Venezuela: The Ticking Time-Bomb

Venezuela: The Ticking Time-Bomb

By Charlie Eckman


If you’ve kept up with the world news you may be aware of the current issues in Latin America, Venezuela in particular. Venezuela appears to currently be in the opening stages, the beginnings, of a civil war. The status of a government greatly relies on it’s ability to maintain a healthy economy which is why Venezuela has fallen in the ranks of the world stage. President day Venezuela finds itself in a similar predicament as Germany, pre-World War Two. Their economy is plagued with debt and hyperinflation. This has made it difficult for the government to continue with its extensive social welfare programs. The crisis in Venezuela has been exacerbated by years of corruption; corruption in all aspects of government as well as the heavy manipulation of currency, over-reliance on oil, and poor planning and execution of all the government programs & industries. To make matters worse, members of the current administration have taken discouraging steps towards extending their terms beyond their constitutional restraints, further expanding their powers. The world watches as the situation steadily deteriorates. Will the nation’s leaders remedy the plight before open war ensues, or is civil war inevitable? Is there a way out for Venezuela?

Background

The late revolutionary leader of Venezuela, Hugo Chavez, was once a member of the Venezuelan army who became greatly influenced by Simon Bolivar[1] and the ideals of the socialist and communist parties during his military career. “Legend has it, [he] started a study group using Marxist texts he found in a burned-out car that had been driven by some fleeing guerrillas.”[2] This would be the instigating incident that led to Chavez’s decision to join FALN (Fuerzas Armadas de Liberación Nacional), a communist guerrilla group in Latin America, and pursue his political agenda. He would then form a similar group “the Bolivarian revolutionary movement” (MBR-200).[3]  After a failed coup in 1992, Chavez was arrested but later released in 1994 and then elected president in 1998.[4] He would quickly form a constituent assembly to draw up a new, ‘Bolivarian’ constitution built on the ideals of Socialism and left-wing populism. The new constitution grew the powers of the government and began a myriad of Socialist programs known by some as ‘Chavismo.’[5] Under Chavez and the newly formed constitution, Venezuela nationalized its oil companies such that the country’s profits from oil revenue would pay for the very government run social welfare programs which were of such importance to the new President.

In an attempt to gain sovereignty from imperialist capitalistic nations (most notably the United States), Chavez decided Venezuela would narrow trade to a select few countries that tended to be socialistic, such as Russia and China.[6] This voluntary isolation from the world’s growing free trade economy crippled Venezuela’s trade options. Furthermore, the lack of diversification in income by almost completely relying on one international export is dangerous. The strategy is effective provided the price of oil increases, and thus quite vulnerable to the commodity’s natural price fluctuations. The Bolivar currency became completely reliant on the international oil market. As a result, any variation in the price of oil had direct consequences on the currency strength and volatility. This has repeatedly shown to be a troublesome strategy over longer run scenarios as all industries are subject to the behavior of the national and international markets. To further this danger to the Venezuelan economy, Venezuela imports most all of its basic commodities and staple goods.[7] Therefore Venezuela has made itself all the more heavily reliant on foreign countries for most of its essentials. Venezuela failed to develop different industries outside of oil, forcing tenuous but essential import/export relationships with economic trade partners. “Chávez in his later years was to become increasingly dependent on a new bureaucracy which began to take on the characteristics – corruption, inefficiency, favouritism – of the old. And the real social advances that millions of Venezuelans had enjoyed as a result of Chávez’s rise to power now began to fracture and fail.”[8]

Image Credit: Hugo Chávez y Nicolás Maduro. Foto: AP. (Pictured Left: Chávez, Right: Maduro)

The Country’s foreign and domestic economic policies during Chavez’s presidency shaped the issues troubling Venezuela today. When Hugo Chavez died in 2013, he was succeeded by his Minister of Foreign Affairs; a close friend and fellow revolutionary, Nicolás Maduro. President Maduro has continued many of the existing economic policies that were in place during the time of Chavez, despite the economic free fall the country has been facing sense before Chavez’s death. The precipice for the recent heightened level of unrest was a fall in the price of oil, directly contributing to Venezuela’s use of its emergency reserve funds. From 2014 into 2018 Venezuela has seen a rise in crime, unemployment, hunger, and overall political unrest. The situation heightens as the economics continue to worsen. President Maduro is seeking reelection. He has called for another constitution rewrite which many speculate will only allow him to lengthen his term as well as the terms for his political allies.[9] His reelection is scheduled for May 20th.[10] Many protesters have been killed especially in the past 5 years. There are long lines at banks and ATM’s to get what little cash the government will allow them to withdraw at a time.[11] “At least 124 people have died in Venezuela’s protests sense April” of this year.[12]

What’s Happening Now and Why?

“In 2001, Venezuela was the richest country in South America. Seventeen years later it is now among the poorest.”[13] Despite periods of oil’s lows, the numerous state run social programs of Chavismo continue to shell out cash. They did so despite the country’s inability to generate enough profit (from oil) to pay for them. Because the Government had lost substantial value in its primary export, it no longer has a strong or steady income to pay for its multitude of social services. As an unfortunate consequence, the country is currently surviving on reserve funds. The time and amount before these emergency funds deplete remains unclear.

Inflation

As of March of 2018, Venezuela’s inflation stands at 8,900% and is increasing by approximately 67% per month.[14] In a year the Bolivar has lost 98% of its value in one year.[15] For the sake of comparison, one of the most studied instances of hyperinflation in history is of pre-World War Two Germany. In October of 1923, the German Deutsche mark reached an inflation rate of 29,500%.[16] As of April 2018, the Bolivar has inflated to 18,000%. This has quadrupled from just two months prior.[17] While it is difficult to determine the future rate of inflation, it would not be surprising that this number will only increase and perhaps surpass the infamous German inflation rate. In January 2018, the President declared he would be giving pregnant women 700,000 bolivars a month. At present day inflation that equates to $3.83.[18] A stretch to feed either the mother or her child for more than a few days.

Image Credits: Rathi, Pranshu. Copyright 2018 International Business Times, In-dia Edition All Rights Reserved.

How People Are Getting Around This

The massive amount of inflation has shaken any faith, citizens, foreigners, and investors had in the Bolivar “Under normal circumstances a weaker currency shouldn’t hurt people too much, but in Venezuela, where almost everything people consume comes from abroad, especially from the United States, a weaker bolivar means virtually everything a family might need or want, from food to clothes, television sets, fridges, washers, and cellular phones, can become more expensive in just days.” One of the only things that’s stable is the use of foreign currency.

Further complicating Venezuela’s problems is the web of nonsensical exchange rates. Instead of simply one universal currency exchange rate, Venezuela has three. That’s right, the government set up the Bolívar to have three separate legally recognized exchange rates. These exchange rates depend on what position you hold in society and are different for various business. Because all of these exchange rates are controlled by the government they are extremely biased and overvalue the Bolivar, which is in the Government’s favor. They are not representative of how much the currency is truly worth. This is why a fourth exchange rate was created: the black market rate. Illegal Venezuelan entrepreneurs make money off of exchanging U.S. dollars for Bolivars at a more realistic and amicable exchange rate for U.S. tourists. Venezuelans are paid by the government in Bolívars but it is much cheeper to purchase their goods with a more stable foreign currency because of the massive price fluctuations. In Raúl Gallegos’s book How Oil Riches Ruined Venezuela, Gallegos details how the black market exchange rate works. It is one of the few ways Venezuelans can achieve any form of financial security. Venezuelan citizens and officials involved in the black market exchange trade often contact American tourists and set up a deal where the tourists meets up with the exchanger and exchange the cash in person under the books. It’s a better deal for both of the parties as it doesn’t involve the government’s exchange rate that is hyper-inflated to take advantage of tourists and it also gives American dollars directly to the Venezuelans without the many obstacles the government has in place. The black market currency exchange is a profitable business but it is illegal and there have been various attempts by the Venezuelan government to crack down on people ‘cheating the system’.

Because the Venezuelan government is the sole provider for everything in the country, the people are left with no other option to make money and purchase food and supplies. These bare necessities such as food and toiletries, have become a primary concern for Venezuelans for the past few years. Supermarkets and convenience stores often have isles of empty shelves. “It had been roughly two years since store shelves were regularly stocked with toilet paper rolls in Caracas, the city in Venezuela where consumers were most likely to find scarce products.”[19] The food and sanitary product shortage became so severe that, in 2013, there was a viral twitter campaign about the toilet paper shortage. It is such a prominent issue that even the luxury hotels in Venezuela ask their guests arriving from out of the country to bring their own rolls. The shortage, coupled with high demand has made the price of toilet paper and all of its substitutes unreasonably expensive. Despite the seriousness of the shortage the government has tried to turn the crisis around to shine a positive light on the government.“Elías Eljuri, head of Venezuela’s National Statistics Institute, said in a televised interview that the toilet tissue shortage was in fact a good sign. It shows ‘Venezuelans are eating more,’ he said, because they have more access to food, thanks to the social policies of the revolutionary government.”[20] Meanwhile, that is not the case as the country remains in dire need of food and medical care.

Instead of Venezuela diversifying their income base so that they might afford to purchase necessary essentials, the government attempted to nationalize some of the toilet paper companies to regulate the price and artificially lower it to the point of unprofitability. This has made the entire toiletry industry unprofitable for any company both in and outside of Venezuela. This price manipulation echoes throughout all industries that the government interferes with. Even outside companies doing business in Venezuela have reported varying degrees of losses. Including instances where the government compensates the merchant for their mandatory price reduction(s) they are paid back in Venezuelan ‘Bolivar’. The currency has always been volatile and often devalued (increasingly so as of late). This lack of transparency by the Government in the true value of its currency discourages foreign and domestic investment in the country. This only further stifles economic growth and lessens the opportunity of diversifying the country’s economic income. “It is a extreme case of the opposite of profit maximization for all parties as this artificial price setting has effectively destroyed all aspects of their economy.”[21] In 2014 alone, PepsiCo lost $126 million and Coca-Cola lost 660 million because of Venezuela’s devalued Bolivar. That same year the Venezuelan government had amassed roughly $4 billion in debt to various airline companies, which has caused some airlines to cut back on flights to the country.[22] The all but worthless currency exchange causes the company to lose product inventory and money.

The American dollar and basic toiletries have become the gold standard and are of the few things that have remained relatively stable in the Venezuelan economy.[23] Street peddlers buy and sell the goods they get from the government with Bolivars for American dollars in order to make ends meet. The country is struggling to pay and feed its people including its police and military. The possibility that one or more branches of law enforcement either in the military or in the police force attempt a coup in the near future if they do not get paid is certainly possible.

 More Recently

There are many clear signs that resentment of leadership in Venezuela is only growing. Venezuela held an election on May 20th, 2018 which yielded Murado as the winner. The election results remain widely disputed by Venesualians and many foreign countries.[24] Nearly every action Murado and his Bolivarian government takes to try to alleviate the current crisis either fails or backfires. In a desperate move to stabilize the economy, Venezuela has launched it’s own cryptocurrency. The Venezuelan Central Bank has developed an App for android users that allows you to convert Bolivars “…to the new Petro-pegged Bolivar Soberano – the Sovereign Bolivar”[25] Because the new crypto (PTR) is backed by the Venezuelan government, few around the world have any faith in it’s structure. Theres so little trust in PTR that the U.S. has banned it’s citizens from investing in it.

On August 22nd, the largest earthquake to hit the country sense 1900 struck the capitol of Caracas. The very last thing Venezuela needs right now. This tragedy on top of the recent years of economic decline will surely bring about further violence and stronger resentment against the government as it will undoubtedly be unable to react appropriately. The country simply does not have the resources to fully rebuild and assist the many citizens who were afflicted by the earthquake.[26] Ultimately this could prove to be the final tipping point for the country’s faith in their leadership and bring an end to Murado’s reign.

Venezuela fairly quickly went from being one of the stronger countries in latin America to the weakest in the world.Venezuela’s over-reliance on oil, isolation of trade partners, devaluation of currency, and the overall corruption within the Government have destroyed Venezuela from the inside out. Venezuela’s neighboring countries have begun to revive many refugees and the numbers will only grow as the situation worsens.[27] Unless president Murado and his allies resign or are replaced through a fair election, the overall decline will continue and the likelihood of either happening without bloodshed seems bleak.

[1] Revolutionary leader of Spanish controlled Colombia (once combined territory with Venezuela)

[2] Gonzalez, Mike. Hugo Chavez : Socialist for the 21st Century. Revolutionary Lives. p 27. London: Pluto Press, 2014.

[3] Gonzalez, Mike. Hugo Chavez : Socialist for the 21st Century. Revolutionary Lives. p 27. London: Pluto Press, 2014.

[4] Gonzalez, Mike. Hugo Chavez : Socialist for the 21st Century. Revolutionary Lives. p xiii. London: Pluto Press, 2014.

[5] Bruce, Iain. The Real Venezuela : Making Socialism in the Twenty-First Century. Pluto Press, 2008.

[6] Gonzalez, Mike. Hugo Chavez : Socialist for the 21st Century. Revolutionary Lives. p 7. London: Pluto Press, 2014.

 [7] Gonzalez, Mike. Hugo Chavez : Socialist for the 21st Century. Revolutionary Lives. p 137. London: Pluto Press, 2014.

[8] Gonzalez, Mike. Hugo Chavez : Socialist for the 21st Century. Revolutionary Lives. pg 7-8. London: Pluto Press, 2014.

[9] https://www.washingtonpost.com/news/worldviews/wp/2017/06/10/maduro-wants-to-rewrite-venezuelas-constitution-thats-rocket-fuel-on-the-fire/?noredirect=on&utm_term=.a9f96cdbbb5d

[10] https://www.yahoo.com/news/venezuela-opposition-calls-boycott-may-20-election-221204046.html

[11] Pozzebon, Stefano. CNN. http://money.cnn.com/2018/01/17/news/economy/venezuela-cash-crisis/index.html?iid=EL January 17, 2018

[12] Gillespie, Patrick. CNN. http://money.cnn.com/2018/01/15/news/economy/venezuela-maduro-pregnant-women/index.html?iid=EL January 15, 2018

[13] The Economist. https://www.economist.com/news/americas/21715694-nicol-s-maduro-draws-wrong-conclusions-economic-crisis-venezuela-crumbles, Jan 28th 2017.

[14] Trading Economics https://tradingeconomics.com/venezuela/indicators

[15] Pozzebon, Stefano. CNN. http://money.cnn.com/2018/01/17/news/economy/venezuela-cash-crisis/index.html?iid=EL January 17, 2018

[16] Fischer, Wolfgang Chr., ed. (2010). German Hyperinflation 1922/23: A Law and Economics Approach. p 91. Eul-Verlag Köln.

[17] DELGADO, ANTONIO MARIA. Miami Herald. http://amp.miamiherald.com/news/nation-world/world/americas/venezuela/article210282264.html May 02, 2018.

[18] Gillespie, Patrick. CNN. http://money.cnn.com/2018/01/15/news/economy/venezuela-maduro-pregnant-women/index.html?iid=EL January 15, 2018.

[19] Gallegos, Raul. Crude Nation : How Oil Riches Ruined Venezuela. p 33. 2016.

[20] Gallegos, Raúl. Crude Nation : How Oil Riches Ruined Venezuela, p 36. Potomac Books, 2016.

[21] Gallegos, Raúl. Crude Nation : How Oil Riches Ruined Venezuela, p 26. Potomac Books, 2016.

[22] Gillespie, Patrick. CNN. http://money.cnn.com/2015/02/11/investing/pepsi-venezuela-hurting-us-companies/index.html February 11, 2015

[23] Perdue, J. B..The War of All the People: The Nexus of Latin American Radicalism and Middle Eastern Terrorism. Lincoln: University of Nebraska Press, 2012. p 12. Project MUSE,

[24] New York Times, William Neuman and Nicholas Casey. https://www.nytimes.com/2018/05/20/world/americas/venezuela-election.html. May 20, 2018.

[25] CCN. Francisco Memoria. https://www.yahoo.com/news/venezuela-central-bank-launches-android-132512171.html August 26, 2018.

[26] USA Today, The Associated Press. https://www.usatoday.com/story/news/world/2018/08/22/venezuela-hit-7-3-magnitude-earthquake-largest-since-1900/1061117002/. Published 10:03 a.m. ET Aug. 22, 2018.

[27] New York Post, Benny Avni. https://nypost.com/2018/08/23/venezuelas-nightmare-is-spreading-to-its-neighbors/amp/. August 23, 2018.


AUTHOR BIO


Charlie Eckman was born in Fort Worth, Texas. He grew up in Oklahoma City, Oklahoma, but came back to his Texas roots for college. He is a history major at St.Edwards University in Austin,Texas. His interests in history often overlap with working on various audio, photo, and video projects in both his professional and personal life. In his free time he enjoys music, movies, and working on older cars and audio gear.

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