Tag Archives: Venezuela

Venezuela’s first step

Venezuela is a nation is turmoil.  The media, as well as our class blog, have highlighted the on going violence and shortages. Many feel that this is a result of the capital controls put in by the socialist regime of Hugo Chavez. By loosening the capital controls on Monday, the Venezuelan government is taking a step in the right direction.  However Venezuela has a long way to go, and further progress requires further action.

Venezuela is one of the largest petroleum exporters in the world.  It seems absurd to think that there is a food shortage.  Yet the country depends heavily on the imports for its food, and the balance of trade is misleading due the heavy influence of oil exports.  In the past, in order to curb capital flight, the regime of Hugo Chavez put in place strict capital controls to keep money in the country.  The ramifications of these actions are being witnessed today.   Many importers lack the currency to secure imports due to capital controls.

The government of Venezuela has taken action.  As reported in the Wall Street Journal, the currency controls are being removed, allowing the currency to float on the open market.  Lifting the currency controls is hoped to have the effect of clearing up the shortages, alleviating the social unrest.  However it could also devalue the currency, causing inflation.

This can be seen in the short-run international finance diagrams. Upon the removal of the controls, the devaluation would come as a result of a shift in the Net Capital Outflows curve to the right, which has the effect of decreasing the value of the currency relative to the other countries (in this case the US dollar), shown in the currency diagram.

The most obvious way to fight inflation is to raise interest rates.  But raising interest rates enough to counter the inflation may be unfeasible and/or undesirable given the current economic situation.  A similar effect could be achieved if Venezuela had increased foreign investment.  To this, the country should remove laws that limit foreign investment and property rights that where implemented by Chavez.  In addition, Venezuela should consider leasing some of its oil and natural gas resources to foreign companies, as it did before the industry was nationalized in 1973.  By increasing foreign investment, Venezuela can shift the NCO curve back without messing with interest rates, as well as generating some badly needed revenue for a cash-strapped country.

Considering the natural resources that Venezuela has, it is surprising to see the situation as bad as it is.  The situation seems to be largely due to bad economic policy.  Capital controls, nationalization, and weak property rights have not proven to be sustainable economic policies.  Venezuela’s decision to lift its capital controls should be followed by further “free market” policies rectifying the above problems.

(Revised) Venezuela’s Deadly Struggle

When someone hears about Venezuela, I suspect the first thing most people think of is oil. Of course, this is due to the fact that this country is an OPEC member and exports around 25 million barrels of oil to the United States each month. Venezuela has one of the most abundant oil sources in the world but, unfortunately, it is being wasted. Perhaps you remember ex-President Hugo Chavez, and his passing in recent years. Many hoped the tyrannical government would disappear along with him, but the power of “chavismo” (the support for Chavez’s socialist reforms) prevailed. But the current president (the used-to-be bus driver who received no college education and is bluntly incompetent) , Nicolas Maduro, is slowly losing control of the country – or so they hope. The world knows little about the horrid situation in Venezuela, and how this potentially-wealthy nation is destroying itself.

Caracas, the capital, is currently (and has been for a while) the world’s deadliest city. Not Baghdad or Mogadishu. Mexico is known for its drug-related violence, but its murder rate is well below Venezuela’s rate of 73 per 100,000 citizens. Caracas, however, experienced a soaring rate of more than 200 per 100,000 in 2012 (and 2013 was even higher). To put this into perspective, Venezuela’s murder rate is higher than the death rates of the US and the 27 countries of the EU combined. Violence is so predominant, that people live in constant fear of going outside. Most wealthy people have to travel with bodyguards in order to avoid kidnappers. I personally know a lot of Venezuelans, and they all know of someone who has been murdered – either friends, family, or friends of friends. Most cases like these are a result of robberies. But gun fights are common to establish property rights, personal disputes, or drug-related problems. And the problem isn’t only the fact that violence is so widespread; nearly 90% of murders go unpunished. The police are so corrupt that they are often the ones involved in murders.

As if this weren’t enough to put up with, Venezuelans face daily shortages of basic goods. The most common ones include toilet paper, flour, sugar, cooking oil, and chicken. Not only are there rations on available goods, but these goods are not readily available. Producers point to the price controls and the limitations on foreign currency, which limit the availability of resources needed for production. Also, there are viable claims that 30 billion dollars were robbed from Cadivi (the government body which administered currency exchange) by the government elite. This is seen as the cause for the country’s current shortage problems.

Additionally, inflation is among the highest in the world at 56%.  Maduro eliminated the Cadivi program last year, which Venezuelans used to transfer dollars overseas. Today, a dollar goes for 84.2 bolivares in the black market – 13 times more than the official rate. Toyota is halting production, while Ford is significantly reducing its production in Venezuela. Venezuela’s economy is in shambles.

And its government is worse. Without getting into too much detail, Venezuela’s government is best described as a raging civil war where the Chavistas in power have bought the support of enough people to think they can deceive the country into thinking that they are representing them. In the last elections, the result was announced before all the votes were counted. People took to social media to report the fraud. Pictures and videos of military men burning boxes of ballots quickly spread over Facebook and Twitter. But the government had enough power over the military to stay “enchufados” (plugged in), as the opposition says. However, beginning February 12th, Venezuelans have taken to the streets by the millions. They are peacefully protesting against the government that is driving their country into ruins. Sadly, many people have been killed as they continue to take to the streets in protest, and the government persistently uses military force to subdue them. Now, they are outraged that the government is so blunt in oppressing them – not even trying to hide it anymore.

It is tragic to see a country so rich in natural resources, with so much talent and potential, deprived of its capability to provide its people with a decent life-style. Corrupt governments have a far-reaching effect on the economic well-being of a country. Most people in the US, and many other democratic countries, don’t realize the deep extent of corruption that exists in places like Venezuela. My intent is to raise awareness about this. The Venezuelan government is not the only corrupt, undemocratic government in the world, but at the moment, it stands out as one that is close to being brought down in favor of a more open, honest government. More pressure from foreign governments is essential–along with the noble efforts of the Venezuelan people–to put Venezuela back on the path of freedom and democracy.

The Economic Effects of Venezuela

Over the past few weeks there has been a lot of news regarding the unrest in Venezuela. For this week’s blog I wanted to look into what is happening in Venezuela and what economic effects this will have on the domestic market as well as the international market.

To understand the current situation in Venezuela it is helpful to look back on the previous presidency of Hugo Chavez. The former socialist leader of Venezuela turned Venezuela into the fastest growing economy in Latin America during his presidency. Through oil exportation, Venezuela’s GDP grew very quickly. The revenue from oil drilling was used for a country wide subsidy of basic goods for the poor in rural areas. The massive government subsidies caused price inflation throughout the country. Rather than letting inflation take its natural course, Chavez emplaced price ceilings on goods. Now enter Chavez’s handpicked predecessor, President Maduro. As price ceilings continue to get stressed, business owners are unable to purchase imported goods at a sustainable level. Rather than adjusting the international exchange rate, President Maduro sent the Venezuelan National Guard in to Curacao to enforce the price ceilings. This led to a shortage of common goods, such as toilet paper and food. Frustrated by the shortage of goods, the Venezuelan youth started protests in the city to voice their opposition to Maduro’s administration and controls. (WSJ – The Short Answer: Venezuela)

As inflation continues to exceed 56% (the current world’s highest yearly inflation rate), goods will inevitably become sparser and violence will increase. The increase in violence has led to support from some major political opponents in Venezuela, including the Presidential runner-up Mr. Capriles. With more domestic support the country could soon become engulfed in civil war and a coup could be imminent. Domestic unrest will likely hurt the growth of the country in the short term, but could lead to decreased regulation and a more business friendly administration. As far as the effect that Venezuela’s violence has on the global markets, Venezuela is one of the top five oil exporters to the United States and is a leading oil supplier to Latin America.

As unrest continues in Venezeula analysts will have to keep an eye on the oil supply from Venezuela. Since oil is the bloodline of Venezuela’s economy, it is possible that the United States may use an oil embargo against Venezuela as economic opposition against President Maduro. Such an embargo will inevitably rise the price of global oil. Another potential scenario is a strike by oil workers if the protests spread outside of Curacao. This scenario would also lead to a decrease in global oil supply and an increase in price. At this point, it is too early to determine the significance of the uprising in Venezuela, but it is likely that there will be one of two outcomes that take place. Either President Maduro is overthrown and a new leader is emplaced, or Maduros administration makes concessions to ease the price ceilings or provides cities with emergency relief of supplies and food. Both scenarios will likely create uncertainty with the Venezuelan oil supply and affect global oil prices.

Venezuela’s Deadly Struggle

When someone hears about Venezuela, I suspect the first thing most people think of is oil. Of course, this is due to the fact that this country is an OPEC member and exports around 25 million barrels of oil to the United States each month. Venezuela has one of the most abundant oil sources in the world but, unfortunately, it is being wasted. Perhaps you remember ex-President Hugo Chavez, and his passing in recent years. Many hoped the tyrannical government would disappear along with him, but the power of “chavismo” (the support for Chavez’s socialist reforms) prevailed. But the current president, Nicolas Maduro, is slowly losing control of the country – or so I hope. The world knows little about the horrid situation in Venezuela, and how this potentially-wealthy nation is destroying itself.

Caracas, the capital, is currently (and has been for a while) the world’s deadliest city. Not Baghdad or Mogadishu. Mexico is known for its drug-related violence, but its murder rate is well below Venezuela’s rate of 73 per 100,000 citizens. Caracas, however, experienced a soaring rate of more than 200 per 100,000 in 2012 (and 2013 was even higher). To put this into perspective, Venezuela’s murder rate is higher than the death rates of the US and the 27 countries of the EU combined. Violence is so predominant, that people live in constant fear of going outside. Most wealthy people have to travel with bodyguards in order to avoid kidnappers. I personally know a lot of Venezuelans, and they all know of someone who has been murdered – either friends, family, or friends of friends. Most cases like these are a result of robberies. But gun fights are common to establish property rights, personal disputes, or drug-related problems. And the problem isn’t only the fact that violence is so widespread; nearly 90% of murders go unpunished. The police is so corrupt that they are often the ones involved in murders.

As if this wasn’t enough to put up with, Venezuelans face daily shortages of basic goods. The most common ones include toilet paper, flour, sugar, cooking oil, and bread. Not only are there rations on available goods, but these goods are not readily available. Additionally, inflation is among the highest in the world at 56%.  Maduro eliminated the Cadivi program (the foreign-currency administration office) last year, which Venezuelans used to transfer dollars overseas. Today, a dollar goes for 84.2 bolivares in the black market – 13 times more than the official rate. Toyota is halting production, while Ford is significantly reducing its production in Venezuela. Basically, Venezuela’s economy is in shambles. And its government is even worse.

Without getting into too much detail, Venezuela’s government is best described as a raging civil war where the Chavistas in power have bought the support of enough people to think they can deceive the country into thinking that they are representing them. In the last elections, the result was announced before all the votes were counted. People took to social media to report about the fraud. Pictures and videos of military men burning boxes of ballots quickly spread over Facebook and Twitter. But the government had enough power over the military to stay “enchufados” (plugged in), as the opposition says. However, beginning February 12th, students have taken to the streets by the thousands. They are passively protesting against the government that is driving their country into ruins. Sadly, three people were killed on the first day as the military shot unarmed protesters. Now, they are outraged that the government is so bluntly oppressing them – not even trying to hide it anymore.

It is devastating to see a country so rich in natural resources, with so much talent and potential, be deprived of its ability to provide its people with a decent life-style. Though this post is not focused on the economics-aspect of the situation, it is intended to express the power that a corrupt government has over the economic well-being of a country. I think the US, and many other democratic countries, take this for granted. My intent is to raise some sort of awareness about this. I’m aware that there are civil wars and undemocratic governments all over the world, but this case has a relatively simple immediate solution (for now): if enough foreign governments put pressure on Maduro’s government to step down, it is likely that the efforts Venezuelans have made so far have been enough to push him to the edge.