Economic Crisis In Venezuela

December 30th, 2020

By: Christopher Egan


Maduro’s Economic Policy and the Venezuelan Political Climate

Nicolás Maduro Moros’s economic policy in the political strife that has gripped post-2013 Venezuela has been characterised by protests mainly in Caracas and other major cities against the regime; demanding the replacement of Maduro by Juan Guaidó Márquez. Protests have increased in frequency and size with Venezuela’s deteriorating socio-economic climate; most of whose effects can be directly attributed to the ineffective economic and domestic socialist policies of Maduro. Venezuela has shifted from one of the fastest developing countries in the late 20th century to one of the fastest deteriorating countries in recent years due to socio-economic mismanagement.

Literature Review, or, “Who Foots the Bill?”

The Maduro regime faced a massive foreign exchange deficit of 40 billion(USD) in 2015 after oil prices fell drastically and steep debt servicing requirements arose, averaging 10 billion(USD) a year from 2015-2018. (Santos, 2015) Maduro encountered two large economic issues: a strain in public finances due to the drop in the oil price from D88 to D44 in 2014 which was exacerbated by the inheritance of Chávez’s economic policy. This monetary policy was reliant on oil proceeds – Chávez borrowed on the expectation that oil prices would remain high, and no sovereign-wealth fund was set up to potentially cushion a fall in oil prices. (The Economist, 2017)

Sullivan (2015) focuses on the decrease of oil price, finding that ultimately, due to the decline in the oil price and thus the reduction of the revenues of the oil industry, Maduro was presented with a huge budget deficit. This forced the Venezuelan economy to contract by 35 per cent from 2012 to 2017. It was also found that this sizable fiscal deficit was financed by the Central Bank of Venezuela who printed more money, rather than increasing taxes and controlling government spending. This eventually led to hyperinflation of 1.7 million per cent in May 2019 from 20 per cent in 2012. (Hausmann, 2017; and Sullivan, 2015).

Nagel (2014) found that in response to the hyperinflation, Maduro implemented a series of price controls, known as the ‘Organic Law of Fair Prices’. He did this without the consent of the Venezuelan electorate, and as such he had managed to grant himself incredible executive power. This bill in January 2014 claimed to protect the salaries and incomes of citizens by setting profits to a maximum; profits were capped off at 30 per cent for all businesses. Nagel (2014) also observed that the bill required all corporations and enterprises to hand over all financial information such as costs, prices, margins and types of production processes to the government. These were then assessed by a dedicated regulator, the “National Superintendence for the Defence of Socio-Economic Rights”, SUNDDE. It was also noted that this attempt at controlling inflation failed, as transactions moved to the black market and supplies dried up. This is largely because international suppliers were discouraged from importing as Maduro had to reduce imports by 21 per cent to reduce the trade deficit. Price controls, coupled with the value of the Bolívar depreciating and hyperinflation (increasing the prices of goods) caused massive shortages of essential medicines and staples. With domestic production not able to substitute for the imports that Venezuela could now not afford due to the weakness of its economy and currency, the populace was forced to go hungry and without medicine.

Santos (2017) also highlighted the effects of debt management, finding that Venezuela faced a foreign exchange deficit of USD40 billion, worth 18.9 per cent of its GDP (Statista, 2019) in 2015. This deficit forced Maduro to cut imports, take on loans from China, swap gold for assets, discount oil credits given to Jamaica and the Dominican Republic and sell off other assets such as international liquid reserves, Special Withdrawing Rights at the IMF and liquidating other public assets. Venezuela’s debt problems were also demonstrated by Schipani (2015) with the discovery that Venezuela was forced to issue some of its debts off at the state oil company, PdVSA’s (Petróleos de Venezuela, S.A.) U.S. Subsidiary, Citgo.

Furthermore, Wheatley (2017) highlighted another issue with Maduro’s economic policy - taking loans worth 9 billion(USD) from China in 2015. Taking on hefty loans from the Chinese was shown to not be an optimal course of action as in November 2017, China allowed the suing of PdVSA for late payments by a U.S. subsidiary of Sinopec, China’s state oil company. In a word, China indicated its growing impatience with late debt repayments and hinted at a potential policy change to prioritising the protection of the value of its financial portfolio. This matter was later settled privately, but in an article for U.S. Congress, Nelson (2018) observed that this lawsuit would not have been approved if the Chinese government prioritised regime stability over its large economic investments – evidently showing Chinese impatience, which could herald future issues for the regime if repayment was demanded.

n addition to the Chinese loans, Santos (2017), with his focus on Venezuelan debt, found that Maduro also had several debts due to be serviced worth USD 10 billion per year from 2015-2018. This only served to worsen the pressure on the Venezuelan economy. To maintain debt services in 2016, the government reduced expenses massively, including oil contractors and suppliers; the United States Energy Information Administration (2019) reported that the production of 755,000 barrels of oil per day was lost from June 2016 to May 2018. Furthermore, Santos (2017) discovered that imports were trimmed by 50 per cent, again weakening Venezuela’s oil-dependent economic output. This led to fiscal issues and financial troubles, causing deterioration in the quality of life marked by food shortages, lack of healthcare provision and mass unemployment for many citizens, and ultimately leading to protests and political strife. Due to the penalties of the profit controls, the majority of industrial apparatus was expropriated; the surviving private sector was deprived of foreign currency due to the depreciation of the Bolívar as a direct consequence of incessant money printing (Thomson and Zerpa, 2018). This meant businesses could not afford to import foreign materials and equipment; the private sector became technologically obsolete, thus indicating the profound weakness of Venezuela’s economy, and suggesting mass unemployment.

Gonzalez (2019) spotlighted the fact that Maduro continued Chávez’s policy of controlling the U.S. Dollar (USD) – Venezuelan Bolívar (VEF) exchange rate after he ascended to power. He kept a watchful eye on the price of the dollar to officially worth around 10 Bolívares and thus allowing Maduro, with the government-bought dollars, to keep himself in power by feeding the top brass of the military with dollars. Gonzalez (2019) also postulated that the dollars were then sold at exorbitant rates on the black market to keep the military, and Maduro, rich. As such, the boliburgueses – the “Bolivarian bourgeois” fly in private jets, buy property in Miami, and send their children to US Ivy League Universities.

Gonzalez (2019) maintained that by overvaluing the exchange rate of VEF, Maduro was able to have several different exchange rates for other purposes. He then allowed citizens and businesses an abysmal exchange rate compared to the stock rate of 1 USD = 10 Bolívares. This meant that businesses, all attaining capital as Bolívares, could not get large amounts of USD to purchase equipment. Some businesses were allowed better exchange rates by approval of the government, meaning that influential business owners could arbitrate the currency. This increased inflation as companies bought fewer goods than the amount initially stated to the government. Rathbone (2017) reported that the manipulation of exchange rates caused pronounced inflation, which in turn then caused unemployment and material shortages. This has caused protests against the regime and political strife in Venezuela.

Hyperinflation and Devastation

Nicolás Maduro’s economic policy can be considered to be a significant cause for the recent political turmoil in Venezuela. This is largely due to the inherent lack of regard for fiscal restraint when it was required to combat the deteriorating economy. Maduro’s policy mainly consisted of trying to reduce the vast foreign exchange deficit of USD 40 billion by printing an excessive amount of money. The problem with printing money to provide cash for repayments is that even though the value of the deficit remains the same, the supply of money increases, which means that the value of the Bolívar decreases relative to U.S. Dollars. As a result, the foreign exchange deficit is not reduced as only an increase in economic output (i.e. an increase in oil exports) can decrease this deficit. Instead, the result is that there is simply more cash circulating in the economy which means that whilst the regular consumer in Venezuela has more money to buy goods with, sellers of goods can just put the price up; the cost of goods in Venezuela inflated massively; hyperinflation.

Maduro had not listened to the lessons of history that dictate that hyperinflation occurs when a government prints money to service its debts – the same happened in Weimar Germany in 1923 following the government’s response ofto hefty war reparations. Therefore, Maduro is the most significant reason for causing the recent political turmoil in Venezuela due to his economic policy. Hyperinflation severely devalues a currency, meaning that the price of goods inflates quicker than money arrives in the consumer’s hands In return, meaning that consumers cannot buy goods due to the exorbitant prices; a monthly salary ends up being too little to pay for essential goods. As such, due to hyperinflation, Venezuela’s businesses suffered as import prices rose and loans became worthless. This, in turn, led to significant unemployment as the lack of demand for goods (due to their immense prices) caused businesses’ incomes to shrivel – companies could no longer pay their staff the enormous amount of Bolívares required by inflation.

Henceforth, unemployment increased momentously, which only worsened the economy as the unemployed cannot buy goods, not least with inflated prices. This led to even more businesses folding and exacerbating the already terrible condition of the Venezuelan economy. Hyperinflation led to a lack of trust in the Bolívar, causing consumers to hoard both durable and perishable items, expecting further increases in inflation to occur, and to buy goods whilst they still could. This led to daily supplies and essential goods becoming extremely scarce, transactions for goods diverting from cash to the black market and even to cybergames such as RuneScape,(The Economist, 2019) which allowed some to get hard U.S. Dollars which protected their money from the hyperinflation as a safe-haven currency.

The extreme lengths that people went to shift their money from Bolívares demonstrate the lack of trust in the government and the currency by ordinary Venezuelans. Ultimately, hyperinflation resulted in economic collapse, which was also worsened by Maduro’s implementation of price controls through SUNDDE, which controlled the profit a business could make off their goods by governing the price they were sold at in an attempt to curb inflation. However, this meant that importing companies were virtually destroyed as the deprecation of the Bolívar against foreign currencies meant that they did not make enough money from their domestic sales to buy imported goods. This led to significant shortages in basic essential goods like food and medicine, and as such, the population was forced to go hungry and without treatment. The maltreatment of the populace has caused vast reductions in the standard of living and quality of life for ordinary Venezuelans. These conditions have played a large role in causing them to rise against the regime in the hope for change and have led to political strife.

Furthermore, the crucifixion of the private sector due to the government confiscation of equipment, profit controls and deprivation of foreign currency due to exchange-rate manipulation has meant that nobody in Venezuela, save for the political elite, are safe from the effects of the economy. (Stott, 2019) All businesses, getting their money in Bolívares, were prevented from obtaining USD to buy equipment, leading to decreasing profit and increasing costs meant that many companies collapsed. Corruption and bribery, rife through the Venezuelan government allowed influential business owners to arbitrate currency and unknowingly increase inflation. These actions have provoked demonstrations due to widespread disgust at graft allowing the influential and wealthy to profit and at the terrible condition of life in Venezuela due to the dreadful economy. (Office of the Spokesperson of the United States Department of State, 2019).

The performance of private companies is not always leashed hard to the performance of the economy and (in non-manipulated exchange rate climates) they tend to be able to move capital into foreign subsidiaries. This allows private firms to ride out issues such as hyperinflation and can help to limit the effect of an economic collapse on some citizens. However, the lack of a private sector in Venezuela means that the vast majority of the populace is vulnerable to Venezuela’s crumpled economy. Again, this causes vast detriment to the standard of living; more are sent into poverty thereby aggravating political strife and a popular will for change.

Hyperinflation and the deterioration of a country’s economy can serve as a harbinger of regime change – the weak, rickety democratic Weimar Government of 1920s Germany quickly devolved to Nazism and totalitarianism with the rise of Hitler being closely correlated to the fall of the Weimar German economy. Hitler gathered his support for the Munich (Beer Hall) Putsch of 1923 after hyperinflation had ravaged the German economy and later when he finally rose to power after continued political instability following the Wall Street Crash. Another example would be 1980s Bolivia, where soaring interest rates and the tumbling of resource prices (which Bolivia’s commodity-driven economy was highly dependent on) caused massive hyperinflation of 60,000 per cent). Attempts to limit spending and raise taxes angered interest groups, and the government was thrown from power by 1985 after three years of rampaging inflation. Venezuela serves as another example of political instability owing from hyperinflation due to Maduro’s economic mismanagement, which has definitively led to political turmoil, as it did in Weimar Germany and Bolivia.

Another major issue with Maduro’s fiscal governance is the poor debt management resulting in massive debt owed by Venezuela to other nations, particularly China, in response to the massive foreign exchange deficit of USD40 billion. Taking on loans from China proved to be a significant error in economic policy as Venezuela was not able to pay the loans back, as demonstrated by Sinopec’s suing of PdVSA for late debt repayments. This also suggested widespread Chinese impatience with the lack of debt servicing from Venezuela. These loans from an increasingly intolerant China causes exceptional risk for the Venezuelan economy; Maduro has created the risk of causing even greater destruction to his economy and even more political upheaval by taking on debt from the Chinese. By taking on debts which eventually needed repaying (USD10 billion per annum from 2015-18) Maduro placed excessive pressure on the economy, leading to austerity measures which include the reduction of expenses, particularly in the oil industry where 755,000 barrels of oil were lost per day from June 2015 to May 2016 and the trimming of imports by half. (the United States Energy Information Administration, 2019).

Maduro’s economic policy has been incredibly ineffectual and has exacerbated the dire situation left by Chávez in the wake of the 2014 oil-price crash: Maduro’s economic policies of merely printing money in the wake of the 2014 oil crash and price controls caused intense hyperinflation, which crippled the oil-dependent economy. The price control, in particular, prevented any form of economic recovery by the private sector, since limits on profits prevented reinvestment and the hallowed multiplier effect of private businesses, where profits allow more capital to flow into companies, decreasing unemployment and increasing economic growth. Furthermore, the taking on of Chinese loans placed a more significant risk on the economy when considering the indication of the Chinese government sanction of Chinese companies withdrawing loans, which could lead the debt-ridden economy to default. Finally, the manipulation of the USD-VEF exchange rate has meant that the majority of firms have not been able to reasonably secure their profitability as they could not buy equipment from abroad necessary for their business, also allowing influential businesspeople to arbitrate the currency, thereby increasing inflation. As such, the economic state of Venezuela is crippled, due to the hyperinflation and depreciation caused by his monetary policy which has led to political strife due to the people becoming frustrated at the shortages of food, water, electricity, medicine and other essential goods and wanting a change of regime in the hope of the situation improving.

Maduro’s foolhardy policy of ‘trimming the fat’ off the expense-sheets of the oil industry is economically irresponsible and irrational as Venezuela’s economic output (heavily tied to the performance of the oil industry) can only decrease with a lack of investment in oil; profits will fall, and costs will rise due to obsolete equipment. The economy has worsened and is deteriorating due to the decrease in economic output, shortages of essential goods and subsequent declines in the standard of living and quality of life: this has led to mass demonstrations, indicative of a precarious political climate.

References:

1. Santos, MA (2017) Venezuela: Running on Empty, LASA Forum, 48.1, 58–62.

2. The Economist (2017) How Chávez and Maduro Have Impoverished Venezuela, April 6, 2017.

3. Sullivan M.P. (2015) Venezuela: Background and U.S. Relations, in Venezuela: Conditions, Issues and U.S. Relations (Nova Science Publishers, Inc., 2015), pp. 1–80.

4. Hausmann, R (2017) Venezuela’s Unprecedented Collapse, Report, IMF World Economic Outlook Database.

5. Nagel, J.C. (2014) Venezuela: A Crisis Three Years in the Making, Caribbean Journal of International Relations and Diplomacy, 2.1 (2014), pp.75–88.

6. Schipani, A (2015) Venezuela gets creative with Citgo. The Financial Times. January 21, 2015.

7. Wheatley, J (2017) Lawsuit shows China Losing Patience with Venezuela. The Financial Times. December 6, 2017.

8. Nelson, R.M. (2018) Venezuela’s Economic Crisis: Issues for Congress. In, Venezuela: Current Issues and Challenges, 2018, 1–23.

9. The United States Energy Information Administration, (2019) Background Reference: Venezuela, January 7, 2019, Energy Information.

10. Thomson, E. and Zerpa, F. (2018) Venezuela Adds to Chaos With One of Biggest Currency Devaluations Ever. Bloomberg. August 19, 2018.

11. Gonzalez, J.S. (2019) The Venezuelan Crisis and Salvador Allende’s Glasses, Prism, 2019, 40–55.

12. Rathbone, JP (2017) How Venezuela’s ‘Bolivarian bourgeoisie’ profits from Crisis. The Financial Times, July 13, 2017.

13. The Economist (2019) Venezuela’s paper currency is worthless, so its people seek virtual gold. November 21, 2019.

14. Stott, M. (2019) Savage capitalism’ takes hold in crisis-hit Venezuela, The Financial Times, July 28, 2019.