The Venezuelan Meltdown: A Country in Turmoil


Aaron Feigenbaum

By all accounts, Venezuela right now is in a life-or-death struggle for its economic and political future. The Maduro government, ideological inheritor to the controversial Chavez regime, has routinely championed the cause of the poor and rallied against the West and rich capitalists. Yet the poverty rate has risen to an alarming 76%, and the gap between the rich and the poor has grown. Supermarket shelves are bare. Power outages are commonplace. Inflation is up to unprecedented levels, thus making food at privately-run stores unaffordable for most Venezuelans. The healthcare system is in shambles. Government corruption is rampant and the national debt is spiraling out of control. Crime rates have skyrocketed as Venezuela has become one of the world’s most dangerous countries. Add a severe nationwide drought to all these, and you have a perfect storm of instability that demands the world’s attention.

To understand the crisis better we should be asking the following questions: What is daily life like for the average Venezuelan? Who’s responsible for this historic catastrophe? What should be done about it?

To answer the first question, according to the headlines, shortages of food and other basic necessities have left many markets severely understocked. During a recent food protest, citizens voiced their outrage at the meager supplies handed out to them, which only contained three bags of flour, one jar of tomato sauce, a sardine, three bags of flour, and a bag of detergent. Many people are restricted to the bare essentials, such as cereal and rice, while things like bread and meat are luxuries. There are even reports of children fainting from inadequate nutrition. With inflation predicted to rise to as much as 1200%, some families have spent their entire savings on stockpiling food. Others have run across the border to Colombia where food is much more plentiful and cheaper than in Venezuela. Some have created online bartering clubs to trade for the most basic necessities. For those who are better off and don’t want to brave the enormous food lines, or who want what the markets don’t have, a black market has emerged offering food and other staples at heavily inflated prices.

Colombia-Venezuela border

Newborn babies

Perhaps even more alarmingly, the shortages have severely affected Venezuela’s healthcare system. An estimated eight out of ten pharmaceutical drugs are either difficult or impossible to find, forcing many patients to look to the black market. Many doctors have resorted to prescribing veterinary medication to their patients. Some patients have even brewed their own medicine from plants, such as yucca (which can be toxic if not prepared correctly). Easily treatable diseases such as malaria, much less the deadly Zika virus, have reached epidemic proportions because of the lack of medicine. Hospitals are usually understaffed, undersupplied, dirty, have malfunctioning equipment, and have a high mortality rate. The most simple of conditions can turn into a full-blown medical emergency. Such was the case with three-year-old Ashley Pacheco, whose scraped knee went untreated and developed into a staph infection which later scarred her heart and left her family almost penniless after paying for their daughter’s medicine.

Mental health patients being locked up

Mental patients, one of society’s most vulnerable groups, have also been hit hard. Without their medicine, many have relapsed into their conditions. Psychiatric facilities that can no longer afford to house and feed their patients resort either to tying them down and putting them in isolation wards or to letting them go entirely.

Pets too are suffering, as owners are forced to choose between feeding themselves and their family and feeding their pets. Many owners have simply abandoned their pets to the streets. The Venezuelan national veterinary system, Mission Nevado, is, like the rest of the country, plagued by chronic food and medicine shortages. Pet shelters are overwhelmed by the number of new strays they’ve had to take in.

pic2Venezuela’s overall economic health is very poor indeed. Venezuela currently has the world’s highest inflation rate – 470%. If trends continue, the International Monetary Fund predicts inflation could hit a shocking 1700% next year. Many manufacturing companies have been forced to lay off workers and close down plants, as they cannot afford the raw materials needed to make their products. Margarita Island, once swamped with tourists and renowned for its balmy weather and beautiful beaches, is mostly empty. Both hotel occupancy and flights to the island have dropped significantly this year. Hotels there have mostly been forced to suspend meal service due to food shortages, and guests are required to bring their own soap, towels, and even toilet paper. Some hotels fill their pool with murky well water as the drought and water rationing have left them with no other choice. In fact, tourism across the country has been affected because of the perceived danger, lack of supplies, and high inflation rates.

Margarita Island

So what are the root causes of this crisis? A major one is the falling price of oil. Venezuela has some of the world’s largest oil reserves and oil constitutes the vast majority of its exports. Venezuela is also heavily dependent on imports for its goods, meaning that falling oil prices and/or oil production issues can have a dramatic impact on the availability of everyday goods, as we’ve seen during this crisis. Venezuelans have also long enjoyed some of the cheapest gas prices in the world thanks to hefty government subsidies. For years, many economists predicted those subsidies would be unsustainable, and their analysis proved correct this year as the Venezuelan government was forced to raise gas prices for the first time in 20 years (albeit not even close to U.S. levels). The falling oil prices have left the country’s petroleum sector in shambles: Foreign investors have been discouraged, oilfields and oilfield facilities have become dilapidated, power outages have affected production, inflation leaves suppliers with higher costs than they can deal with, and the Venezuelan government is having a hard time paying other countries like the U.S. and Nigeria to blend its heavy crude. Venezuela’s oil problems tie in to its foreign debt, especially its Chinese debt. Venezuela owes China over $50 billion, and this year marks the first since Venezuela started lending that the China Development Bank has not issued any additional money. Chinese officials fear a Venezuelan default and so have been in talks with both President Maduro’s administration and the opposition for a possible loan resettlement.

President Nicolas Maduro

Yet even if oil prices rise, Venezuela faces another daunting problem: that of government mismanagement. President Nicolas Maduro, taking after his ideological predecessor Hugo Chavez, has gone after the private sector with a vengeance. In order to reduce the influence of foreign corporations, both leaders nationalized large sectors of the economy, from banking to telecom to steel and even the nation’s largest supermarket chain. Per socialist ideology, the goal was to turn these nationalized industries into state-owned, worker-operated collectives.

Unfortunately for the Venezuelan economy, this experiment has failed. These state-owned companies simply can’t compete with their privately held counterparts. As we’ve seen in Cuba and the former Soviet Union, government-run businesses are extremely inefficient. Bureaucracy, corruption and artificial price controls lead to shortages such as the ones in Venezuela right now because if the price is too low, then fewer people are willing to produce. For example, in one particularly ill-advised move, the government last year forced farmers and manufacturers who produce staples such as milk and sugar to sell between 30% and 100% of their produce to the government. As Ricardo Hausmann, the former Venezuelan planning minister, puts it, “A lot of people are putting in effort, and none of that increases the supply of anything. This is perfectly unproductive labor.”

Exacerbating the production problem are the government’s currency controls. First enacted by Chavez in 2003 after an oil industry strike, the controls place the bolivar (the nation’s currency) above all other currencies at the expense of foreign investors. Thus, the problem today is that the exchange control system doesn’t have enough dollars to import foreign goods. The government loosened its currency restriction earlier this year to allow for greater market influence in setting prices. However, severe currency problems remain. Venezuela’s economy is still heavily dependent on bolivars and the government needs to print more currency. The problem with that is that the national printing presses are low on the special security paper and metal needed to produce bolivars. Thus, like with most other goods in Venezuela, money has to be printed abroad and imported. The catch-22, though, is that with currency reserves at critically low levels, Venezuela can’t afford to purchase its own money! In fact, De La Rue, the world’s largest banknote manufacturer, sent a letter to Venezuela’s central bank demanding the $71 million it was owed. Astonishingly (or perhaps not so astonishingly), the finance minister insisted that all this was caused by capitalist greed and not faulty monetary policy.

In fact, this response is typical of the Maduro administration. While the country is beset by severe problems on all sides, Maduro refuses to admit his policies are to blame. Instead, he politicizes the crisis and blames the U.S., the West in general and “greedy” capitalists both at home and abroad for his country’s mess. Sticking closely to Chavez’s playbook, Maduro consistently accuses the U.S. of plotting to overthrow him and destabilize Venezuela. In typical paranoid fashion, Maduro calls his opposition “fascists” and part of a U.S.-led “economic war” against Venezuela. The Organization of American States disagrees and places the blame on the Venezuelan government saying, “Venezuela should be one of the most prosperous and influential countries in the region. Instead, it is a state mired in corruption, poverty, and violence. It is the population who suffers the consequences.”

The question now is if Maduro can keep hold of power until the end of his term in 2018. According to recent polls, Maduro is very unpopular. A whopping 80% would vote to cut his term short via referendum, as the opposition has vehemently argued for. Led by politician and lawyer Henrique Capriles Radonski, the opposition has gathered enough signatures to call for a referendum and the country’s national electoral council has verified the signatures. The process now requires that one-fifth of the electorate formally demands a referendum take place. As to whether that referendum takes place this year or next (if at all) remains to be seen.

Whether it’s Radonski or Maduro’s loyalist vice-president that becomes Venezuela’s next president, there will be some hard choices to make. One that most economists agree on is abolishing price controls. For a population that’s used to low commodity prices, this may be a painful shock, but with government revenues so low, it’s most likely a necessary step. Another critical action is to take the bolivar off a fixed exchange rate. This would have to be done gradually and with plenty of foreign currency reserves to bolster the bolivar. Alongside this would be a cohesive plan to overhaul the economy in hopes of convincing foreign investors (exactly the kind of people Maduro abhors) to pump in much-needed capital. Another important step is to abolish subsidies and de-nationalize most of the economy. While the population may suffer even more in the short-term, in the long-term this will make Venezuela a friendlier place to do business and lead to economic stability. Last but not least, Venezuela must reduce its dependence on oil for revenue so that’s its economy is diversified and doesn’t fluctuate according to the price of a single commodity.

The socialist playbook of nationalization, price controls and a fixed exchange rate has failed before and is failing now in Venezuela. It should take a hint from other Latin American countries, like Chile, which has emerged from a period of dictatorship to become a well-functioning democracy with a moderate economic policy that allows for a great deal of market freedom.

As the food lines grow ever longer, and as critical supplies become more and more scarce, the time is now for Venezuela’s leaders to put aside their ideology and immediately develop a plan that works for the benefit of all Venezuelans.