Archive for July 2nd, 2016

Myths And Realities Of The Distorted Venezuelan Economy Part I

July 2, 2016

By now, news about shortages, hunger and protests in Venezuela have become quite fashionable in the international press. It is a crisis that is difficult to understand: How did such a wealthy country get into such a state that it can’t even feed it’s people? How could the one time appealing Chávez revolution stray from its supposedly heroic course? What went wrong in Venezuela?

For those of us chronicling the fake revolution, this is no surprise. We have been recording the inefficiencies, the corruption, the waste and the incompetence of Chavez and his cronies, to say nothing of the hare brained policies and controls of the last seventeen years.

Despite this, people want to be simplistic about what is going on in Venezuela. They think it can be understood simply as the “fall in oil prices” or “Things went wrong after Chávez died”, ignoring the fact that the origins of the crisis, as well as its most symptoms, such as shortages and inflation, began appearing in Venezuela long before Chávez died and way before the the downturn in oil prices began in July 2014.

The biggest myth is that the fall in oil prices is at the root of the current problems. Nothing can be further from the truth. As shown in the graph below from Econoanalitica, the Venezuelan economy was in trouble long before that:


As oil prices hovered around US$ 100 per barrel in 2012, the Venezuelan economy began sputtering under the weight of irresponsible policies and ever increasing Government controls. In the first quarter of 2013,  when Chávez died, oil was at a hundred, but the Venezuelan economy could barely manage less than 1% growth in GDP. And by the first quarter of 2014, with oil still above US$ 90 per barrel, the economy began contracting by 5-6%.

And long before the fall in oil prices, inflation, which was already running high, began soaring:


jumping from 21% in 2012, to 40.6% in 2013 and increasing to 62.2% in 2014 as oil prices finally began their decline. No direct effect of the oil price drop there either.

And as oil prices began dropping in the summer of 2014, scarcity levels had already reached absurd levels, as shown in this graph:

Shortages.jpgAs by the time oil prices began dropping, Venezuela (the plot is only for Caracas) was showing shortages for 50% of the items considered to be basic.

Of course oil prices exacerbated the situation, increasing it to the near 90% levels seen today, but the root causes were sowed during many years by the absurd policies, widespread controls and increasing domination of the Government in the Venzuelan economy.

So, PLEASE, don’t blame the drop in oil prices for Maduro’s and Venezuela’s problems. You don’t see the same thing happening in say, Ecuador, an oil-dependent country with an equally populist Government, but where policies have not had the level of improvisation and ignorance that Venezuela has had.

What happened and is happening in Venezuela has its roots in policies that began in 2002-2003, when Hugo Chávez decided to involve the Government in producing foodstuffs, as well as controlling prices and the rate of exchange. The Government got involved initially in sugar, farming and milk production and distribution. Grandiose projects were started, most of which were never finished and produce very little today. Today, even some of the more emblematic products in which the Government got involved, are mostly imported with heavily subsidized dollars. Thus, not only was the Government a failure in producing these products, but it also destroyed the ability of the private sector to compete, as it began limiting their access to foreign currency, while importing products at the lowest possible available rate of exchange.

Since this was not working, the Government began then controlling prices, later extended to controlling profits of companies, a true recipe for disaster. And as the Government did this, it spent more on importing less, as the inefficiency and corruption, as well as over-pricing, began dominating the whole food chain from importing to distribution, leading to where we are today.

And as the Government did this, it created ever increasing and intertwined distortions, most of which are not only still in place, but are part of a complex and convoluted economy, which will be discussed in Part II, and which needs to be fully overhauled from scratch in order for the Venezuelan economy to begin a new path to normalcy.

But in the end, the fall of oil prices had little to do with most of it, in the same way the rise of oil prices did not create the value or the wealth that it should have.