[News] The Roots of the Current Situation in Venezuela

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*http://www.telesurtv.net/english/opinion/The-Roots-of-the-Current-Situation-in-Venezuela-20151122-0031.html* 



  The Roots of the Current Situation in Venezuela

By: Gregory Wilpert

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By Gregory Wilpert - November 22, 2015

By: Gregory Wilpert

This content was originally published by teleSUR at the following address:
  "http://www.telesurtv.net/english/opinion/The-Roots-of-the-Current-Situation-in-Venezuela-20151122-0031.html" 
<http://www.telesurtv.net/english/opinion/The-Roots-of-the-Current-Situation-in-Venezuela-20151122-0031.html>. If you intend to use it, please cite the source and provide a link to the original article. www.teleSURtv.net/english

How did Venezuela get into this difficult economic situation? What 
happened since Hugo Chavez’s death? Did the project derail, get stuck, 
hit a speed bump, or crash altogether?

The current economic, political, and social situation in Venezuela is 
very complicated, which makes it somewhat difficult for outsiders to 
make sense of. On the one hand there are many people who defend the 
Bolivarian revolution, pointing to the successes it has had in reducing 
poverty and inequality and in increasing citizen participation and 
self-governance. On the other hand, there is a chorus of critics, not 
just from the usual suspects on the political right, but often from the 
left, who criticize the Maduro government’s economic management of the 
country, corruption, the high inflation rate and shortages, and the 
trial of a high profile opposition politician, who the government 
accuses of fomenting violence. How did Venezuela get here? What happened 
since Hugo Chavez’s death? Did the project derail, get stuck, hit a 
speed bump, or crash altogether? In order to answer this question, I 
will first analyze the origins of the current economic situation. Future 
articles in this series will explore what this history means for the 
present and immediate future of Venezuela.

The Bolivarian revolution in Venezuela is no doubt undergoing one if its 
toughest periods at this time. With inflation reaching an unprecedented 
160-200 percent for 2015, nearly constant long lines at subsidized 
supermarkets, and sporadic shortages of many consumer goods, the entire 
population – whether Chavista, opposition sympathizers, or “ni-ni” 
(neither one side nor the other) – is frustrated with the situation. 
While the Maduro government says that the problems are the result of an 
economic war that is being waged against the government, the opposition 
argues that it is government economic mismanagement that is to blame. 
The truth, as usual, is more complicated.

The roots of today’s economic problems can be found in Chavez’s efforts 
already in 2001, to fundamentally reorganize Venezuela’s economy and 
polity. That is, back then Chavez proved to the country’s old elite that 
he would not be their pawn and do their bidding as so many presidents 
before Chavez had done. Instead, in late 2001 he introduced land reform 
and oil industry reform legislation that touched on the elite’s two most 
important sources of economic power. In reaction to this move, the 
opposition launched the April 2002 coup attempt and the December 2002 
oil industry shutdown. These efforts at political and economic 
destabilization provoked a massive bout of capital flight in early 2003. 
At first, the government tried to counter the capital flight by 
intervening in the currency market, using its dollars to purchase the 
bolivar, in order to keep its price stable. However, this caused the 
central government to lose dollar currency reserves precipitously and so 
it abruptly changed gears and introduced a fixed exchange rate in March 
of 2003.

Ever since then, the currency has been fixed and adjusted very rarely. 
Only those who meet government conditions to buy dollars with bolivars 
are allowed to do so. The conditions for gaining access to the official 
exchange rate include international travel, supporting a son or daughter 
with their studies abroad, or – most importantly – importing essential 
goods into Venezuela, among several other types of uses. Of course, 
almost immediately a black market for dollars sprung up, with an 
exchange rate that was very different from the official one. At first 
the official exchange rate was 2.15 bolivars per dollar, while the black 
market rate quickly reached double or triple that rate.

For a long time, from 2004 to 2008, the Venezuelan economy did quite 
well, growing at a very rapid rate of, on average, 10 percent per year. 
This was in part possible because the price of oil was quite high (and 
climbing), which meant that the government could accommodate most 
requests for dollars at the official exchange rate. Also, the 
government’s policies of capturing a far larger proportion of the 
dollars that the country earned and then reinvesting that money in 
social programs, education, and in efforts to diversify the economy also 
made a difference.

However, in mid-2008 the global financial crisis struck and drove the 
price of oil down from US$140 per barrel in mid 2008, to less than US$40 
per barrel in early 2009. Suddenly the government could no longer cover 
all of the imports with its oil industry earnings and so in June 2010 
the government introduced a new exchange mechanism, SITME, which sold 
dollar-denominated bonds that could be bought in bolivars at an exchange 
rate that was double that of the previous rate. The combination of SITME 
and the borrowing to cover the budget deficit meant that total foreign 
debt increased rapidly in the period from 2006 to 2014, from 10% of GDP 
to 25% of GDP. Nominal external debt (private and public) went from 
US$41.8 billion in 2006 to US$134.5 billion in 2014, a 320 percent 
increase in eight years. The percentage of GDP is indicated on the basis 
of GDP PPP. The debt to GDP ratio is fairly low compared to the rest of 
Latin America.

Another measure that the government took during this time was to 
restrict access to dollars at the official exchange rate. That is, the 
conditions under which Venezuelans could access dollars were 
significantly tightened. Fewer dollars were available for travel, for 
study abroad, and for a more restricted list of imports. The consequence 
of this action was that the black market exchange rate shot up during 
this period, going from about 8 bolivars per dollar in 2011, and to 16 
in 2012.

Also, since fewer goods could be imported at the official exchange rate, 
more and more importers began to use the black market to import goods, 
thus driving up inflation. Even if they used the official exchange rate, 
rather than undercutting importers who had to pay for goods at the black 
market rate, people knew that they could make a killing by pricing goods 
at the far higher black market rate and thus did so. In short, inflation 
began to heat up too, going from a fairly moderate (for Venezuela) 13.7 
percent in 2006, to 31.4 percent in 2008 and holding at 20-21 percent, 
on average, between 2010 and 2012.

Borrowing in order to pay for the low official exchange rate had another 
side effect, which is that it increased the volume of bolivars in 
circulation, relative to the country’s foreign reserves. The M2 money 
supply figure (which includes circulating cash and bank savings) 
increased by a factor of 28 (2,800 percent) between the end of 2006 and 
the end of 2014, while foreign reserves dropped by more than 50 percent 
during the same time, from around US$30 billion to US$15 billion, 
according to the Venezuelan Central Bank. Although there is some debate 
among economists about the importance of this ratio for the exchange 
rate, it is undeniable that in a context of high inflation, where many 
ordinary Venezuelans and most businesses seek to buy dollars in order to 
protect their savings from devaluing, a low demand for bolivars and a 
low supply of dollars will mean a declining black market exchange rate 
between dollars and bolivars.

All of these trends became accentuated when President Chavez died of 
cancer on March 5, 2013 and new elections were held a little later, in 
April, resulting in Nicolas Maduro’s election by a 1.5 percent point 
margin of victory. The wave of violence following the election, which 
opposition candidate Henrique Capriles Radonsky encouraged when he 
called on people to demonstrate “with all of their rage,” in which 14 
people died, only made the perception of political and economic 
instability worse. Further destabilization attempts, the violent street 
blockades known as “guarimbas,” between March and June 2014, and which 
resulted in another 43 dead and over 100 wounded, further exacerbated 
the economic problems.

That is, the destabilization created further pressure on the black 
market exchange rate, which, in turn, meant that there was a growing gap 
between the official and the black market exchange rates that could be 
exploited for massive profit-making. Anyone who had the opportunity to 
take advantage of this gap faced enormous temptations to do so.

While the official exchange rate was fixed at 6.3 bolivars per dollar 
since early 2013, the black market rate had reached three times that, at 
18 per dollar. In other words, someone who traveled to the U.S., for 
example, could buy up to US$4,000 dollars at the official rate (paying 
25,200 bolivars). If they did not use this cash up or if they purchased 
equivalent goods abroad, they could trade that at the black market back 
into bolivars for a 300 percent profit, earning 75,000 bolivars.

A vicious cycle thus began in early 2014, where an ever-widening gap 
between the official and unofficial exchange rates created ever-greater 
incentives to profit from that gap, thereby further widening that same 
gap. The black market exchange rate thus began to increase exponentially 
in the course of 2014 and 2015, reaching 100 bolivars per dollar in late 
2014 and 800 bolivars per dollar by late 2015, creating a 125:1 ratio 
between the black market and the official exchange rates. Massive 
profits of up to 12,500 percent were thus possible.

As a result, more and more people became involved in efforts to acquire 
dollars at the official rate, mostly by purchasing subsidized goods in 
Venezuela and (re-)exporting them across the border for an enormous 
profit (people known as /bachaqueros/). Of course, major companies are 
involved in this process too, claiming that they need to import 
essential goods, and then either not importing these or re-exporting 
them to acquire dollars. In mid-2014 president Maduro estimated that up 
to 40 percent of all goods imported into Venezuela (at the official 
exchange rate) were smuggled right back out again.

A logical consequence of all of this was that more and more goods became 
scarce at the price-controlled prices and in massive inflation for 
unregulated goods. That is, already early in Chavez’s second term in 
office, in 2006, the government had begun to introduce price controls 
for most essential goods, in order to counter the retailers’ tendency to 
price things based on the black market exchange rate instead of the 
official rate. Over the years, the government gradually expanded the 
number of goods that the price controls covered, which, if adhered to, 
also meant that more and more products were priced far below what these 
could be sold for in neighboring countries, thereby adding these 
products to those that could generate massive profits by re-exporting them.

The big question that everyone asks—both within Venezuela and 
outside—is, if the low fixed exchange rate is leading to so many 
economic problems, why has the government not raised the rate? There are 
two main explanations for this. First, raising the official exchange 
rate so that it is more in tune with the black market exchange rate and 
with the prices in neighboring countries would mean raising prices for 
products imported at the official exchange rate, thereby further stoking 
an inflation rate that is already far too high. And unless wages are 
raised correspondingly, changing the exchange rate would also mean a 
corresponding decrease in incomes and thus an increase in the poverty 
rate. Second, changing the official exchange rate would represent an 
admission of defeat in the context of what the government is calling an 
economic war against Venezuela. While an exchange rate adjustment or 
devaluation will probably have to happen sooner or later, it is out of 
the question that such a move (and the implied concession) would be made 
before the December 6 National Assembly elections. Note, ^# there is 
some debate within Venezuela as to whether it makes more sense to call a 
change in the exchange rate an “adjustment” (the government’s preferred 
term) or a “devaluation.” I prefer to call it an adjustment because 
technically the currency has already lost a tremendous amount of its 
value due to inflation, so, in effect, a lowering of the exchange rate 
is more of adjustment to the reality that inflation has already devalued 
the currency – this is especially true if you consider that very few 
people have access to the official exchange rates, thus making the black 
market rate more real for most people than the official ones.

In other words, the current situation in Venezuela is a result, first, 
of the exchange rate control that was meant to defend the currency 
against the destabilization attempts of 2002, which themselves were the 
result of the Chávez’s government’s attack on capitalist class 
interests. Second, an already relatively fragile exchange rate control 
became worse in the wake of the oil price declines of 2008 and again in 
2014, which made it increasingly difficult for the government to meet 
the demand for dollars without going further into debt. Third, the 
opposition’s new destabilization efforts against the Maduro government 
the day after Maduro’s election in April 2013 and again in early 2014, 
turned the existing economic volatility into a vicious cycle of 
inflation, shortages, black market devaluation, and renewed inflation. 
The situation is thus quite difficult for the government and very 
frustrating for the population.

-- 
Freedom Archives 522 Valencia Street San Francisco, CA 94110 415 
863.9977 www.freedomarchives.org
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