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<h1 id="reader-title">The Roots of the Current Situation in
Venezuela</h1>
<pre style="position: absolute; left: -99999px;">By: Gregory Wilpert
This content was originally published by teleSUR at the following address:
<a href="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"</a>. If you intend to use it, please cite the source and provide a link to the original article. <a class="moz-txt-link-abbreviated" href="http://www.teleSURtv.net/engli">www.teleSURtv.net/engli</a></pre>
<p>By Gregory Wilpert - November 22, 2015<br>
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<pre style="position: absolute; left: -99999px;">By: Gregory Wilpert
This content was originally published by teleSUR at the following address:
<a href="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"</a>. If you intend to use it, please cite the source and provide a link to the original article. <a class="moz-txt-link-abbreviated" href="http://www.teleSURtv.net/english">www.teleSURtv.net/english</a>
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<p itemprop="description alternativeHeadline"
class="subtitle">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?</p>
<div itemprop="articleBody" class="txt_newworld">
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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.
</p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<p>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 <em>bachaqueros</em>). 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. </p>
<p>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. </p>
<p>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, <sup>#</sup>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. </p>
<p>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. </p>
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<div class="moz-signature">-- <br>
Freedom Archives
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San Francisco, CA 94110
415 863.9977
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