Venezuela’s worst eco­nomic cri­sis: What went wrong?

Kuwait Times - - BUSINESS - By Wafa Sbaiti

Venezuela, the country that sits on world’s largest oil re­serves in the world, is go­ing through the worst eco­nomic cri­sis in its his­tory. It is on the verge of a col­lapse as its econ­omy and po­lit­i­cal sit­u­a­tion have de­te­ri­o­rated. Short­ages of ba­sic goods, from food to medicine all in­cred­i­bly scarce all around the country as the govern­ment mas­sively cuts im­ports in a bid to save money.

Hos­pi­tals are run­ning dan­ger­ously low on medicine, the public hos­pi­tals have fallen apart caus­ing many peo­ple in­clud­ing in­fants to die be­cause of scarcity of ba­sic med­i­cal care. In­fla­tion has reached ridicu­lous lev­els, it is ex­pected to be 1160 per­cent by end of 2017 and 2280 per­cent in 2018 if the govern­ment con­tin­ues run­ning out of money and re­sponded sim­ply by print­ing more money. Unem­ploy­ment is set to sur­pass 25 per­cent and the em­ployed peo­ple ac­tu­ally have just mean­ing­less salaries due to this hy­per­in­fla­tion.

How did the country get here?

How did a country with such amaz­ing wealth and po­ten­tial get this close to to­tal dis­as­ter? To bet­ter un­der­stand what is go­ing on in Ven­zuela we need to go back to 1998, upon the rise of Chavez’s power. Af­ter he has been elected pres­i­dent he be­gan his re­forms with a new con­sti­tu­tion, so­cial­ist poli­cies and an ex­treme anti-US for­eign pol­icy. Due to in­creased de­mand from China and other emerg­ing mar­kets, oil prices rose again af­ter many years, re­sult­ing in the pe­riod of higher oil rev­enues the his­tory of Venezuela. With all this money sud­denly in their hands, the Chavez govern­ment be­gan to make some amaz­ing things, such as pro­mot­ing eco­nomic growth and fight­ing poverty with many so­cial pro­grams. In 2005 Chavez signed a de­cree on land re­form that ba­si­cally elim­i­nated all largest states to sup­pos­edly ben­e­fit the poor. In 2006 Chavez won his third pres­i­den­tial elec­tion which con­sid­ered an over­whelm­ing vic­tory for him.

Be­tween 2005 and 2008, the country’s eco­nomic per­for­mance was im­pres­sive. Poverty rates were al­most halved, and there were im­por­tant im­prove­ments in health and ed­u­ca­tion. All this made him a kind of hero in the eyes of many Venezue­lans. Af­ter he felt com­fort­able with the power, he be­gan his na­tion­al­iza­tion process. In Jan­uary 2007 Chavez an­nounced key en­ergy and telecom­mu­ni­ca­tions com­pa­nies to be na­tion­al­ized. In June 2007 his ad­min­is­tra­tion ex­pro­pri­ated Exon Mo­bil’s and Cono­coPhillips oil op­er­a­tions in the Orinoco belt which ba­si­cally meant seiz­ing con­trol of other as­sets and op­er­a­tions. In Fe­bru­ary 2009 a ref­er­en­dum was put out to vote to abol­ish the term lim­its on the pres­i­dency which would al­low Chavez to run again for of­fice once his term ex­pired in 2012.

Chavez suc­ceeded to style him­self a cham­pion of the poor dur­ing his 14 years in of­fice, pour­ing bil­lions of dol­lars of Venezuela’s oil wealth into so­cial pro­grams. He sought to reduce in­equal­ity by lift­ing many Venezue­lans out of poverty. Af­ter he changed the Con­sti­tu­tion to be able to be re-elected as of­ten as pos­si­ble, he used the country’s money to buy po­lit­i­cal sup­port from the army and ac­cepted un­prece­dented de­grees of cor­rup­tion in ex­change for loy­alty politics.

The sit­u­a­tion did not last for long and by the end of 2009 Venezuela’s econ­omy started shrink­ing fast. At the same time ten­sions started ris­ing with Colom­bia over al­low­ing the US to use their mil­i­tary bases. Venezuela’s ties with Rus­sia were grow­ing fast. Chavez was then forced to de­value the currency against the US dol­lar to boost their lo­cal econ­omy but the move had a very neg­a­tive ef­fect on the country.

By 2012 things in Venezuela started to turn for the worse, as the govern­ment printed more money, in­fla­tion was get­ting out of hand and the oil prices were at an all-time low for his pres­i­dency. In the mean­time, poverty lev­els and so­cial in­di­ca­tors stopped im­prov­ing, and the econ­omy stag­nated. In fact, Venezuela’s eco­nomic per­for­mance af­ter 2008 has been the worst in Latin Amer­ica. On top of that, negligence and cor­rup­tion of the govern­ment al­lowed crime rates to sky­rocket.

Chavez died of can­cer in April 2013. His clos­est con­fi­dante and at the time Vice Pres­i­dent Ni­co­las Maduro be­came the in­terim pres­i­dent. With the death of Chavez and fall in oil prices, the sit­u­a­tion had only got worse. Since Ni­co­las Maduro, took of­fice in 2013 crime rates con­tin­ued to in­crease, in­fla­tion reached 180 per­cent, the econ­omy fell into a re­ces­sion and poverty was on the rise again. Through­out 2016 protests arose and the peo­ple started blam­ing Maduro for the eco­nomic cri­sis.

On March 2016, 29th the Supreme Court in Venezuela dis­solved the Par­lia­ment. This of course did not au­gur well for the Venezue­lan peo­ple who have gone through very tough times lately. This de­ci­sion was re­versed three days later but it was too late given the protests had al­ready erupted all around the country. Pres­i­dent Ni­co­las Maduro de­clared a state of emer­gency in May 2016 which de­spite be­ing chal­lenged by the op­po­si­tion con­trolled Na­tional Assem­bly was backed by the Supreme Court. Venezuela is the per­fect ex­am­ple of how even a promis­ing, wealthy country can be a vic­tim of a charis­matic leader be­ing se­duced by power, and a cor­rupt govern­ment un­able to learn from their mis­takes.

Where the econ­omy is head­ing for?

The In­ter­na­tional Mon­e­tary Fund (IMF) has pre­dicted that the Venezue­lan econ­omy will con­tract by 8 per­cent in 2016. While it shrank around 5.7 per­cent in 2015. The eco­nomic sit­u­a­tion is bleak and an­a­lysts are pre­dict­ing that it will only get bleaker. The IMF es­ti­mated that in­fla­tion could rise to as much as 720 per­cent in 2016 tip­ping Venezuela into col­lapse. The country is also heav­ily in debt with no im­me­di­ate means of pay­ing off what it owed. Ac­cord­ing to the Tele­graph, around $116 bil­lion is due over the next two decades, with a fifth of pay­ments are due in the next two years.

De­pend­ing on a sin­gle com­mod­ity

Venezuela is an ex­am­ple of ex­treme de­pen­dency on oil which ac­counts for a shock­ing 95 per­cent of Venezuela’s ex­port rev­enues. Venezuela’s econ­omy has been through some ex­cep­tion­ally pos­i­tive spells in re­cent his­tory. How­ever as the price of oil dras­ti­cally de­clined in the last two years the cur­rent eco­nomic cri­sis is dis­tinctly caused by chang­ing prices. Ac­cord­ing to IMF es­ti­mates, the Venezue­lan state earned around $80 bil­lion through oil in 2013 the year Maduro took over as Pres­i­dent. How­ever, the pro­jected fig­ure for 2016 is only be­tween $20-25 bil­lion. Venezuela also has a prob­lem with vi­o­lence and crimes lev­els and has one of the world’s worst homi­cide rates. There­fore, an­a­lysts are wor­ried that in­creas­ing public anger could re­sult in blood­shed.

The govern­ment failed to use their sur­plus in the short run to sub­sti­tute oil for a more sus­tain­able source of rev­enue. In­deed, the re­cent oil price de­cline, cre­ated a major prob­lem for the Venezue­lan econ­omy. As a major ex­porter of oil, its bud­get saw a mas­sive deficit which nat­u­rally led to chaos.

Re­liance on im­ports

The heavy de­pen­dence on oil rev­enues means that the econ­omy is im­port-driven and not self-suf­fi­cient which makes the econ­omy is vul­ner­a­ble to any shock. This in­di­cates, once again, a lack of long-term strate­gic plan­ning and my­opia that left Venezuela worse off, both eco­nom­i­cally and po­lit­i­cally.

Any oil de­pen­dent econ­omy must shift to­wards some­thing more sus­tain­able in the long run, and de­vel­op­ing var­i­ous types of in­dus­tries, to en­sure that it does not rely purely on ex­ter­nal im­ports in or­der to sus­tain its econ­omy and avoid be­ing vul­ner­a­ble to any chock in oil prices.

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.