Venezuela is suffering from the ultimate case of 'Dutch disease'
ReutersAntigovernment demonstrators pretend to bat gas canisters to police during riots in Caracas, April 1, 2014.
The headline at ZeroHedge back in January said it all. “This is what the death of a nation looks like."
It now seems inevitable that Venezuela, for decades touted as a “socialist paradise,” will disintegrate by the end of the year.
It’s the ultimate case of “Dutch disease,” a country now rotten from depending far too much on the export of a primary product and, as a result, facing a currency so bloated it can’t maintain productivity and competitiveness.
Now the inevitable violence and chaos is starting to spill over. On Sunday, the Financial Times cited reports of the morgue in the capital city of Caracas overwhelmed with the stench of dead bodies piling up.
There’s been no official homicide data from Venezuela since 2006, but El Nacional is claiming “5186” murders in 2016 to date. One local think tank puts the rate at 92 killings per 100,000 citizens — about 22,000 Australians a year in local terms, or 84 murders every weekend in Sydney.
It’s almost fives times the rate in the year before Hugo Chavez came to power.
US journalist Jeff Berwick recently,bravely, stepped out for a night or two in downtown Caracas. He claims he virtually had the streets to himself. No one else was silly enough to venture outside at night.
Berwick, a US citizen, doesn’t miss the chance to turn the situation into a gun debate.
But in Caracas, he may have a point. “No guns” notices are present in every public space, every restaurant. The security guard at his hotel was hiding behind the door when they knocked, because he’s not allowed to carry a weapon.
The FT spoke to local man Luis Mejía, who said three members of his family had been shot in the past fortnight.
“This is now wilder than the wild west,” he said, adding the morgue attendant who a decade ago received seven or eight bodies every weekend is now faced with 40 and 50.
Seventeen years ago Chavez brought his socialist revolution to Venezuela. Now, barely two years after his death, lynchings, prison breakouts, deadly student protests, and mafia executions dominate the pages of national newspapers.
Thomson ReutersVenezuela's President Maduro attends a rally against the opposition's amnesty law at Miraflores Palace in Caracas.
The problem with Maduro
“Chavismo” is the term given to Chavez’s ruling style, which takes in everything from of socialism, populism, and feminism to green politics and workplace democracy.
They still love him. In 14 years, he won the presidency four times in closely scrutinized elections. He died of cancer in 2013, but the iconic image of his eyes is still present every day on T-shirts, posters, billboards, and buildings.
Nicolás Maduro worked with Chavez since 2006 as his minister of foreign affairs and vice president. While he tries to adhere to the ideology of chavismo as Venezuela’s president, he simply lacks the charisma of the man he inherited this mess from.
And facing a no-win financial situation, charisma is the only tool he’s got left in his bag with hundreds of thousands of poverty-stricken locals demanding he take control of a problem he realistically has no power to control.
Instead, Maduro and his party spokespeople:
Blame food shortages on opposition misinformation and a wider CIA conspiracy to destabilise his governmentBlame inflation on local oligarchs trying to dominate the market by deliberately cutting their production capacityTake action against media that highlight the problems Venezuelan citizens face, andBlame violence on a war with right-wing Colombian paramilitaries.
None of which feeds or even inspires Venezuelans, with poverty levels now approaching 90%. But almost all experts agree it’s obvious evenChavez’s charisma wouldn’t have seen Venezuela through this crisis.
Backpacks full of cash
Officially, a US dollar will cost you 9.95 bolivars. In August last year, the rate was around 6.50 bolivars to the US dollar.
Unofficially, on the black market, you can get a staggering 1142 bolivars for a single US dollar,according to dolartoday.com. That’s up from 300 this time last year.
Venezuela’s problem is the crashing price of oil, its major export commodity. About 95% of the country’s exports, in fact. Because of that, it’s considered to be burdened with the riskiest debt in the world.
Revenue from oil exports is said to have plummeted from $37.2 billion in 2014 to $12.6 billion.
Compounding the problem, it also has to import roughly half of the food its people consume, so in those two stats alone, you can already see the trouble it faces.
Back to Berwick, who recounts leaving the airport with a backpack full of bolivars knowing it’s only enough to buy dinner.
In November last year, McDonald's brought fries back after a 10-month absence, but because the state forced McDonald's to source potatoes from Venezuela, the fries cost $133 — for a single large serving.
Even the black-market rate, which brings fries down to $1.15, is around 10% of the average weekly wage in Venezuela.
In many restaurants, prices are stuck on menus with printouts, as they have to be updated weekly, or sometimes several times a week.
YouTube via WeAreChangeA menu in Venezuela.
The new national profession
In February 2015, Venezuela topped the “Misery Index,” an annual list compiled by The Cato Institute. For the second year in a row, it was considered the most miserable country in the world based on data about a country’s inflation rate, interest rates, and unemployment.
Note “second year in a row.” Even before the oil crunch looked like it was setting in, Venezuelans were dealing with crazy rates of inflation. CPI skyrocketed in early 2014 and hasn’t dipped since.
Trading Economics
While the Venezuelan government still denies it, for nearly two years now, people have been saying they must wait several days in lines to enter government grocery stores for basic essential items which may not even be on the shelf when they finally get through the door.
Standing in line has actually become one of the better-paid professions in Caracas. The queues are solely outside state-run supermarkets, which see government-subsidised staples selling for as much as four times cheaper than in private stores. Just last week, one woman gave birthwhile queuing.
The other edge of the sword is that when Venezuelans eventually get inside the stores, they’re leaving with much more than they need, because reselling it across the border into Colombia and Brazil is extremely lucrative.
There’s huge pressure on the government to maintain the subsidies or face a political backlash from the country’s significant chunk of voters beset by poverty.
How did it happen?
There’s some irony in the fact that it’s how well the former Chavez government looked after the poor that has triggered the country’s slide.
Chavez was a noted, and beloved, socialist who subsidised gasoline down to $0.02 a gallon, and even provided free housing to make life easier for his people.
But to subsidise that kind of vote-buying, he installed loyalists in the state-owned oil companies who kept profits flowing to government coffers, at the expense of investment in the infrastructure needed to refine its extra-heavy crude.
That triggered a downward slide. According to The Washington Post, oil production dropped some 25% between 1999 and 2013.
And the budget started to slide into the red, and Venezuela reacted in the worst possible way — by printing more money, so Chavez could keep his people fed and housed.
On February 19, gasoline prices rose for the first time in 20 years — by 6200%.
Then there’s the toilet-roll fiasco.
Reuters/Carlos Garcia RawlinsA woman carries bags with toilet-paper rolls as people queue to buy staple items at a Makro supermarket in Caracas, Venezuela.
The toilet-paper thing
You might have read about how Venezuela is “running out of toilet paper” and figured it was simply something to do with everyone being poor and lining up for basic items. And you’d be right, to some extent, but there’s a bigger problem in this for the government.
Since 2013, the Venezuelan government has been seizing toilet-paper factories. That’s because toilet paper is an essential item that receives “preferential dollars.”
If you need to know why that’s a huge problem — aside from causing a chronic shortage of toilet paper — here’s an example dolartoday used back in November, updated with the most recent valuations:
Say you import 10 million bolivars worth of toilet paper. Officially, that’s about $1 million worth in US dollars.Toilet paper is a preferential item, so it can only be sold at the official government bolivar rate, and as such, you are only allowed to make a maximum of 20% profit on it in Venezuela.So you send 5 million bolivars worth back across the border and sell it for $500,000, which you spend on iPhones.iPhones receives no preferential dollars, so you can sell them in Venezuela at the black-market rate of 1142 bolivars a US dollar.You receive $571 million bolivars for your $500,000 worth of iPhones, which, converted back at the official rate, snag you $57.1 million — a staggering 11,320% return.
You can see why the Venezuelan government is trying to shut down and sue dolartoday, which is a US website.
There’s also the other problem all this subsidisation causes.
If you’re not subsidised, there’s no point buying any stock because people can’t afford to buy it off you.
If you are subsidised, you’ll just take the money the government gives you and exchange it for a whole lot more on the black market, rather than buy more stock.
