If you’re a concerned individual of this world, you might’ve heard about Venezuela quite a lot in the recent news. So, what exactly is the Venezuelan crisis, how bad it is and what will happen in the near future? I’ll be analyzing all of this today. Let’s first learn a few things about the country itself first.
Imagine waiting in lines at the bank for several hours to receive your pensions, only to find out that there is no cash left. You head back home, in a smelly street since the garbage collection rarely happens, to find your grandchildren waiting at the door with their hopeful eyes. With a faint smile and empty hands, you disappoint them and go to your room quietly. You’ve been sick for years now but neither do the public hospitals have the equipment, medicine or electricity to help you, nor can you afford it. Your son is away, working hard to find jobs to feed his family but unfortunately you know that he has to steal money or food in order to feed Rodrigez, his six-year-old son, and Gabriela, his nine-year-old considerate daughter. The wife stays at home, attending to the children and you; she tries to comfort the former and remains hopeful in front of them but deep down even she knows the harsh reality and truth that nothing’s going to get better anytime soon. It might be hard for most to empathize and put themselves in the shoes of a Venezuelan family but this is what happens in the daily lives of the people living in the Bolivian Republic of Venezuela.
Venezuela is a Federal Presidential Democratic State with a mixed economy, dominated by the petroleum sector. It is one of the most urbanized nations in South America, bordering the northern coast. Its capital is Caracas and the most spoken language in the country is Spanish, with Roman Catholicism is followed by almost 92% of the population. Talking about the economy, its GDP as of 2018 was $276 billion, almost half of what it was in 2014, $514 billion. As per experts at International Monetary Fund (IMF), its inflation rates are predicted to go through the sky at around 10 million percent, making it one of the worst hyperinflations in history after Hungary, Zimbabwe, and Yugoslavia. About 3.4 million Venezuelans have left the country seeking food, work, and a better life since 2014. But the most interesting fact is that even today, Venezuela has the largest proven oil reserves in the world, surpassing even those of Saudi Arabia. So, the question we must ask is how did one of the most flourishing nations in South America, with such enormous oil reserves, reach this point in history? Before that, let’s understand what inflation means.
Inflation as a concept is nothing new. The cost of a movie ticket in India in 1975 was Rs. 3 whereas nowadays, it costs almost around Rs. 500 in multiplexes. In 1985, you could read your favorite Archie Comic books at Rs. 4 but now it costs Rs. 75. These simple examples explain to us how money loses its value over time when prices rise – a phenomenon known as inflation. It is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
So, when inflation rates get extremely high, usually more than 50% per month, it is termed as hyperinflation. If the hyperinflation by the end of 2018 is 1 million percent then, something costing $1 would cost $10,000 by the end of the year. Venezuela currently is expected to reach 10 million percent hyperinflation by the end of 2019, as per experts at IMF. So, that would mean that something very basic such as a toffee costing 1 VES in the Venezuelan Bolivar in 2019 would cost 100,000 VES by the end of the year.
Venezuela, as a nation, is crippling – politically, militarily, and most severely, economically. A nation which during the 1970s was the richest in South America is now an economy with extremely inflated prices and unemployment rates, with a shortage of essential commodities such as food, medical supplies and equipment, electricity and other such utilities. Blackouts occur very often, sometimes lasting for days and result in hundreds dependent on electricity, such as patients in hospitals’ death. These problems have led to black markets, organized crime, highest mortality rates that Venezuela has experienced, extrajudicial police killings and high crimes rates fueled by the hunger and anger among the civilians.
The Venezuelan Observatory of Violence (OVV) said in its annual report in 2018 that Venezuela still had the world’s highest murder rate, 81.4 per 100,000 inhabitants, but it noted that figure was down from 89 in 2017 and 92 the year before. The citizens in Venezuela cannot even exercise the right to protest or seek information, wherein journalists and protestors have been captured, tortured and sometimes even killed. The wages in public institutions such as hospitals, schools, and administration cannot keep up with the high inflation and as a result, people do not have enough resources to feed themselves properly, let alone afford the luxuries in life. Since the agricultural, banking, mining, metallurgy, electrical, telecommunication, and even oil and gas sectors have been nationalized by the governments, the incentives to work in harsh conditions at low wages have decreased and as a result, the productivity in each of these sectors has decreased by a great extent. From a high of 3.5 million barrels per day in the 1970s, as per a report by Forbes; the average time taken to oil in Venezuela is 193 years as compared to 7 to 8 years in other oil producing nations. Hence, from being an asset in the past few decades, oil has almost become a liability of the government.
The reasons for the abovementioned are complex but can be narrowed down to a couple of simple ones- overdependence on one commodity and a corrupt, incompetent government. In the last couple of years, oil has accounted for almost 95% of the country’s exports and 25% of the GDP. The country was doing well during the first decade of the 21st Century until oil $100/barrel and the country was booming from 2004-2014. This led to the former President of Venezuela, Hugo Chavez, making an unsuccessful attempt at diversifying the economy, redistributing oil and eliminating poverty by introducing “misiones”, a series of social programs. These programs included citizenship rights for the people, identity cards, access to job training, breakfast clubs and universities.
It was after the 2006 Presidential elections that Hugo Chavez brought back oil to the center of the economy, nationalizing all the previously mentioned sectors and importing essentially everything from medicines, sugar, and clothes to cars and industrial equipment. As a result, the country lost most of its private businesses and destroyed the production of goods domestically. During the oil boom, government expenditure increased drastically on sectors such as bureaucracy and sextupled public debt. Essentially, when the price of oil was high, the government spending was high and savings were low and as a result, when the price of oil fell to $50, the country went into recession.
When the current President of Venezuela, Nicolas Maduro came into power in 2013, the disaster was already in motion. Since then, he has made several attempts to solve the economic crisis which proved to be ineffective and unsuccessful. President Maduro has ordered 26 minimum wage increases in his six years in office, including a 300% increase earlier this year, introduced a new cryptocurrency known as “Petro”, which Steve Hanke, Professor at Johns Hopkins University and expert in Applied Economics has called “fiction”, claiming it doesn’t exist. Along with that, the Venezuelan Bolivar has also been devalued by 97% but neither of these measures has proved to be beneficial for the people of Venezuela. This is evident since the unemployment rates have reached almost 44%, more than 3 million Venezuelans have fled the country via the Colombian border to South American countries such as Chile, Peru, Ecuador, etc and the people still can’t afford basic commodities.
There has also been great political unrest across the country with protestors, civilians and journalists being arrested and tortured by the military led by Vladimir Lopez since 2010, which is in complete support of President Maduro and currently in charge of the national food supply, from its distribution to price. President Maduro has severed all ties with Colombia, closing all borders and refused to accept humanitarian aid from various countries and agencies with the aim of helping the country,d calling it “a spectacle to justify military intervention (in Venezuela).”
As a result, a new leader or the ‘People’s President” has emerged in Venezuela by popular support of the citizens, Juan Guaidó. He aims to bring humanitarian aid and democratic reforms in the nation and has received support from the international community such as the governments of Canada, Brazil, Argentina, the United States and many more. The Canadian government has declared the Maduro Government “a dictatorship” and the Trump Administration called on the Venezuelan armed forces to back interim President Juan Guaido claiming that he sought a peaceful transition of power in Venezuela, but “all options” remained open. This has the people of the country divided between the two leaders and created political and civil unrest across the nation.
Many experts in Applied Economics and Inflation such as Steve Hanke believe that incompetent socialist institutions have resulted in such a scenario and that dollarization seems like the only solution. In January 1994, Yugoslavia faced the third worst hyperinflation in history and was solved by stopping the printing the Yugoslavian Dinar and converting all reserves to US Dollars, ultimately resulting in a stable economy. Similarly, Zimbabwe, the second worst case of hyperinflation in history with prices were doubling every twenty-four hours, solved its hyperinflation in November 2008 by dollarization.
With all that being said, the economy does not seem to have a very bright future and is dependent on the political scenario of the country. The military plays a very key role here, If they side with Maduro then thousands would be killed in protests and result in a bloody crackdown; If they side with Guaido then Maduro’s days are limited and in case they side with neither, Venezuela is in grave danger.
By Yashvardhan Sharma
Grade 12 student, The Millennium School, Lucknow
This piece was written under our Writing Mentorship Program – June 2019.