Abacus: A look into Venezuela's economy going bust
Imagine paying for a cup of coffee with a tote bag full of cash. If you visit the store again in some time, you might have to pay even more than before, because prices fluctuate on a hourly basis, and there might not even be coffee leftover.
The cup of coffee is worth a bag full of money because of the highest inflation rate of 80,000 percent in the world. This is the story of the richest country in Latin America, boasting the largest oil reserves going bust.
Venezuela once was the wealthiest country in Latin America. Despite having the largest petroleum reserve in the world, fertile land filled with natural resources and a lot of cheap manpower, Venezuela has become unlivable for its very own citizens. With more than three million residents fleeing the country to seek asylum in neighboring states, Venezuela has become an example of what might happen with poor governance and the introduction of socialism in the economy.
The year was 1998, late Prime Minister Hugo Chavez won the elections with a promise of social economic revolution called the ‘Bolivarian Revolution.’ The Bolivariana Revolution was based on redistributing wealth equally amongst the working class by providing government-funded welfare system for food, healthcare and education.
At the time, Chavez took the reigns of the wealthiest economies of Latin America. Chavez promised to tackle corruption with an iron fist and reduce the rising economic gap between the rich and the poor. At the time nearly 50 percent of the population was living under the poverty line despite being one of the richest countries in the world.
In 1998, the cost of one barrel of oil was $7-$8, but by 2005, the price of one barrel of oil rose to a $100. Experiencing the oil boom, Chavez wanted to create an economic system which can distribute the oil revenue in a more massive way downwards of the economy, to the poor.
With more money coming in from exporting oil, Chavez used the revenue to set up social programs known as ‘Misiones,’ which gave people citizenship rights, access to job training, access to breakfast club, university programs and healthcare for all.
The Misiones social program although did reduce the economic gap between the rich and the poor. By 2006, only 36 percent of Venezuelans were living under the poverty line and children enrolled in secondary education rose from 48% in 1999 to 72% in 2010, according to UNESCO figures.
Chavez’s new economic model of Venezuela was using oil as that redemptive quality to bring social change but also deepening the dependence on oil.
By 2006, oil prices were still soaring high at $75 per barrel. Chavez took this opportunity to diversify his social-economic reforms with a very clumsy process of nationalism.
Chavez went out and bought heavy state assets like electricity sector, oil sector, telecommunications sector and anything that he could get his hands on. He also went out and bought the Banco de Venezuela from the Spanish bank Santander along with investing heavily in cement companies. The idea was to bring all sectors under the Venezuelan government so that prices can be easily regulated for the poor. In other terms, Chavez was pushing hard-core socialism with the oil bust money.
Venezuela although did manage to reduce the stark gap between the rich and the poor but lost most of its private business in the process.
The Venezuelan government wasn’t ready to maximize its in-house production after the buying spree of Chavez, leading the country to import more goods to meet the demand.
Venezuela started importing goods and services at exponential growth. In 2006, Venezuela imported goods and services twice as much as they exported products. Oil was the only product that was keeping the economy afloat despite its spending spree, social welfare programs and high imports. The Venezuelan economy exported 3.3 billion barrels per day in 2006, which accounted for 80 percent of the exports and half of the government’s revenue.
Whenever the prices would fluctuate, Chavez borrowed money from the international market to keep the economy afloat in promise of returning it when prices rose again.
After the great depression of 2008, oil prices stooped down to $53 a barrel. Growth stagnated, so did the prices of oil.
But the world had seen enough growth in the first decade of the 21st century, and emerging economies like China, India, Russia, and Brazil’s economy started slowing down. The US and Canada started mining their own lands for oil rather than importing it, putting more downward pressure on oil prices.
By 2012, Oil accounted for 95 percent of Venezuela’s exports.
The oil industry being a cyclical one gave the Venezuelan economy a sugar rush for nearly a decade before collapsing in 2013.
With oil prices falling, Chavez, the charismatic leader of the Bolivarian Revolution fell too. In March 2013, Hugo Chavez, who was battling cancer died, making way for his hand-picked successor Nicolas Maduro.
When oil prices fell starkly in 2014, Maduro was faced with a huge economic dilemma. Falling prices of oil, their sole export and rising debt on the country made it difficult to import food and goods. The Venezuelan economy was faced with exporting an oil barrel for a mere $44 and high debt of $150 billion in the international market.
Low oil prices made the government’s cash flow dwindle. Still trying to keep Misiones running and his successor’s legacy alive, Maduro was providing food well below its nominal price. Maduro started printing more and more bills to keep the cash flow going not realizing that it will induce inflation and a plunge in the bolivar’s value in the international market.
In 2010, one USD was about eight bolivars, as compared to 24,000 bolivars in 2018.
People have argued that the fall of Venezuela was because of the cyclical nature of the oil industry. But I think, that nationalization of all the sectors, the Misiones programs, and other social economic welfare programs were the cause of the fall of Venezuela.
If not for so many added expenses on the government, Venezuela with its oil reserve would have easily waited out the cyclical downturn of the oil industry. To fund these government-run programs with a dwindling cash inflow, Venezuela took more debt which dug a bigger hole in the sinking ship. The icing on the cake was Maduro’s currency printing and devaluation of Venezuelan currency by 96 percent in hopes of controlling the hyperinflation of 108,000 percent.
The Trump administration has openly supported Maduro’s opponent Juan Guaido.
President Trump and his security adviser, John Bolton have said to employ military force in Venezuela to avoid disruption in the oil market. President Trump even imposed sanctions on import of Venezuelan oil to force Maduro out of power.
Such sanction can give native oil companies in the US opportunity to produce more oil, hence boosting economic growth the US market. When and if Guaido gains power, the US can negotiate a good deal for the Venezuelan oil and get a reduced price on its imports.