Thursday, June 27, 2019

Venezuela Economy Update


Population 32.7 million. Land area 353,841 square miles. Nominal GDP $96.328 billion. Nominal Per Capita GDP $1.00.  Unemployment 44.3%. Poverty 90%. Inflation 10,000,000%. Government debt $150 billion. Debt to GDP 273%.

Venezuela oil production dropped from 1.85 million bpd in 2017 to 0.80 million bpd in 2019. Active oil rigs dropped from 80 in 2011 to 20 in 2019.

Chavez introduced a Land Law in 2001 permitting the expropriation of agricultural land. Seized estates were turned over to co-operatives and regime supporters. The new farmers lacked the technical know-how, management skills and capital necessary to maintain production. Moreover, as state retained title to the land, the regime would repossess it if the new farmers did not continue their political support. By 2010, the government had seized 20% of the agricultural land in Venezuela. The remaining private farmers do not invest in their farms for fear of expropriation.

These expropriations destroyed Venezuela’s agricultural capacity. According to the National Confederacy of Agriculture and Livestock Associations, agricultural productivity dropped sharply from 2007 to 2011. Maize production fell by 40.3%; rice by 38.9%; sugar by 33.6%; coffee by 46.5%; potatoes by 63.5%; tomatoes by 31.0%; and onions by 24.6%. Livestock farming was also devastated. Beef and veal production have dropped by 75% between 1998 and 2014.

Nationalization also affected Venezuela’s food processors. The government expropriated 18 of the 27 plants producing the staple corn flour. All are now making a loss and are in various stages of collapse. One of the most egregious nationalization cases is the Cariaco Sugar Plant: within two years of being nationalized it was only producing at 11% of its previous production levels. The Ezequiel Zamora Sugar Plant, started in 2002 as a new state enterprise by Chavez in his home state, has cost a huge amount but is largely in ruins and barely producing any sugar. Workers in nationalized food-processing firms who protest the situation are treated with no mercy. In February this year, the regime arrested several trade union leaders at the Lacteos Los Andes “Hugo Chavez” plant in Cabudare who protested corrupt and incompetent management.

Chavez also nationalized food retailers, such as the large supermarket chains Exito and Cada in 2010.  These were turned into a state-owned operation called Bicentennial Supplies that by 2017 had largely collapsed, with 60% of its shops shut and 6,000 of its 9,000 workers dismissed.

The cost of goods and the value of currency - 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 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 solution of Venezuela’s new president Nicolas Maduro, who succeeded Chavez in March 2013, was to print more money. That might seem silly, but it can keep the economy moving while it gets over a hump caused by a short-term price shock.

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. It added to the supply of currency, pushing the value down even further. As prices rose, the government printed more money to pay its bills. This cycle is what causes hyperinflation.


Norb Leahy, Dunwoody GA Tea Party Leader


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