Global Economics 101: Venezuela – Lessons Learned, Spoon Feeding Failure

Statista Venezuela refugees economy

Venezuela has the largest oil reserves in the world and yet the country is in a major crisis, not only from the aspect of the economy but also socio-political. It has now become one of the biggest economy refugees with almost 4.5 million of its population leaving the country due to economic hardships. Image source: Statista

Anton Lyadov’s Most Dangerous City

Just how bad is the situation in Venezuela?

This travel vblog by a Russian blogger, Anton Lyadov titled “Caracas – the most dangerous city in the world” paints a grim picture of the situation in the capital city of Venezuela. It has become a country, where you should only walk the street holding things you a ready to give away to folks with guns, who will surely find you sooner or later.

Professor Ricardo Hausmann’s Interview

To have further insight into the crisis, this interview with Professor Ricardo Hausmann by The Harvard Gazette gives an overview situation in the country.

Incidentally, Ricardo Hausmann was Venezuela’s Minister of Planning in the 1990s and also was a member of the Board of the Central Bank of Venezuela.

Once one of the richest countries in Latin America with the world’s largest oil reserves, Venezuela has been in political, economic, and humanitarian freefall in recent years. With the economy failing, millions of Venezuelans have fled the country, and the International Monetary Fund anticipates the inflation rate there will hit 10 million percent this year.

The current situation is the biggest economic collapse in human history outside of war or state collapse. The GDP has fallen by well over 50 percent. That is double the size of the U.S. Great Depression. It’s double the size of the Greek crisis. It’s double the size of the economic collapse that occurred during the Spanish Civil War.

The consequence of that collapse is expressed in the fact that the minimum wage today is $6 a month. That means that the minimum wage does not buy two eggs a day. It buys something like 700 calories a day.

It means that because you don’t have the calories and the proteins and the medicines for 30 million people, people are losing weight. This has been measured at something like eight kilos a year on average — there is in that the stunting of children’s growth.

People are also fleeing the country. We did a study using Twitter, and we estimated that last year something like 10 percent of the population left. We tracked the number of people abroad using Facebook, and we estimated that 5.3 million people had fled.

So, there are shortages of electricity, of water, of transportation. There are no buses, there are no trucks, and there are no tractors because of a shortage of spare parts. There’s no cooking gas, there’s no gasoline.

(Source)

The Main 3 Reasons

Venezuela refugees economy protest

Professor Ricardo Hausmann identifies 3 main reasons why Venezuela has gone down the gutters despite having strong fundamentals. Image source: Center for Preventive Action

First – Attack on Basic Economic Rights

If the suppliers have no property rights, if they cannot access foreign exchange or the raw material or the machinery they need to make toilet paper, if they cannot set a price that lets them recover their cost, then there is the need but there is no incentive to supply that need, and that mechanism has been destroyed. That market mechanism, that invisible hand, in Venezuela, has been destroyed by massive expropriations and massive controls.

Six million hectares of agricultural lands, supermarket chains, coffee processing plants, dairy processing plants, the cement industry, the steel industry, banks, detergent factories, tire factories, telecoms, and so on have been expropriated.

Those that haven’t been expropriated have been restricted in their ability to buy foreign exchange, to buy imports, to set prices, to decide who they sell things to. Their production has been requisitioned by the state. All of this has created this destruction of the market mechanism.

Second – Severe Shortage of Foreign Exchange

Imports are down more than 85 percent from 2012. Private-sector imports are down almost 95 percent. So, in the country there is a shortage of raw materials, intermediate inputs, spare parts, and that prevents labor and stalls capacity.

Oil production in the country is less than half of what it was when Maduro came into power in 2013. And it’s less than a third of what it was when Chavez came to power in 1999.

Even though Venezuela sits on top of the largest oil reserves in the world, they are easily accessible with zero geological risk, the government, instead of allowing oil production, focused on expropriating the companies that had provided services to the oil companies, and that brought a catastrophic collapse in output.

Third – No Backup Plan

They used the period of high oil prices between 2004 and 2012 not to save for a rainy day, but to borrow as it if was going out of fashion. They sextupled the public debt in the middle of an oil boom, spending as if the price of oil was at $200 a barrel when it was only at $100.

When the markets decided that Venezuela’s debt was too big, they stopped lending, and the price of oil collapsed. That explains why the shortage of foreign exchange is so severe. Ultimately, this meant the collapse of the state.

Lessons Learned From Venezuela

There is a serious lesson to be learned from this crisis.

Over dependency on one main source of income who is subjected to global demand and supply will eventually doom the country’s economy. This is the situation that Middle East countries like Saudi Arabia whom petroleum is the main source of income are facing – a situation that is compounded by slower economy growth & businesses during this COVID19 pandemic.

Diversification is the key – Malaysia in this matter is blessed with both natural resources and also industrial prowess. However, the agriculture sector is still low compared to other economic sectors in the country. As of 2019, the agriculture sector contributed only 7.28% to the GDP whilst the industry sector contributed around 37.42% and the services sector contributed about 54.17%.

However, Malaysia does have a problem which is similar with Venezuela which is the allocation of Government funds for affirmative actions that in the end, created abuse, mismanagement and a reduction the level of the global competitiveness.

Affirmative action is an important tool for accelerating progress towards substantive equality for particular groups. It is an essential element of the right to equality.

However, the Malaysian case is an example of a worst practice of affirmative action, ill-designed from the start despite its initial legitimate purpose.

Today, having become a tool of unfavourable treatment of ethno-religious minorities such as the Chinese and the Indians, the Malaysian case is an example of race discrimination through a mis-application of the great notion of affirmative action.

(Source)

At the end of the day, cheap politics should not be in the way of managing the country in the right way. We often learn from others and our past experiences to avoid making the same mistakes.

Presently we have a Government that is in place because of politicians switching camps and not because that is the wish of the voters. Many of the politicians within the same camp have been appointed as GLC heads instead of true professionals who can run the organisations professionally (see “MPs are not necessarily qualified to lead GLCs”).

One should never be ignorance of others’ mistakes.

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