Venezuela hyperinflation hits 10 million
percent. ‘Shock therapy’ may be only chance to undo the economic damage, by
Valentina Sanchez, 8/3/19.
Wasted oil riches - Shock
therapy supports the implementation of drastic economic policies to combat
hyperinflation, shortages, reduce the budget deficit — Venezuela’s current
budget deficit stands at –29.95% in relation to GDP — and transition
from a state-controlled economy to a mixed one.
The World Bank and IMF - Besides foreign investment, Venezuela will likely need help from multinational institutions such as the World Bank, the Inter-American Development Bank and the Development Bank of Latin America in order to fund the infrastructure development.
A massive brain drain - The lack of human capital is another issue Venezuela will have to address in order to recover from its economic crisis. Venezuela has lost more than 10% of its population in recent years. The number of Venezuelan migrants and refugees has reached 4 million and is expected to surpass 5.3 million by the end of this year, according to the U.N. Refugee Agency.
Foreign alliances and influence - China, Russia and Cuba have enabled Maduro’s continuation in power by lending money, providing weapons, intelligence support and political advice — relationships that date back to the regime of former Venezuelan president Hugo Chavez. Some experts believe these world powers need to be held responsible for it.
Venezuela’s state-run
economic model wasted the world’s largest oil reserves. The country owes $100
billion to foreign creditors. Its educated, professional class has fled.
Economic shock therapy, implemented in regions like the former Soviet bloc,
could be its only chance.
Venezuela’s crisis has been marked by corruption, hyperinflation,
one of the world’s highest homicide rates, food and medicine shortages and the
largest exodus “in the recent history of Latin America,” according to the U.N.
Refugee Agency.
Its chances to recover may start with President Nicolas Maduro stepping down or being forcibly removed — either by the
opposition or through foreign military intervention. But that would just be the
first step to get the ruined economy on the road to recovery. A major course of
economic shock therapy will be required.
Venezuela’s hyperinflation rate increased from 9,02 percent to 10
million percent since 2018, according to the International Monetary Fund,
though it is expected to decline to back below 1 million percent due to recent moves
by the country’s central bank, according to a recent IMF forecast.
But the economic situation remains dire: The IMF says the
cumulative decline of the Venezuelan economy since 2013 will reach 65% this
year — for 2019 the annual decline forecast has increased from 25% to 35%. The
five-year contraction is one of the worst in the world over the past half
century and one of the few that was not caused by armed conflicts or natural
disasters, the IMF stated earlier this week.
Some experts believe that in order to regain control over Venezuela’s monetary system and zero out hyperinflation, drastic decisions
will need to be taken.
“Venezuelans who have been suffering all of this time are going to
be faced with a very dramatic, very draconian policy aimed at bringing their
monetary system under control,” said Dr. Eduardo Gamarra, professor of politics
and international relations at Florida International University.
It was used in post-communist Poland and Russia, and in other
countries like Chile and Bolivia, where it successfully ended hyperinflation.
Shock therapy measures,
based on recent economic history, can include ending price controls and
government subsidies, instituting higher tax rates and lower government
spending to reduce budget deficits, devaluing the currency to boost foreign
investments and selling state-owned industries to the private sector.
Venezuela will have to
transform its current scheme of restricting foreign investment in order to fund
the restoration of the energy sector, as well as its infrastructure, including
the country’s roads and bridges and the power grid.
The petrostate recently
experienced a weeklong blackout caused by the deterioration of the power grid,
leaving people in 19 of 23 states without running water and causing four
deaths.
“They need to rebuild
everything, but the state is bankrupt and has no ability to fund any of these
projects,” Gamarra said. “Unless they invite major foreign investment, I don’t
see where the revenue is going to come from, because it’s certainly not going
to come from oil.”
Venezuela is home to the
world’s largest oil reserves, and its economy has been tied to the ups and downs of the
international price of oil for decades — oil constitutes about 25% of the
country’s GDP and 95% of its exports. But the country’s oil production reached
its lowest point since 2003 this year, when production went from 1.2 million
barrels per day in the beginning of 2019 to an average of 830,000 barrels per
day. The energy sector is only producing a fraction of the 4 million barrels of
oil a day it could be producing. “The sector has to be completely
recapitalized,” said Eric Farnsworth, vice president of the Council of the
Americas and the Americas Society.
“The government will have to reinvest in that industry. They also
need to modernize that sector because they haven’t done anything in the last
decade,” Gamarra said.
It is not rare for a South American country attempting to recover
from an economic crisis to accept large loans from multinational institutions.
The World Bank and the International Monetary Fund played an instrumental role
in Bolivia’s economic recovery in 1985 by pledging a total of $250
million in loans. Chile also received multimillion-dollar loans
from international institutions such as the Inter‐American Development Bank
and the World Bank throughout the ’70s in order to manage its mounting
inflation rates and debt.
During the recent political unrest in Venezuela, the IMF and World
Bank both indicated they were prepared to help, but the leadership uncertainty
— as Venezuela’s opposition chief Juan Guaidó attempts to take control — made
these institutions’ positions difficult. The U.S. has the largest share of
votes in both institutions. Some major powers continue to recognize Maduro’s
government, such as Russia and China.
The U.S. government has indicated it would offer both investment and credit
to the country, but only after regime change to a democratic government.
Leadership negotiations are set to resume later this week,
according to Carlos Vecchio, a Venezuelan diplomat representing the opposition,
who spoke at the National Press Club in Washington D.C. on Tuesday. Although he
would not specify exactly when or where the talks would take place, he expects
a resolution by the end of this year. Vecchio said Guaidó would prefer a
peaceful transition rather than international intervention to remove Maduro.
“They could have created the Emirates.
... Instead, they blew it. It was money blown through corruption and these
international alliances. However you look at it, even from the kindest, kindest
way, it was a model that was bound to fail.”
Dr. Eduardo Gamarra, Professor of Politics and
International Relations, Florida International University.
Current IMF managing
director Christine Lagarde recently told The Economist Radio, “As soon as we are asked
by the legitimate authorities of that country to come in and help, we will come
in. It is going to require significant financing from all the international
community.”
Maduro and his predecessor Hugo Chavez have refused to provide the
IMF with information it would need to perform audits. Lagarde told The
Economist that she could not be specific about an aid package but added, “We
will open our wallet, we will put our brain to it, and we will make sure our
heart is in the right place to help the poorest and the most exposed people,”
she said.
Back in 2007, when Venezuela was flush with cash from years of a
booming oil business, Chavez paid off all of the country’s debt to the World
Bank and severed ties with both it and the IMF.
Experts urge Venezuela to diversify its economy from primarily oil
production in order to prevent a similar crisis in the future. “If you depend
solely on the export of a single product, you are bound to the ups and downs of
the oil price,” the University of Florida’s Gamarra said. “You have to
diversify your exports, you have to have a range of high value-added exports,
because your economy has to be able to overcome moments of downturns in your
principal commodities. Unless they diversify, they’re going to go through this
again.”
Many of those who have fled will most likely not return. They are
making their living elsewhere; their children are attending college and are
finally comfortable after starting from zero in a foreign land. The idea of
leaving everything behind to return to Venezuela and help rebuild the country
might not be appealing.
The lack of a solid professional class will be the primary issue
holding Venezuela back, Farnsworth of the Council of the Americas said. “Venezuela
has been bleeding their professional class for years. The money will be there.
Money is going to show up if they see opportunity. But particularly in the
petroleum sector, Venezuela’s main productive sector, you have to have highly
educated and experienced managers, engineers ... That professional class left
Venezuela years ago.”
Gamarra is concerned about the lack of human capital pushing out
the timeline for economic recovery.“Venezuela is taking a huge, huge loss of
human capital more than anything else,” he said. “And whenever a country loses
such a large number of people, it’s not that those who remain behind aren’t
capable, but a lot of those who left are the educated, the wealthy, the kind of
people you need to rebuild a country.”
Venezuela will have to develop a new professional class through
steps including the reformulation of its education system, which will take
years to accomplish.
The Venezuelan petrostate has relied on China and Russia to stay
afloat — they have given Venezuela billions of dollars in loans and investments
over the past decade. By some recent estimates, China has become the world’s largest official
creditor,
surpassing institutions like the IMF.
Venezuela now owes about $100 billion dollars to external
creditors, according to the latest Central Intelligence Agency report.
“The external support of those countries, in particular, has
certainly enabled the continuation of the Maduro regime, because they have
provided resources through the purchases of petroleum,” Farnsworth said. “Those
three countries have clearly made the transition more difficult. They have
enabled Venezuela’s collapse.”
Some experts agree that
these countries, especially China, should contribute to the alleviation of the
humanitarian crisis in Colombia, Brazil and other nations affected by the mass
exodus, as well as using its wealth to contribute to the economic recovery of
Venezuela.
“If they want to engage
in the Western Hemisphere, they have to engage in other ways, not just by
selling products and then skedaddling when things get tough,” Farnsworth said.
“Try to address some of the problems in the region ... particularly problems
that they themselves have helped to cause.” Venezuela’s recovery will require a
decade-long transformation after a 20-year-long ordeal, rebuilding the country from
the ground up.
But the experts say
socialism was not the root cause of Venezuela’s problems. Corruption and
mismanagement are to blame for the collapse of the oil-rich country. “It was,
and I hate putting labels on it ... but it was really a scheme to scam the oil
revenue, to promote the Bolivarian model, which again was not socialism to any
extent,” Gamarra said. “Everything was done through this corrupt scheme where
they skimmed the money off the top and did everything in such a corrupt manner
that it only benefited a few.”
“They could have created
the Emirates. The King Chavez. But still spend all of that money on Venezuela.
Instead, they blew it. It was money blown through corruption and these
international alliances,” Gamarra said. “And so however you look at it, even
from the kindest, kindest way, it was a model that was bound to fail.”
Norb
Leahy, Dunwoody GA Tea Party Leader
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