Venezuela is embroiled in one of the worst economic crises in history, and certainly the worst anywhere in the world today. Its socialist government is at pains to be able to solve it, but this is a crisis that is preventable and should not have been allowed to occur in the first place. The blame and responsibility for this catastrophic situation lie firmly with the socialist governments of Chavez and Maduro.
The country which rests on the northern tip of South America, bordered by Columbia, Brazil and Guyana, has a population of 31 million people. It has the world’s largest proven oil reserves. Therefore it should, in theory, be the richest country in South America and one of the richest in the world; its citizens enjoying the wealth that oil can bring.
How Has This Occurred?
Instead, the country is in total economic collapse and decline. The socialist policies that have been implemented since 1999 when Chavez came to power, and subsequently under Maduro, have led to this. The nationalisation of private businesses; refusal to deal with inflation; politicians interference in the state-owned oil company and siphoning off funding for other means, has led to inefficiencies and huge drops in oil output.
Reliance on oil became the country’s Achilles heel. In 2014-2015 the price of London Brent Crude Oil (the principal index for world oil prices) fell from over $100 a barrel to $40 a barrel. This has been nothing short of disastrous for the country which has a huge over-dependence on the resource, accounting to no less than 95% of the country’s exports, so this precipitous price drop represented a huge problem. Venezuela promptly entered recession that year.
The fall in prices has meant less foreign currency flowing into the country and therefore a big reduction in Dollar reserves which made it more difficult to import goods. Consequently, this has meant that businesses have raised prices and contributed to higher inflation.
Since then, the situation has only deteriorated further. In 2015 GDP contracted by 5.7%, in 2016 by 16.7%, and by 14% in 2017, with it likely to have fallen 15% in 2018, according to IMF projections. Overall, since 2013, more than half the entire economy has been lost.
Inflation was a key feature of the Hugo Chavez presidency and had been consistently high throughout. By 2010 wage increases were already proving futile as they did not rise as rapidly as inflation. However, the crisis has made it worse, and by the end of 2014, inflation was at 69%.
In 2016, Venezuela entered a period of hyperinflation, where a currency loses its value rapidly, meaning the cost of living spiralled out of control and left many unable to buy essential items such as flour and bread. As 2018 approached an end, the inflation rate had reached a staggering 1.3 million %.
This is the worst economic crisis in the world right now and one of the worst bouts of hyperinflation since Weimar Germany. Just to illustrate what this means, by the end of 2018 prices were doubling every 19 days, making it impossible to know how much your next meal would cost.
In an attempt to resolve this issue, in August 2018 the government introduced a new currency, the ‘Sovereign Bolivar‘, essentially taking five zeroes off of the old one, the ‘Strong Bolivar‘. This has not worked and the currency continues to fall as more minimum wage increases have been brought in. The IMF is predicting the rate will rocket further to an unbelievable 10 million % in 2019.
The country’s health system has collapsed, leaving many without access to lifesaving medicine. Hunger is common, and the shelves of supermarkets lie empty. Public services have completely broken down and power cuts are the norm. There is no sense that conditions are improving.
Meanwhile, more than three million people have fled Venezuela since 2014 due to the crisis, according to the United Nations migration agency, which has left neighbouring countries struggling to respond.
The government is also struggling to get credit from its lenders as they have already defaulted on a number of loans. This has led to the government adopting a loose monetary problem, printing evermore money which only increases inflation further, making Venezuela less internationally competitive and deteriorating the economy more rapidly. Furthermore, Maduro refuses to accept financial aid from the IMF as it does not want outside interference in its internal affairs and accuses the United States and others of fuelling the crisis with their sanctions and wanting to overthrow him.
The socialist policies of Chavez and Maduro have squandered the oil wealth that once made this country the richest in South America.
It is unclear and indeterminable how long this crisis will continue. What is clear, however, is that as Maduro clings to his grip on power, refuses to accept help and continues to implement policies that are exacerbating the problem, the people are the ones who suffer.
Since the time of writing, the leader of the National Assembly Juan Guaido has proclaimed himself to be interim president, and vowed Maduro as illegitimate. The US and other states back him, however, it is uncertain at this point whether he will succeed in ousting Maduro.