Venezuela's Economy Implodes

Not even the nation's vast endowment with oil could save Venezuela's socialist economy from ending up where socialism always ends up: economic calculation has become increasingly difficult, which has made it nigh impossible for entrepreneurs to plan production in a rational manner. Consequently shortages of all sorts of goods have begun to crop up.

In order to 'make up' for these obvious shortcomings of its economic policy, the government has decided on a flight forward which consists of blaming said entrepreneurs for the fruits of the government's 'planned chaos' and resorting to ever more brutal political repression. Of course you wouldn't know that when reading leftist journals such as 'Counterpunch', where they are still swallowing the Chavista propaganda hook, line and sinker (according to their theory, 'Venezuela is under attack again' from 'ecnomic [sic] sabotage').

The poor socialist government, which controls the central bank, all political and economic policy decision-making, and last but certainly not least, all the guns, is allegedly completely powerless against the evil 'forces of capitalist reaction' – even while it imprisons  opposition leaders, denies newspapers the ability to buy newsprint and issues one irrational economic decree after another (all of which are enforced at gunpoint and with the threat of imprisonment).

Veneuzuela's president Maduro and one of his hired claqueurs proudly showing off the document that gives the president the power to 'fight economic war by decree'. That was back in November, when Venezuela's actual annual inflation rate hit 320%. Maduro, a modern-day version of Roman emperor Diocletian, has been just as unsuccessful as the latter in his attempt to alter the laws of economics by waving his legislative and executive magic wand.

(Photo via Reuters / Author unknown)

By now, Venezuela is spiraling toward an economic denouement of Zimbabwean proportions, a fact that has not gone unnoticed by the population at large. Here are two charts Professor Steve Hanke published in November last year. We were unable to find a more recent update on the annual inflation rate, but the black market rate of the bolivar is regularly updated, so we have incorporated the current situation on its chart. The exchange rate has actually literally gone 'off the chart' by now, and the implied inflation rate must therefore have done likewise, only even more so. Based on a projected compounded rate of bolivar devaluation of a constant 45% per quarter, the annualized inflation rate should eventually reach about 1,300%. 

Venezuela's estimated annual inflation rate hit 320% in November. Given that it is  implied from the rate of change of the black market VEF/USD exchange rate,  the bolivar's devaluation by yet another 45% in the span of three months has presumably accelerated the implied annualized inflation greatly since then. Officially the annualized inflation rate is currently reported to be at 56% – click to enlarge.

The black market rate of the bolivar has declined by another 45% since mid November, to its current rate of 87 to the dollar from 60 then. The current rate is slightly off the chart actually – click to enlarge.

As noted above, neither price increases nor the increasing shortages in goods on which price controls have been imposed have gone unnoticed by the population. Newsprint and toilet paper are not the only things running out. Venezuela's car  industry has de facto ceased to exist. What used to be a two year waiting time for a new car (these waiting times for new cars are a typical indication of socialist 'success' – they amounted to some 15 years and longer in several of the former COMECON countries) has now turned into 'forever'. All the car factories are standing still, as it has become impossible to import car parts that are not manufactured in Venezuela. International travel is also becoming impossible for Venezuelans: the airlines can no longer afford to sell tickets at the artificial exchange rate imposed by the government.

“Leonardo Hernandez had hoped to buy a new car this year, ending nearly two years of waiting on various lists at different dealerships throughout the country.

Those hopes were dashed last week when Toyota Motor Co. said it would shut down its assembly operations in Venezuela due to the government's foreign exchange controls that have crippled imports and made it impossible to bring in parts needed to build its vehicles. The country's other car manufacturers, including General Motors and Ford, haven't even started operations this year, while waiting for needed parts to arrive.

"I desperately need a new car for work,'' said Hernandez, who works as a salesman. "I have been waiting and waiting, and now this. I have no idea what I am going to do. And I can't even find spare parts for the old car I have." Toyota joins a long list of companies saying they are having to curtail or stop operations in the South American country thanks to the government's foreign exchange regime, which the late President Hugo Chavez created in 2003 to fight capital outflow.

International airlines are refusing to sell tickets in bolivars, or the local currency, saying the government owes them $3 billion from sales last year. Empresas Polar, the country's largest food processor, has already warned that it may have to shut some operations as it owes its overseas suppliers nearly half a billion dollars.

Newspapers throughout the country are running out of newsprint, and there are shortages of foodstuffs and medicines. The shortages prompted protests this week against the government. On Wednesday, protests ended in violence when three people were killed by masked men on motorcycles, according to demonstrators. Business associations estimate that Venezuelan companies owe their international suppliers upward of $14 billion to cover past purchases. Many suppliers are now cutting off credit, tired of waiting for payment.

And for Venezuela, which has the world's largest oil reserves but imports about 70% of the goods it consumes, the results are catastrophic.

(emphasis added)

When suppliers refuse to continue deliveries in the face of an ever greater mountain of unpaid bills, that's 'economic sabotage' in the minds of the deluded supporters of Chavismo. We suppose though that it is rather convenient for Maduro's government that newspapers are running out of newsprint. That helps with keeping reportage on the most recent developments in check.

Beleaguered Socialist Regime

If not for amateur film-maker Andreina Nash posting a video of the recent protests in Venezuela on youtube, the world may still be largely in the dark about what is going on. The video entitled “What's going on in Venezuela in a nutshell” shows details from three days of riots and has gathered almost 2 million views by now:

Amateur video showing protests in Venezuela

Following the student protests shown in the video, during which three students were killed, the demonstrations became bigger. Although they are apparently quite unorganized, they are reminiscent of the demonstrations that once brought Hugo Chavez to power. These were originally motivated by fuel price increases, so there is definitely a strong similarity. Of the two opposition leaders mentioned in the article excerpt below (Henrique Capriles and Leopoldo Lopez), one has now been imprisoned on what are quite evidently trumped-up charges.

“After the student deaths of Feb. 12, crowds began flooding the streets, demanding that Maduro step down, but lacked clear organization. Capriles has responded cautiously just as Lopez has urged bold confrontation. The army has rolled into Caracas in armored personnel carriers and met the demonstrators with beatings, detentions, and, so it is claimed, torture, which has only provoked more demonstrations and outrage. Maduro’s regime has also further clamped down on the media, neutering coverage of the unrest, blocking Twitter at times, and leaving the opposition to circulate calls for action via Facebook and video clips.

The opposition, consisting of 30 parties and famously fractious, has largely rallied behind Lopez and Machado. In advance of Tuesday’s march, Lopez issued a call on YouTube. The destination: the Ministry of Justice, a place that, he said, “has been converted into a symbol of repression, torture, and lies.” He demanded that the government clarify the circumstances surrounding the students’ deaths on Feb. 12 and abolish the Chávez-founded paramilitary groups “responsible for homicides and intimidating our people … with impunity granted by the Venezuelan state.” He also announced that he would turn himself in and “accept the persecution” if the government chose to arrest him at the march for a crime he did not commit.

The government ruled the gathering illegal. “They will not pass,” thundered Diosdado Cabello, president of the National Assembly, in a televised address. “They can call on the gringos and the marines, but they will not pass!”

They may not—at least this time. But it’s clear that Venezuela has entered a period of instability not seen since the 1989 Caracazo riots over fuel-price increases that led to regime change. That set the stage for Hugo Chávez’s rise to power.”

(emphasis added)

Lopez is taking a calculated risk: he is obviously betting on the fall of the Maduro government. Once he is released, he will be the natural opposition leader, since he has now proved that he is prepared to even go to prison for his beliefs. He may well turn out to be right, considering that Maduro won only 50.7% of the vote against Capriles in the 2013 election, after squandering an initial double-digit lead according to polls – and that was before the inflation rate and the shortages really took off. 

Capriles at the time not unreasonably alleged that the election outcome was probably fraudulent, but since the courts are stacked with Chavez supporters, his challenge went nowhere. Here is an excerpt of a press report on Lopez' surrender:

“Clashes during days of demonstrations have already left three anti-government protesters and one government supporter dead. And the simmering tensions show no signs of letting up. The confrontation took a dramatic turn Tuesday, when Lopez, accused by the government of conspiracy and murder in connection with the recent violence, marched with a crowd of thousands of protesters before surrendering to national guard troops.

"The options I had were leave the country, and I will never leave Venezuela!" Lopez told the massive crowd. "The other option was to remain in hiding, but that option could have left doubt among some, including some who are here, and we don't have anything to hide."

Hours later at a rally with throngs of supporters, Maduro said the head of Venezuela's National Assembly had helped negotiate Lopez's surrender and was taking him to a prison outside Caracas. Maduro described opposition leaders as right-wing fascists who plant seeds of fear and violence. He claimed they have U.S. backing and repeatedly tried to assassinate him and overthrow his democratically elected government. And he compared the opposition to an illness plaguing the South American country.

"The only way to fight fascism in a society is like when you have a very bad infection … you need to take penicillin, or rather the strongest antibiotic, and undergo treatment," he said. "Fascism is an infection in Venezuela and in the world. And the only treatment that exists is justice."

[…]

Charges against him include murder, terrorism and arson in connection with the protests, according to his party, Popular Will. Lopez denies the accusations, the party said in a statement calling for witnesses of the protests to send their own accounts of what happened to be used in his defense.

A message on Lopez's Twitter account Tuesday night said he was on the way to a military prison, where party officials said he would be held at least until a court appearance scheduled for Wednesday. The post included a link to an apparently pre-recorded video message, showing the opposition leader seated on a couch next to his wife, calling on Venezuelans to keep pushing for change.

"If you are watching this video, it is because the government has carried out one more abuse, full of lies, of falsehoods, of twisting facts and trying to manipulate the reality that we Venezuelans are living," he said. "I want to tell all Venezuelans that I do not regret what we have done up to this moment, in convoking the protests … The people came out. The people woke up."

Major social and economic problems in Venezuela have fueled the protests. But as the demonstrations gained steam, officials have pointed fingers at other factors, accusing the United States of plotting to destabilize the government.

On Monday, Venezuela gave three U.S. diplomats 48 hours to leave the country, accusing them of conspiring to bring down the government.  At Tuesday's rally, Maduro shouted, "Yankee, go home" from the stage, drawing cheers from the crowd. The opposition has been defeated over and over again at the polls, and despite this decision by the people, it continues to call for marches and protests, Julio Rafael Chavez, a ruling party lawmaker, told CNN en Español on Tuesday. "The peace-loving Venezuelans feel very, very worried by the irrational, fascist-leaning attitude and actions of a sector of the Venezuelan opposition," he said.

(emphasis added)

Of course it goes without saying that the US administration would be quite happy to see the Chavistas kicked out of government. Maduro has a propaganda lever at his disposal, in that he can always point to the 2002 coup attempt against Chavez, which certainly reeked of CIA involvement, in spite of all the heated denials that were issued in its wake.

It must be remembered in this context that Chavez indeed enjoyed broad popular support at the time, as he was still able to paper over the growing economic problems with the country's vast income from oil exports. However, the constant 'the opposition are fascists' and 'capitalists are sabotaging the economy' refrain is beginning to wear rather thin in the face of Venezuela's economic and social reality. Note that economic problems are only one aspect motivating the protests. The other major problem is soaring crime, which the government is seemingly powerless to do anything about. It is a good bet that the rise in the crime rate is intimately related to the deterioration in economic conditions.

Leopoldo Lopez as he is arrested

(Photo credit: Leo Ramirez / AFP / Getty)

It is therefore quite doubtful that kicking out US diplomats (this has frequently happened under Chavez and it is the third time that Maduro is doing it since coming to power) will actually help Maduro much. The US may be sympathetic toward the opposition, but it seems rather unlikely that this unorganized and highly fractious group can be effectively steered by outside forces.

Judging from both his words and deeds, Maduro meanwhile seems incapable of realizing how extremely counterproductive his economic policies are. Note that the bolivar's black market rate stood at 8:1 against the US dollar at the time of Chavez' death compared to 87:1 now. Obviously, Venezuela's economy is in serious trouble and who can be blamed for that if not the people deciding  economic policy?

Maduro's government of course still enjoys a measure of support, especially among special interest groups that have benefited disproportionately from the manner in which the goodies (i.e., the oil income) are distributed by the government. Among these groups are workers for the state-owned oil company, which always stand ready to join counter-demonstrations.

PDVSA workers, dressed up in red, at a counter-demonstration. “These men in red helmets and caps are one hundred percent with the Revolution" according to the company's president.

(Photo credit: Alejandro Cegarra / AFP)

Incidentally, these revolutionary stalwarts decided that this would be the optimal juncture to present their new wage demands to the president. One has to give it to them – they do have a good sense of timing. The company's president is concurrently Venezuela's energy minister, and we suspect that he probably has his own plans for political advancement.

“Government supporters rallying at Plaza Venezuela, northeast Caracas, departed for the presidential palace of Miraflores, downtown Caracas. Oil workers intend to deliver the collective bargaining agreement of state-run oil firm Petróleos de Venezuela (Pdvsa) to President Nicolás Maduro. Heading the rally, Pdvsa President and Energy Minister Rafael Ramírez said that the workers who support the government will remain on the streets.

"The oil workers will be on the streets to defend the revolution. We do not fear fascism," said Rafael Ramírez, who is also the Venezuelan Vice-President for Economic Affairs. "30,000 workers are marching to Miraflores, with discipline." He noted that "we are calling on people to avoid violence. We are red, very red. We are calm, we do not want violence and we will not let the minority come to overthrow us."

"These men in red helmets and caps are one hundred percent with the Revolution," he added.

(emphasis added)

Yep, we are very, very red. And by the way, here is what we want to get paid henceforth, so we can remain very, very red with a good conscience.

Conclusion

It remains to be seen for how much longer the Maduro government can cling to power. Given that the government has so far not seen fit to alter its economic policy in a manner that promises to relieve shortages and spiraling inflation, its days are probably numbered, as all these problems are set to worsen further.  If it doesn't succumb to the pressure from the people thronging the streets in protest, then it probably will eventually from infighting in its own ranks. Surely there are quite a few people in the revolutionary party who sense that Maduro might be profitably replaced in this moment of weakness, preferably by themselves.

As one journalist sagely remarked, the students who started the demonstrations were all born at a time when the glories of the Chavist revolution began to fade already. All they know about socialism is what it means in practice, or rather, what can be termed its inevitable long-run result. Shortages of goods and political repression are hardly the kind of things that are likely to produce ardent supporters of the revolution. As is always the case, socialism only 'looks good on paper', before it is actually implemented.