Empty shelves in the supermarkets. Never-ending lines forming before dawn to buy whatever basics good from whatever brand arrives to the store. Hostile military officers threaten reprisal, ensuring that those lined up keep their grievances silent. This is how shopping for food or basic household goods looks like in Venezuela today.
Rising shortages and inflation have submerged the country in a deep recession. This precarious reality is the result of actions carried out by the ‘revolutionary’ government in the past years: a model of poor economic management in a context of prevalent incompetence, corruption, and human rights violations.
Did oil prices trigger the crisis?
Venezuela is highly dependent on oil, accounting for around 95 percent of its export earnings. Moreover, it is the country with the world’s largest proven oil reserves. It would be logical to assume decreasing oil prices led to the country’s recent economic crisis. Since June 2014, oil prices have fallen from $111.87 to $53.82 in March 2015. This represents more than a 50 percent reduction in the country’s cash from its exports; but this event did not generate the crumbling of the Venezuelan economy.
It might be useful to see how falling oil prices affected other Latin American peers. In Bolivia, 49 percent of the total export revenues come from natural gas exports. In Colombia, oil accounts for approximately 55 percent of its export revenues. Regardless of the falling oil prices, both neighboring countries are expected to grow more than 4 percent in 2015. Meanwhile, Venezuela projects a contraction of 2 percent, the worst among Latin American countries.
Economic results for Venezuela before the oil price drop are similarly worse. In 2013, oil prices were historically high and stable, closing at $110.63. Yet, Venezuela still had the lowest growth among South American countries, a mere 1.3 percent. Hence, falling oil prices likely did not cause Venezuela’s economic debacle. On the contrary, poor performance was already present before this, even during high, steady oil prices.
Inflation, scarcity, and poverty on the rise
In 2013, Venezuela had the highest inflation rate in the world at 59.9 percent – a position that it still holds today with an increasing total of 68.5 percent in 2014. To provide perspective, the inflation rate just in December 2014 in Venezuela was 5.3 percent. This monthly value is significantly higher than the annual value of Ecuador (3.5 percent), Paraguay (3.4 percent), and Peru (3.1 percent). Moreover, the 68.5 percent inflation rate is obtained from official government sources that take into account numerous price-regulated products. According to Robert Bottome, publisher of VenEconomy Weekly, unofficial inflation today should be around 100 percent, while Russ Dallen of Caracas Capital Market estimates it to be at 120 percent. The Central Bank has not reported the inflation rate since December 2014.
Venezuela had also been facing shortages of basic goods such as food, medicine, and toilet paper, before the drop in oil prices. The Central Bank used to publish a scarcity index to measure the percentage of goods missing from shelves. Since August 2013, the indicator has consistently been over 20 percent, reaching its peak in January 2014 at 28 percent. This value is almost six times more than the acceptable norm (5 percent). Moreover, when seeing the shortage by product, the situation is even more critical. In that same month in the capital city of Caracas, cooking oil had a scarcity level of 100 percent, coffee of 94.2 percent, sugar of 90 percent and flour of 89 percent. After these readings, government reports started omitting this indicator, but the long lines and empty shelves remain.
Poverty was also rising before falling oil prices. According to the UN’s Economic Commission for Latin America, Venezuela was the only country in the region that increased its poverty levels in 2013 and it did so by 6.7 percent. This means that the number of poor people rose by approximately 2 million between 2012 and 2013. A study published by Venezuelan universities also concluded that poverty was on the rise compared to 1998 by 3.4 percent, since the last time a similar study was conducted.
Poor performance is also evident in the Venezuelan state oil company, Petróleos de Venezuela (PDVSA). The firm’s oil production fell from 3.5 million barrels per day in 1998 to 2.6 million in 2013. The number of employees increased from 42,000 in 1998 to 111,000 in 2013, while productivity decreased from 83 barrels per worker to 23 barrels per worker in the same period, a productivity decrease of 72 percent.
The crisis in Venezuela was not a consequence of falling oil prices. It was present before it and it was a result of the government’s decisions and actions.
Incompetence and corruption
Since 2003, the government of Venezuela has devalued its currency 10 times, starting from an exchange rate of 1.6 Venezuelan Bolivars (VEF) for 1 USD to an actual rate of 196.7 VEF for 1 USD. It also implemented a complex exchange model controlled by the government with multiple rates, currently ranging from 6.3 to 196.7 VEF.
The exchange policy of the government for the last 12 years resulted in a severe deterioration of the Venezuelan currency and fostered widespread corruption. The multiple exchange rates and the abysmal difference among them is an invitation to public officers and related enterprises to profit from buying at 6.3 VEF and selling at the higher official rate (196.7) or at the even higher black market value. Unsurprisingly, Venezuela is ranked 161 of 175, the worst among Latin American countries, in Transparency International’s Corruption Perception Index.
In 2013 Venezuela also ranked third-to-last globally, only behind Somalia and Central African Republic, in the rule of law dimension of the Worldwide Governance Indicators. In 1998, according to official government data, there were 4,550 homicides. Six years later, total homicides more than doubled, reaching 9,719 in 2004. Of which, only 61.8 percent were dispatched to the prosecutor and only seven percent received a sentence. This means that in 2004, 93 out of 100 homicides in Venezuela remained unpunished. After 2004, the government stopped publishing official data. However, this same ‘inefficient’ judiciary system acted with expedite on the particular political directions that came from the Executive. It wasted no time indicting Manuel Rosales former opposition presidential candidate, banning opposition figure Leopoldo López from running for public office (even against the Inter-American Court of Human Rights ruling), and rejecting presidential elections recount request by the opposition candidate Henrique Capriles.
The Venezuelan collapse started as a result of poor economic management, under a system of widespread negligence and corruption.
The situation today
The government is not immune to this fiasco. President Maduro’s popularity sunk to 22 percent, the lowest of his nearly two-year rule. As a consequence of the existing economic crisis, worsened by falling oil prices, one would have expected some sort of policy correction. But nothing happened. Instead, the government has generated ‘red herrings’ in order to pursue its plan of escalating the radicalization of its ‘revolution.’ A regime that controls all of the public powers and most of the economy has irresponsibly decided to blame the crisis on a supposed ‘economic war’ carried out by the opposition and has intensified human rights abuses.
Instead of generating conditions for private sector investment, the government arrested executives from the largest pharmacy chain and a supermarket chain, accusing them of the rising scarcity. Instead of eliminating the exchange control and tackling internal corruption, the government indicted opposition congresswoman María Corina Machado and arbitrarily detainedprotestors and politicians, as is the case of opposition figure, Leopoldo López, who has been in jail for more than a year under precarious conditions without a sentence. Instead of implementing a gradual price-controls removal or adjusting subsidies on cheap gasoline, the government has just denounced 16 different plots that allegedly attempt to kill President Maduro.
The escalation of political radicalization led recently to the imprisonment of Mayor of Caracas and veteran opposition leader, Antonio Ledezma. In the afternoon of February 19th, he was arbitrarily arrested by a large group of intelligence agents holding semi-automatic weapons, masks, and bulletproof vests. Hours later the judiciary again acted with ‘selective efficiency’ and formally accused him of a new supposed coup plot.
It is difficult to anticipate what will happen in the upcoming months. But one thing is clear: When looking back, the economic debacle was triggered not by external factors or falling oil prices. Instead, the locus of control was completely internal. The Venezuelan government is reaping what their incompetence and corruption sow.
Cover photo: cc/(Presidencia de la República del Ecuador)
Leonel Prieto is a first-year student in the dual-degree Master of Public Policy and Master in Business Administration at Georgetown University.
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