Venezuela is in its third year of a recession. According to the International Monetary Fund, the country's GDP would contract by another 10% this year (IMF). In an optimistic scenario, the IMF expects that Venezuela would be in a recession until 2019. While the country's economy is contracting, consumer prices continue to rise at alarming rates. According to the IMF, inflation will climb by more than 450 percent (Canvas 8). Venezuela's currency continues to lose value. Whereas 100 bolivars were for one dollar almost two years ago, one dollar is now worth more than 1200 bolivars. The statistics are according to the Dollar Today that keeps track of the dollar currency. The primary cause of the prolonged economic crisis is based on excessive government spending on welfare programs. Poorly managed funds are also attributed to set the stage for the economic crisis. The crisis has led to deteriorated living standards in the country. It has increased the levels of unemployment and criminal activities. Cases of shortages in food and commodities are common in the country. Venezuela’s economic crisis is politically catalyzed, and the solution is more political than economic. This paper analyzes the aspects of the economic crisis in Venezuela, the causes of the crisis, and the impact of the crisis. It also recommends ways of improving the economic status of Venezuela.
Aspects of the Crisis
The main characteristic of the crisis is the ever increasing inflation rate that many economists term as the runaway inflation. The level is almost at hyper-inflation. The inflation levels are expected to be at more than 700 percent according to reports from the IMF (Gladstone). Venezuela has seen multiple years of low and negative economic growth levels over the past years. The economic growth rate was at 1.2% in 2013 and declined to -4 in 2014. The economic growth levels further dropped to -5.8 in 2015 when the recession in the country became acute.
In 2016 the country recorded a negative growth rate of more than eight percent. That was after Venezuela recorded a forty percent drop in imports in the previous financial year. Since 2012, the country has experienced more than 60% drop in the levels of imports. An approximation of 75 percent scarcity index is reported in the country. It includes a chronic shortage of food, medication, and other essential commodities (Gladstone). Venezuela relies heavily on income from oil exportation which declined by more than 35% in the year 2015. The high levels of social evils such as corruption in both the public and private sectors contribute to the contours of the crisis. The widespread rejection of the government and the anxieties amidst the population on how to meet daily needs have resulted in high levels of tensions in the country. The mere lack of support for either the government or the opposition by about fifty percent of the population proves the political tensions in Venezuela.
Causes of the Crisis
The Venezuela Crisis has short, medium and long run multiple factors that caused it. To an extent, the current economic crisis in Venezuela is considered to be government-generated. The government actions and inaction over the past decade have made the crisis worse than it was at the beginning. Many people recognize the cause of the crisis to be an excess of socialism in the country (Gladstone). Socialism is a concept used to showcase the ills in the society from dictatorial rule to hostility towards the private sector, and the suffocation of the public’s control over the state of the country. The state of the country gets analyzed regarding the economy and the general living conditions. However, socialism does not apply in the case of Venezuela since the county is not dictatorial. President Maduro won the elections fairly (Duddy 2). Similarly, the government does not influence the options of the public. However, many international media reports recognize the authoritarian nature of the Maduro government. All the riots and public protests organized by the opposition have been met with force from the government resulting in deaths of the civilians. Here, the role of the government in the current economic downturn in Venezuela is clear.
It is clear that the present economic crisis has been inevitable in the past decade when the country was under former President Chavez. The policies and laws advocated by Chavez’s administration did not consider future economic development. During Chavez presidency when the oil business was in the boom, and the prices of oil were going up, he mainly used the revenues for social programs in the country. He used the oil revenues to provide food and housing subsidies for the low-income individuals in the country (Canvas 8). The oil revenues were used to finance health care services and education initiatives for the poor. While the policies advocated by Chavez administration may seem noble and essential to the development of the country especially from a social justice perceptive, they prove to be harmful in the long run.
Venezuela has the largest crude oil reserves in the world. It is ultimately unrealistic for a country endowed with such a valuable resource in the world to experience an economic crisis. The crisis stems from Chavez policies that failed to recognize the importance of investing in other commodities as a country. Oil makes up about 95.5 percent of Venezuela’s total exports (Duddy 2). The large figure proves how Venezuela is usually affected by the changes in oil prices in the world market. It was the decline of the world’s oil prices in 2013 that plunged Venezuela into a recession. The country’s over-dependence on oil as her primary source of revenue resulted in the current economic crisis experienced.
Chavez had also used oil as a means of building strong diplomatic international relationships by selling oil on conditions of preferential payments to countries in the Petrocaribe Alliance (Andres 4). If the Chavez government had invested a fraction of the revenue in other commodities such as the sovereign wealth fund, the current crisis would be less severe. Venezuela’s economic policies that are solely designed for the poor such as strict pricing are to blame for the economic crisis. Economists argue that maximum price limits mostly discourage local production (Gladstone). It is suggested to be one of the reasons for food and other basic commodities shortages in Venezuela.
Venezuela government international reserve is below 12 billion US dollars. The fall in foreign reserve is attributed to the mismanagement in the oil sector. The decline in oil production in the country over the past four years supports the argument that the government should have spent more on earning oil revenue and less in other relatively minor projects. According to the International Energy Agency, as reported by Bloomberg, the main reason for the drop in production is the failure to pay the oil service companies. The state-managed oil company, Petroleos de Venezuela (PDVSA), reduced production by more than ten percent in 2016 (Gladstone). The reduction is attributed not only to mismanagement but also to cases of corruption and poor infrastructure. The recent 35% decline in oil exportation revenues makes it impossible for the country to import other commodities from the international market.
The crisis has been escalated by some short-term policies of President Mudoro that aim at eradicating the recession. Mudoro has made efforts to reimburse the country’s international debts by reducing the level of imports in the country. The move helps to conserve the scarce foreign currency to be able to repay the nation’s debts. However, this policy did not improve the economic situation in the country. The system together with the reduced productivity in the country contributed to the current scarcity of goods. The Mudoro government also increased the state’s minimum wage rates by more than 1500 bolivars. The increased rates impacted on the already high levels of inflation. While this was aimed at improving the living standards of the people, it contributes to the already severe economic crisis in the country.
President Maduro has also increased the prices of gasoline in the country for the first time in the past seventeen years. According to him, the rise has no significant impact because the price of oil in Venezuela remains the least in the world. The president aimed at controlling the activities of smugglers who sell the oil at higher prices in the neighboring countries increasing inflation. The Venezuelan president further devalued the country’s currency to reduce the gap between the official and black-market exchange rates. Although this policy is necessary to curb illegal money exchange, it is a burden to the population since imported goods become expensive and the country’s international debt increases in regards to bolivars.
However, it is essential to realize the government is not the only reason for the crisis. The working of the government in a hostile domestic and international environment has made the crisis impossible to eradicate. The efforts of the opposition to fight for a regime change by any means necessary have worsened the economic standings of Venezuela. The opposition has created a politically toxic environment since 2013 (Andres 5). Political stability is an ingredient of economic growth and prosperity. The lack of political peace discourages investments and production. The opposition’s refusal to acknowledge President Nicolas Maduro has been a catalyst for various violent activities since the declaration of Maduro as the president in April 2013 (Duddy 3). Such events deter economic activities and reduce the investment opportunities.
Effects of the Crisis
Records of the Venezuela Central Bank show the country’s debt amounts to more than 130 billion US dollars (Gladstone). The state is expected to pay the debts in every financial year which is not possible in the current economic situation. A default in payment will harm the PDVSA which will get sued for violation of payment. The Venezuela government has been issuing bonds using PDVSA to obtain lower interest rates for their loans, especially from China. The default in payment will affect the operations of the PDVSA further slowing down the oil production levels. Similarly, the state will get hurt in case of a default in payment since unpaid creditors will aim to seize the country’s global assets.
Venezuela had become increasing reliant on the oil revenue during Chavez’s regime, and in recent years Venezuela is more dependent on the specific prices of oil. The Bolivar currency continues to get overvalued. The overvaluation plus the reduced production has increased the chances of hyperinflation in the country. The Bolivar is inflated and is highly unstable. The likelihood of attracting investors from both domestic and foreign capacities grow less with each week of increased inflation. The political tensions and violent public protests discourage investments.
According to polls, individuals regard the current economic situation as the worst ever recorded in the country’s history. Almost 60 percent of Venezuelans believe that the economic condition of their families is adverse. More than 50 percent of the country’s total population believes that the situation will get worse in the coming years according to reports in 2016 (Canvas 8). The pessimistic nature of the people is a clear reflection of the impact of the crisis on individuals and households.
The shortage of food and other essential commodities has escalated in the recent months. Reduced importation levels by almost 30 percent contribute to the deficiencies reported in the country. Lowered production in the country has also contributed to the commodity shortage. One out of three houses in Venezuela cannot afford the basic three meals a day according to a statistic research (Canvas 8). The scarcities have heightened the levels of crime in the society. Security is a matter of high concern to the majority of the Venezuelans. As the number of criminal activities continues to increase and shortage levels worsen, the public discontent with the government worsens thus contributing to political tensions. As Venezuelans keep struggling for basic provision, the rate of unemployment is on the rise. Many of the country’s policies and economic situation discourage production especially in the private sector which in turn leads to unemployment.
The crime rates have been on the rise since 1999 when Chavez took over the leadership of the country. Gallup named Venezuela the most insecure country in the world in 2013. In efforts to eradicate crime, both the Chavez and the Maduro administration affirmed they would tackle crime. In 2009, Chavez formed a special task force in the Bolivarian Military Policy. Violent crimes have been on the rise as the criminals are desperate to use any means possible to survive in the economically stable system. The level of corruption is high in the country so much that the public no longer trusts the police force. Many of the cases related to corporate fraud and organizational theft go unreported due to lack of confidence in the justice system. Since 1995 Venezuela has been listed among the most corrupt countries in the world in the Transparency International’s Corruption Perceptions Index (Canvas 9). The economic crisis gets illustrated by the high unemployment levels, uncontrollable crime rates, and increased public discontent with the government’s contribution to overall brain drain. While the Chavez government emphasized the importance of education, many of the educated youth are migrating to other countries to escape from discrimination and the effects of regression in Venezuela.
The crisis has affected Venezuela’s international relationships, especially regarding regional spheres. The spirit of the Bolivarian Revolution united many South American nations that were against the capitalist regimes like the United States of America. Venezuela has a major alliance with Cuba emphasized by both the Maduro and Chavez administrations. However, with the decline of the oil revenues in Venezuela, Cuba is under pressure to sought new alliances to maintain her economy. The Cuba-USA Talks worries Venezuela since both countries regarded the western capitalists as their regional enemies. The Maduro government blames most of the crime rates to the neighboring Colombia. The government insists the current crime rates are due to the Colombian cartels (Canvas 11). The accusation has triggered conflicts amongst Colombia, Guyana, and Venezuela.
In regards to the on-going economic crisis in Venezuela and the growing debts of the country, Mudoro has opted to seek hope from Venezuela’s global allies such as China, Russia, and Saudi Arabia. China provided financial assistance to Maduro in 2013 in efforts to boost the declining oil industry. Energy shortages in the country led to rationing of power in many parts of the country. Blackouts were frequent in the past one year limiting the economic activities of the Venezuelans.
Recommendations
The option of defaulting foreign debt payments is not a viable option to Venezuela since the country has a lot to lose. The PDVSA owes the external debt and default in payment will result in the bondholder suits that would disrupt the activities of the petroleum company. For the Venezuelan government to avoid default in paying their debts, it is important for the country to restructure the terms and conditions of both their previous and current debts. For instance, the Chinese granted Venezuela loans in exchange for oil (Kott). With the current crisis, the state is unable to pay for their existing loans since most of their oil exports are paying for their previous loans. While the government recognizes that the Bolivar is artificially overvalued, devaluation will increase the prices at the level of state-owned business entities which many Venezuelans rely on (Gladstone). The move will not solve the current economic crisis. However, it will acutely increase the amount of the country’s international debts concerning dollars and deteriorate the already poor living conditions.
The efforts of the government to provide essential commodities at lower prices may be considered a useful coping mechanism. However, the time and energy consumers spend on queues to access these goods have increased their frustrations and discontent with the ruling government. The government economic war advocated by Maduro may go a long way in reducing the shortages and unemployment levels. When the private sector is forced to produce, there will be more commodities in the market reducing the current picture where a lot of money is chasing few goods. Similarly, increase in production will create employment opportunities reducing criminal activities and cases of brain drain in Venezuela.
Venezuela’s global allies such as China are reluctant to bail the country out of the crisis due to the political instability (Gladstone). While China announced eased terms on several of Venezuela previous loans, the country is not willing to bail Venezuela out of her current economic disaster because of the political instability. The economic crisis in Venezuela is not merely economic but also politically catalyzed. To live past the recession period in Venezuela and to improve the economic conditions of all citizens, it is important for the country to stabilize politically.
Conclusion
The economic situation in Venezuela is commonly referred to as the Dutch Disease. The Dutch Disease encompasses a country with enormous natural resources but suffers from an economic crisis. It describes the situation of over dependence on particular products. The condition makes this country vulnerable in international markets and pricing. Many policies both political and economic interacted to cause the current economic crisis in Venezuela. However, mismanagement and policies that discouraged investments in other commodities are the main reason for the crisis. During the oil peak years, Chavez administration emphasized on the social development of the poor by using the state’s revenues to improve the education and health care system and providing housing subsidies for the poor. The failure to invest in other revenue-generating projects by the government encouraged the over dependence on oil funds putting Venezuela at the mercy of international oil prices.
The decline in oil prices in 2013 coupled with political tension surrounding Maduro’s election into office plugged the country to a recession. The short-term policies such as reduction in imports have made the recession period in Venezuela severe. Due to this, the country is experiencing increased levels of unemployment, food and commodities shortage, and increased levels of inflation. Venezuela should consider restructuring the terms of her foreign debts to avoid having faulty payments that could hurt the state-run petroleum company. To address the economic crisis in Venezuela, it is important to curb the political crisis and stabilize the nation politically. Venezuela has a lot of economic potential due to the vast crude oil reserves. However, the heavy dependence on oil exportation, plus the government’s financial and pricing regulations resulted in an economic downturn.
Works Citied
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Duddy, Patrick. "Political Crisis in Venezuela." Council of Forign Relations (2015): 1-4.
Gladstone, Rick. "How Venezuela Fell Into Crisis, and What Could Happen Next." The New York Times, 5 April 2017, https://nytimes.com/2016/05/28/world/americas/venezuela -crisis-what-next.html. Accessed 5 April, 2017.
Kott, Adam. "Assessing Whether Oil Dependency in Venezuela Contributions to National Instability." Journal of Strategic Security (2012): 69-86.
