
negative growth rate of minus 8 percent, an inflation rate of 481 percent and
an unemployment rate of 17 percent that is expected to climb to 20 percent this
year.
Currency
controls have limited imports, putting a strain on supply. The government
controls the price of basic goods, this has led to a black market that has a
strong influence on prices too.
The
most recent report by CENDAS (Centre for Documentation and Social Analysis)
indicates that in March 2017 a family of five needed to collect 1.06 million
bolivars to pay for the basic basket of goods for one month, that includes food
and hygiene items, as well as spending on housing, education, health and basic
services.
The
cost of that basket rose by 15.8 percent that is an increase of 424 percent
compared to 2016.
During
the rule of Hugo Chavez, the price of key items, food and medicines were
reduced. Products became more affordable but they were below the cost of
production.
Private
companies were expropriated, and to stop people from changing the national
currency into dollars, Chavez restricted the access to dollars and fixed the
rate.
When
it became unprofitable for Venezuelan companies to continue producing their own
products, the government decided to import them from abroad, using oil money.
But
oil prices have been falling since 2014, which has left the economic system
unable to maintain the system of subsidies and price controls that functioned
during the oil boom years.
The inability to pay for imports with bolivares coupled with the decline in oil revenues has led to a shortage of goods. The state has tried to ration food and set their prices, but the consequence is that products have disappeared from shops and ended up in the black market, overpriced.
As
many as 85 of every 100 medicines are
missing in the country. Shortages are so extreme that patients sometimes take
medicines ill-suited for their conditions, doctors warn.
Given
the long litany of woes, some analysts think there are two options before
Maduro's government: to default on its debt or to stop importing food.
"For
those of us who work with a normal wage, we can barely eat, it's like a war
situation [we eat what we can get and what we can find] because the price of
food is astronomical," Leonardo Bruzal, a Venezuelan citizen, told Al
Jazeera.
Many
Venezuelans search for food, occasionally opting to eat wild fruit or rubbish.
"We are facing a food crisis," analyst Jose Guerra explained to Al
Jazeera.
Venezuela
has established different exchange rate systems for its national currency, the
bolivar. One
rate was established for what the government determines to be "essential
goods", other for "non-essential goods" and another one for
people. The
two primary rates overvalue the bolivar, but the black market values the
bolivar at near worthless.
This
has generated a situation in which Venezuelans are opting for dollars instead
of bolivares. The government maintains a trade
around 710 bolivares per US dollar. At 10 under Venezuela's other
official rate But the black-market rate has risen
to 4,283 bolivars for one dollar.
The
government has also increased the number of bolivares available in the streets,
as the money in circulation has not been enough to pay for basic goods that
today cost a lot more. This has stoked fears of hyperinflation.
On
April 30, Maduro announced a 34.42 percent increase in the total salary. Faced
with this new wage increase - the 15 during Maduro's mandate - economists
reacted saying that this measure is insufficient to deal with inflation, which
they warn is going to worsen with this setting.
Between 1900 and 1920, Venezuela's per capita GDP had grown at a rate of barely 1.8 percent. Between 1940 and 1948 it grew at 6.8 percent per annum.4) Venezuela before Chavez
By
the 1960s and the 1970s, the governments in Venezuela were able to maintain
social harmony by spending fairly large amounts on public programmes.
In
1970, Venezuela had become the richest country in Latin America, and one of the
20 richest countries in the world, with a per-capita higher that Spain, Greece
and Israel, Ricardo Hausmann explains in his book Venezuela Before Chavez:
Anatomy of an Economy Collapse.
Venezuelan
workers were known for enjoying the highest wages in Latin America, a situation
that dramatically changed when oil prices collapsed during the 1980s. The
economy contracted and inflation levels rose, remaining between 6 and 12
percent from 1982 to 1986.
The
inflation rate surged in 1989 to 81 percent, the same year the capital city of
Caracas experienced rioting during the Caracazo following the cuts in
government spending and the opening of markets by the then president, Carlos
Andres Perez.
Venezuela's
GDP went from -8.3 percent in 1989 to 4.4 percent in 1990, and 9.2 percent in
1991. However, wages remained low and unemployment high among Venezuelans.
By
the mid-1990s under Caldera, Venezuela saw annual inflation rates of 50-60
percent, and an inflation rate of 100 percent in 1996, three years before
Chavez took office.
The
number of people living in poverty rose from 36 percent to 66 percent in 1995
with the country suffering a severe bank crisis.
When
Chavez first took office as president in 1999, the country was not an economic
model: almost half the population was below the country's poverty line.
However,
the country was an affluent country and the government finances were in
tolerably good shape.
Comments
In the
video, Hausmann says that Chavez spent money like oil was at $200/bbl, but it
was only at $100/bb; Now it’s in the $40s /bbl. this overspending left nothing
in the way of savings for when oil prices dropped. Venezuela owes Wall Street
$150 billion in Bond debt, but only exports $25 billion in oil. They only have
$10 billion in cash.
Norb
Leahy, Dunwoody GA Tea Party Leader
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