The Collapse of Venezuela

Stoyan Panchev | Bulgarian Libertarian Society | Gold Newspaper No. 6 | 2017

After 18 years of socialist rule in a Venezuela addicted to government spending, the news coming from that corner of the world brings equal doses of shock, curiosity, and drama. It begins with the now-proverbial toilet-paper deficit, the empty shops, and the lack of basic medicines, and goes on to include crowds of Venezuelans trying to cross the Columbian border in order to fulfill their basic needs.

At the same time, dozens of Boeing 747s are landing at Caracas airport, carrying valuable cargo from different countries around the world. No, the “Bolivarian Republic” government is not importing food or medical supplies. The cargo planes are flying in newly-printed banknotes of the Venezuelan currency — the bolívar. This unlikely scenario is not simply the next malign joke of the Venezuelan government; it is merely that it is impossible to avoid printing new banknotes, considering the annual inflation rate of 800% in 2016, combined with the reluctance to correct this inflation by increasing the currency’s nominal value — although it was eventually raised, under pressure from 2017’s reality (Graph 2).

In effect, the situation is so severe that the authorities are struggling to find enough dollars to pay for its printing of new bolívars. As the famous finance blog Zero Hedge writes, “Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.” And while the socialists at the top are trying to come up with costly methods of covering up the hyperinflation, the mayor of the Chacao Region in Caracas recounts that, since last May, Venezuelans have been hunting down pigeons and dogs, seeing as how 70% of basic necessities cannot be found in stores.
How did it all come to this? Venezuela is the country with the largest oil reserves, amounting to almost 300 bln barrels of high quality hydrocarbons, according to data from Caracas — more than Saudi Arabia; Venezuela — which the American and British presses were composing odes to in 2013, praising the success of Chavism and the new South American Socialism; Venezuela — which had become a “threat to global capitalism” when, within 10 years (from 2003 to 2013), it doubled its GDP, reduced child mortality by half, enrolled millions in universities, and provided the nation with access to medical aid (Graph 1).

Venezuela’s predicament is a classic of every planned, interventionist economy, and one neatly summed up by Margaret Thatcher: “The problem with socialism is that you eventually run out of other people’s money.” The new state housing, “free” education and healthcare, Christmas bonuses, subsidies for various products including foodstuffs, special benefits for the “upper crust” — all of it has to be paid for. It can be financed as long as there are foreign companies to nationalize, there is property to be expropriated by the socialist state, and above all, “black gold” remains a source of immense revenues.

The problems, however, were obvious even before the largest collapse in oil prices. As early as 2014, Venezuela’s budget already had a worrying 17% deficit. The shock was only made more severe when oil prices on international stock markets caved to $40 per barrel in 2015 — after having stayed within the range of $100 for several years — and they continue to maintain prices of $50 per barrel to this day. The Venezuelan socialists’ reaction was the same as usual, a very familiar one to students of economic history. The huge expenses necessary to remain in power cannot be financed by natural resources or by more forceful deprivation of property, which left the socialists the remaining two instruments — money printing and price controls.

Their monetization of budget deficits (i.e., covering the deficits up with newly printed money) between 2007 and 2013 led to an average inflation of 27.4% — more than five times as much as the average in South America at that time. Restrictions on foreign currency access were introduced to prevent any retreat from the hastily devaluing bolívar. The government imposed several varying official exchange rates, while preferential rates were only available to certain groups with close access to the authorities. Of course, instead of stopping, the flow of capital increased, as many Venezuelans paid enormous amounts of bolívars for dollars to then smuggle out of the country. Currency exchange on the black market become commonplace, as well as websites specifically tracking the volatile dollar exchange rate; Bitcoin proved to be many people’s salvation, as it cannot be easily traced by the government.

But the above hardly exhausts everything that Chavez and his successor, Maduro, forced upon their fellow citizens. Thousands of private businesses were expropriated, shopkeepers arrested for “excessively high prices,” and heavy price restrictions introduced (and later enforced by soldiers in over 1400 supermarkets). Not only were the prices of goods and services controlled, but also employment opportunities — salaries could not go down, and prices could not go up. As to be expected, the result was total economic breakdown: the bankruptcy of what few remaining enterprises there were, the disappearance of every type of good, including necessities, and — as the grand finale — mass famine.

In order to counteract the devastation he had caused, Maduro began to surpass even his mentor Chavez, using ultra-populism to pull the wool over the eyes of Venezuelans. In particular, he created the Ministry of Happiness and continued to hold ceremonies to distribute homes, at which, in order to receive the holy key, the ill-fated new homeowners had to swear undying allegiance to the regime and to the party. Due to upcoming important mayoral elections, Christmas was “moved” to earlier in the year in order to “increase people’s happiness,” which in turn would lead to better election results for the socialists.

It was all topped off with repression of the opposition, the breaking-up of protests, and special motorized “death squads” to deal with the most dangerous opponents of the regime. Needless to say, Maduro and the other Venezuelan socialists had an explanation and a verdict in regard to the “real culprits” that had caused the crisis in the South American country. They were the foreign and local capitalists, the American imperialists with their anti-environmental fracking, the “parasitic bourgeoisie.” And they were all conspiring to destroy the socialist paradise of the Bolivarian Republic.
This scenario is similar to dozens of other governments’ stories, governments addicted to spending and the hyperinflationary events that ensue like hangovers. For some time, the government manages to maintain the spending, which lends it popularity among its future victims and which is sometimes financed by a natural resource — and sometimes not. At some point, when the budget can no longer be sustained via the usual routes of expropriation (taxes and debt), money printing comes to their aid. The resulting hyperinflation is “medicated” with price controls. Any entrepreneurs who do not successfully transfer to the black market stop working, and deficits and suffering rise … until the regime is ended.