• 1

    Shares
  • Likes
1 Shares
4 Likes
Share

Venezuela, once celebrated for one the strongest and richest economies in the world, has been crippling because of the financial collapse. The crisis has become bigger, and is no longer confined to one nation due to the unseen problem of refugees and migrants into neighbouring countries  The South American nation been an oil producer since 1914 and is currently a member of the Organization of Petroleum Exporting Countries (OPEC). According to OPEC, 95 per cent of Venezuela's export earnings come from oil. But for decades, the country's oil wealth mostly benefited the country's elite.[2] Former Venezuelan President Hugo Chávez was elected in 1998, partly on the promise to use some of that oil money to help the country's poor.

The prices of oil and Venezuela’s economy move in pretty much the same direction. When oil prices are high, Venezuela’s PDVSA earns huge revenue. When oil prices in the international markets drop, the nation faces severe cuts in the state-funded entitlements. Venezuela is on the verge of defaulting its debt, along with the crumbled currency system after the speedy and abrupt fall in oil prices in the international markets in mid-2014.[3]

After coming in, Hugo Chávez implemented a series of socialist policies, aimed at alleviating poverty. The policies of Chávez depended completely on the revenue generated from Venezuela’s state-owned oil company, PDVSA, and no other industry except oil was given enough consideration. Chávez’s populist policies made him subsidize basic goods and services, with the prices of oil in the international market constantly rising. One of the main reasons because of which the Venezuelan oil industry collapsed is lack of investment and subsequent increase in production when the oil prices were high. Venezuela was inoperative to monetize when it was profitable. Chávez was also successful in consolidating power by replacing the existing Congress with a new National Assembly (which he controlled), changing the term period of the presidency and reshaping the Supreme Court by inserting Chávez’s followers. Chávez’s keynote policy was the destruction of the private sector, as he nationalized thousands of private companies and industries.[4] Chavez served as president for 14 years, until his death in 2013.

Nicolás Maduro, heir to Chávez took control of the presidency after Chávez’s death. Unfortunately for Maduro, in 2014, oil prices began a steep decline, falling from over $100 a barrel in the summer of 2014 to a low of around $33 dollars a barrel in early 2016.[5] One mistake after the other by the Maduro government has brought Venezuela to where it is today. The collapse in oil prices reduced the nation’s foreign reserves and paralysed the government as it could no longer subsidize basic goods and services for its people. Maduro decided to cover the deficit by printing currency notes. Excess deficit financing brought in the problem of hyperinflation, destroying savings of individuals. To control inflation, the government implemented price control systems, setting maximum prices that a private business could charge for a wide range of basic goods and services. Price control served to be counter-productive as it disincentivised businesses to produce goods and Venezuela witnessed a cut back in production. By late 2017, revenue had dropped by $100 billion and the country owed some $150 billion to foreign creditors while it held just under $10 billion in reserves.[6]

Moreover, Maduro also introduced a fixed exchange rate system. Ignoring the inflation rate, the official exchange rate was fixed at 10 Venezuelan bolívars per U.S. dollar. Just as black markets arise in the face of price controls, private markets establish parallel exchange rates in the face of currency controls. The state has operated two official rates, the DIPRO rate of 10 bolívars to the dollar and the DICOM rate, set at auction, which stands at 3,345 bolívars. In February this year, a decision has offered a glimmer of hope. The government has decided to scrap the DIPRO rate, and has also reformed the way the DICOM auctions are held. This could help push the new unified rate towards a more realistic level.[7] 

Neighbouring countries have not been supportive to the Venezuelan government. Mercosur, an economic and political bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela, suspended Venezuela in 2016. In March 2017, the Organisation of American States (OAS) recommended suspending Venezuela from the bloc following Maduro’s decision to not hold elections, however, Venezuela announced its withdrawal from the OAS in April 2017.[8] 

The strongest foreign opposition for the Maduro government is from the United States. By the end of July 2017 elections, President Trump decided to impose sanctions on Vice President El Aissami, eight members of the Supreme Court, and most importantly, on President Maduro himself. In August 2017, the US decided to impose even stronger sanctions which essentially blocked U.S. financial institutions from investing in PDVSA bonds. Given that the United States has left a huge vacuum by imposing sanctions, China being opportunistic as it has been in recent past, lent Venezuela more than $60 billion since 2001, and a vote of confidence in November 2017, stating that “Venezuela’s government and people have the ability to properly handle their debt issue.”[9]

Going forward, to handle the situation and to bring back life in Venezuela to normalcy, military intervention is a step that scares most Latin American governments because of a history of aggressive actions against their sovereign interest. The only plan that seems feasible is the impeachment of the current leadership by the national assembly, followed by free and fair elections which could possibly be willing to accept aid, not to be thrown away for buying Chinese-made crowd control systems to thwart public protests. 

 

[1] Faiola, A. (2018, March 2). The Crisis Next Door. The Washington Post. Retrieved from: https://www.washingtonpost.com/news/world/wp/2018/03/02/feature/i-cant-go-back-venezuelans-are-fleeing-their-crisis-torn-country-en-masse/?noredirect=on&utm_term=.d907c0006f73

[2] Cawthrone, A., Parrage, M. & Ulmer, A. (2017, November 13). Venezuela crude output hits 28-year low: OPEC. The Thomsom Reuter. Retrieved from:  https://www.reuters.com/article/us-venezuela-oil/venezuela-crude-output-hits-28-year-low-opec-idUSKBN1DD1QD

[3] DePersio, G., How does the price of oil affect Venezuela economy? Investopedia, https://www.investopedia.com/ask/answers/032515/how-does-price-oil-affect-venezuelas-economy.asp

[4] Carrillo, P.E. (2016, July 6). How today’s crisis in Venezuela was created by Hugo Chavez’s ‘revolutionary’ plan. The Conversation. Retrieved from: https://theconversation.com/how-todays-crisis-in-venezuela-was-created-by-hugo-chavezs-revolutionary-plan-61474

[5] Cangero, T. (2017, March 1), Venezuela: Socialism, Hyperinflation, and Economic Collapse, American Institute for Economic Research. Retrieved from: https://www.aier.org/research/venezuela-socialism-hyperinflation-and-economic-collapse

[6] Bathke, B., (2017, August 15), Oil-rich but cash-starved Venezuela could be close to bankruptcy, Deutsche Welle. Retrieved from: https://www.dw.com/en/oil-rich-but-cash-starved-venezuela-could-be-close-to-bankruptcy/a-40091975

[7] Gupta, G., (2017, May 25), Venezuela sets new exchange mechanism, as currency continues to slide, The Thomson Reuters.  Retrieved from: https://www.reuters.com/article/uk-venezuela-economy/venezuela-sets-new-exchange-mechanism-as-currency-continues-to-slide-idUSKBN18L03C

[8] Venezuela to withdraw from OAS as deadly protests continue. (2017, April 25), BBC New. Retrieved from: https://www.bbc.com/news/world-latin-america-39726605

[9] Rodriguez, D., (2017, February 15). Exit the Dragon: Why China Should Stop Supporting Venezuela. The New York Time. Retrieved from: https://www.nytimes.com/2017/02/15/opinion/exit-the-dragon-why-china-should-stop-supporting-venezuela.html

Image Source: Reuters 

Share this article

Written By Parth Gupta

Economics Undergrad (Batch 2019) | Panjab University, Chandigarh

Leave A Reply