Monthly Archives: May 2016

Venezuela is Collapsing

Shoppers waiting in line at a supermarket in Caracas, Venezuela

Shoppers waiting in line at a supermarket in Caracas, Venezuela

Venezuela, the fifth most populated country in South America, is in the midst of a severe economic collapse. Over the past two years, hyperinflation has devastated the economy while the government’s attempts at currency manipulated have only added to the problem. The official government rate today trades around 10 bolivars for a dollar, but in reality the exchange is closer to 100 to one. Initially in January and affirmed in April, the IMF predicted the currency could collapse completely by the end of 2016 according to its World Economic Outlook, noting the inflation rate could more than double from its current rate of over 275% to as high as 720%. Earlier this month, President Nicolas Maduro declared a 60-day state of emergency.

President Nicolas Maduro

President Nicolas Maduro

The government is shuttering offices and services five days a week to save money and schools are now closed on Fridays. Limits have been placed on the usage of water and electricity, when and if they are available at all, and food shortages can be seen by the empty grocery stores being replaced by a pop up black market economy. Furthermore, the rate of violent crime has skyrocketed as the nation’s capital, Caracas, posted the highest murder rate outside of an active war zone in 2015. Over 330 police were murdered last year in Venezuela according to independent groups, and they purport armed gangs and drug cartels are expanding their operations ruthlessly and rapidly.

Multinational companies have also been hit severely by the crisis, and nearly all have taken action to cut losses. Companies that have already deconsolidated their holdings in Venezuela include Proctor & Gamble, Ford, and PepsiCo. General Mills and Clorox have exited the country, Coca Cola has shut down production due to a shortage of sugar, and dozens more companies are debating whether to renege on their investments and leave or try to stick through the downturn. Tourism in the beautiful country has also been devastated as airliners slash operations and limit flights. American Airlines has cut their number of flights per week from 48 to 10, both Delta and United have drastically reduced the number of flights, and Lufthansa has indefinitely suspended its Venezuelan service altogether. The business reputation of the country has all but vanished for the time being.

Real vs. estimated inflation in Venezuela

Real vs. estimated inflation in Venezuela

How did Venezuela fall into this crisis? Hugo Chavez led the country for over a decade heralded as one of the world’s strongest socialist states, depending heavily on the country’s vast oil industry. Corruption was relatively overlooked because abundant oil money sustained the system and the country’s GDP was consistently high among South American countries. The over reliance on oil completely undercut the possibility of a balanced economy during Chavez’s presidency, which was also marred by potential human rights violations and the stymieing of any political opposition. Real cracks in the system became even more apparent in the early 2010s as government expenditures continued to rise while actual revenues fell due to the drop in oil prices.

Following Chavez’s death in 2013, his successor, Nicolas Maduro, has attempted to continue Chavez’s state-heavy policies and entrenched socialism, however with oil funds drying up and persistent corruption, the situation quickly spiraled out of control. Opposition politicians won big in the elections against Maduro’s camp in December and ever since have contested his power amid the collapsing economic and political structures. Social, political, and security indicators have all worsened with the continued consolidation of state power, and Maduro today stands on a fragile precipice.

Even if oil prices rise as expected, the amount of revenue needed to dampen the crisis seems unobtainable without drastic political changes. Government employees have actually personally benefited in the short term from the hyperinflation because they can utilize the official exchange rate unlike ordinary citizens. Maduro may be ousted sooner than later as his crumbling government continues to flounder, polls suggest nearly 70% of Venezuelans want him to step down this year and talks of a referendum occur often. Hard times are ahead for Venezuelans and the situation will get even tougher before it begins to turn around.

 

 

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