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Before all else, foreigners must understand that politics in Venezuela has two periods : before and after the arrival through violence on 4 February 1992 of Lt. Col. Hugo Chavez.
Contemporary political policy in Venezuela in the 40 years before Chavez was dominated by bi-partisanship, the Democratic Action (center left) and Copei (center right) and the power was distributed without many problems beyond the normal political difficulties associated with government.
The policies of both sides were supported by most democratic Latino-americans. These parties emerged quickly after the previous military dictatorship was overthrown in January 1958.
I personally lived most of my life (23 years) in the period we call the Fourth Republic or Bi-partisanship and now I live (the past 16 years) suffering the ravages of the so-called (Fifth) Chavismo republic and can compare the two periods by economic aspects, or social and political development.
Chavism, or Chavismo as we call it, is a complex and lengthy topic to analyze.
I remind you that I have no political affiliation or membership in any party, I’m just a citizen who suffers daily living in a country that could be the Dubai of Latin America and yet today is leading the worldwide negative statistics.
The Venezuelan crisis (plural) have always been tied to oil and the problem is older than Chavez in Venezuela. While it is true that Chavez accelerated the national disaster, the vices which caused it began much earlier with low noise and less corruption, but they were the issues which later led to the Chavismo.
Consider for example that in Venezuela, during the last year of the so-called Fourth Republic (the years of democracy bi-partisanship) crime was a lesser evil but from that point began to grow. If we see the year 1998 the number of murders nationwide was 4500 people with rate of 19 murders per 100000 inhabitants. Now the number of killings has quintupled, reaching the tragic figure of 25000 murders in 2014 and in 2015 that figure is likely to increase, placing us as the second highest country in the world for murder with the homicide rate at approximately 65 per 100000 inhabitants.
With regard to abductions it has been increasing and also is moving to the big cities. Initially kidnappings were carried out on estates in border regions close to Colombia. The targets were usually rich farmers and millionaire landowners and Colombian guerrilla groups would kidnap them to exchange them for large sums of money to finance their war. This uncommon crime then began to happen inside Venezuela, in the workplace, and now abductions are carried out in family homes in the cities, with well planned strategies and operation. This crime has become an industry of evil. Today we have the shame of being among the five countries with the most kidnappings in the world.
To give you an idea, in 40 years before Hugo Chavez came to power there were only 150 kidnappings while in 2014 more than 1000 people were kidnapped. These are official figures. The real figures are much higher as people do not report out of fear, or because they do not trust the police who are now penetrated by crime and drug trafficking gangs. Especially unreported are the so-called “Express Kidnapping” which is merely a form of abduction that lasts up to 24 hrs. You may be kidnapped and the perpetrators take away as much money as possible while they have you. “Express Kidnapping” is rarely reported as the criminals may take revenge later on the victim.
During the last fifteen years in Venezuela a political system with high state intervention in all spheres of social life was adopted. It’s promoters call it "Socialism of the XXI Century".
The institutional order became highly a discretionary patronage to implement populist policies, exerting an almost hegemonic power by the use of force or threat of use of force. All political, economic and civil freedoms have been increasingly restricted, given that the regime has manipulated, changed and ignored the constitution and laws to the interests of the ruling group. This has led to abuse of political power, rampant corruption, high levels of insecurity, shortages of all necessities and most luxuries, inflation as well as restrictions on the rights of association and restriction of freedom of expression.
We have had a serious setback in all areas of the nation.
Chavez’s authoritarian regime has concentrated power through control of the political institutions and manipulating the economy through price and exchange controls, expropriation (Theft by Government) of private property, credit management and exploitation of the state oil company, among other measures.
In November 2013, an enabling law took effect giving almost unlimited discretion to the President of Venezuela to issue decrees with the force of law. In short, the concentration of power has been used to stifle individual rights of citizens.
Venezuelans began protests from early February 2014 to mid-year. The protests were violently quelled by the police, paramilitary and military bodies (Organisations which are highly ideologized and completely corrupted). What we are witnessing is an economic, social and political crisis without precedent in the country. No easy or quick exit is in sight, implying further deterioration of freedom and consequently a reduction in the quality of life of Venezuelans.
Power is exercised without taking into consideration the most basic rights or principles of law, such as respect for property rights, or economic principles. It is estimated that under the system of central planning, more than 50000 properties between farms (small, medium and large), industries and businesses have been expropriated or nationalized without compensation for their market value. During the last 15 years, large companies and sometimes entire sectors have been expropriated : electricity, telecommunications, banking and finance, oil and technology, media, attractions, hotels, food chains and supermarkets, among others. In November 2013, they nationalized two oil platforms, for reasons of public utility and "social" interest.
Under the Chavez regime, the Venezuelan state became an entrepreneur, importer, marketer and price fixer of various goods and services. However, scarcity of commodities is the order of the day as an effort to have a monopoly on the import of all kinds of products has destroyed the productive apparatus of the nation.
History tells the story of the economic disasters that befall any society which places its economic management and means of production under the compete control of the state.
With the justification that the entrepreneurs and businessmen are "capitalist criminals" who only make a profit by exploiting their neighbors, the Chavez regime has seized control of much of the economy. The government has distorted all reporting on consumption, savings, credit, investment and production. In February this year, the President of Venezuela expressed this in public : "I do not underestimate sections of the bourgeoisie. We’re going to expropriate [steal] from those who we have to". This is done to fight an imaginary "economic war", a spectre that has been continually raised by the Chavez regime since its inception to justify their actions and excuse their inefficiency and inability to address the severe problems of the Venezuelan economy.
Since the beginning of the Chavez regime there has been a full frontal attack on the market economy, imposing obstacles, tight controls and trade barriers. This has had the effect of promoting high hidden costs, less investment, lower production, lower employment generation and generally less wealth for all Venezuelans. The business environment in Venezuela has deteriorated and there has been a lot of uncertainty introduced by the expropriations, censorship, lack of freedom of association and waste of resources. These methods are used by the Chavez regime to concentrate power through populism and clientelism [a social order that depends upon relations of patronage]. For example Venezuela until 2007 exported cement to various countries and supplied all of the Venezuelan domestic market. Today after the nationalization of all Venezuelan cement facilities, it is difficult to get any cement for local construction, let alone export. Most of the little that is here is imported.
In publications such as Doing Business published by the World Bank and the Global Competitiveness Report of the World Economic Forum, Venezuela ranks as one of the countries with the highest barriers to doing business. The onslaught against the free functioning of the market economy is one of the main reasons for the economic, social and political crisis in Venezuela. This happens because the incentives to venture into economic activities fade, and fewer goods and services are produced. Shortages resulting in unmet human needs are generated, and unemployment and reduced production cause lower wages, rents and revenues for various segments of society.
Venezuela is in a very disadvantaged position compared to most countries in the world with respect to the business environment. Instead of generating more wealth in Venezuela, successive Chavista governments have wasted resources (gifts to other countries to get political support, credits which are not charged, oil shipments at low or 0 cost as the case of Cuba, financing leftist groups in many parts of the world, and even [alleged] financing to terrorists and guerrilla groups) have siphoned off financial resources which could have been used for capital investment in the country.
The attack on the market economy has only been used to centralize power and try to exercise hegemonic control of the country. In an economic system where property rights are not guaranteed the free-market pricing system that solves problems in society does not arise.
The free-market pricing system : (1) promotes the production of goods that really value the masses ; (2) coordinates the best use of limited factors of production ; and (3) allows coordinate compensation to the owners of factors of production, including labor factor (wages for workers). If we do not have a fair pricing system, the coordination of economic activities becomes impossible ; voluntary and peaceful exchange is replaced by conflicting economic relations.
A distorted price system, as exists in Venezuela, is one involving the waste of scarce and valuable resources which could be used in a better way to meet human needs and demands. The best social policy of any government is to create a business environment that promotes investment, production, and generate more productive and better jobs, resulting in more available wealth and a better quality of life fro all of society, not just the rulers and their elite friends.
Venezuela has the largest proven reserves of oil in the world and the income from the sale of this product are the main source of income for the Venezuelan State Today, 95 % of our revenues come from oil. In the previous democracy the figure was only 70 % with the remaining 30 % being non-oil exports such as vegetables, fruits, rice, cement, coffee, cocoa, chocolate, etc.
Venezuela has become a "petro-state". According to the World Bank, oil exports represent 96.6 % of total exports of goods. These figures show the importance of the oil industry to the Venezuelan economy and how vulnerable a society can be when the economic benefit from those resources is subrogated. With weak, coerced and threatened institutions, discretion, privileges and corruption are part of the equation in the oil industry, and given its importance to our economy, it affects all of Venezuelan society.
The company that manages the oil industry is state-owned Petroleos de Venezuela SA (PDVSA), which emerged in 1976 after the nationalization of the industry in 1975 (Government of Carlos Andres Perez). PDVSA has been the "cash cow" used by the Chavez regime to implement its populist and patronage politics.
Despite representing a pillar of public finances, successive Chavista governments have made bad investments and ignored maintenance of infrastructure, consequently resulting in a reduction of daily oil production. This is despite having a payroll of state employees going from 25000 to more than 120000. Most are now low-skilled employees with little or no value to the company.
The government has used events at the Amuay refinery complex (the second largest in the world) to politically control the company.
PDVSA’s current production was about 2.3 million barrels per day in April 2014. This represents almost a third less than that achieved in 1997, when it produced around 3.4 million barrels a day. Of the 2.3 million barrels produced per day, about 200000 go to the countries that signed the Petrocaribe agreement and 800 thousand barrels are consumed locally. The remaining nearly 1.3 million barrels are exported to the world. PDVSA sales to US have been reduced to the lowest level in 28 years and much of the production is exported to China to service an estimated US$ 60 billion debt.
With high oil prices since 20005 until now, the Chavez regime did not, or could not accumulate resources in the Macroeconomic Stabilization Fund (FEM) due to their patronage populist policies. Gasoline retails at about five Venezuelan centivos per gallon (less than US 1 cent per gallon). In Venezuela, gasoline is significantly cheaper than bottled water. This price is below production costs and represents a hidden subsidy of more than US$ 25billion annually.
Populism and clientel politics controlling the revenue from PDVSA have generated a deficit that weighs on the development of the oil industry and in turn cause most of Venezuela’s fiscal deficit. This company has been one of the hardest hit by the bureaucratization of the Venezuelan state, as its payroll has grown incrementaly while profits have been mis-allocated and wasted. In fact, PDVSA’s debt with the Central Bank of Venezuela (BCV) to April 2014 has grown by 400 % compared to December 2011, reaching US$ 76000 millions at the official exchange rate.
One of the keys to centralized power in Venezuela factors is that the state gets almost two-thirds of its income from oil revenues (tax and non-tax) and tax revenues from non-oil taxes represent only 34.3 % of tax revenues. By not having to constantly burden citizens with higher taxes to finance more government spending, unsupervised waste of limited resources becomes easier. The Chavez regime has maintained an irresponsible fiscal policy to the extent that more deficit spending means more debt to foreign creditors (mainly China) and internally (mainly with BCV).
The fiscal deficit have occurred despite the increase in oil prices, which resulted in the highest revenues in the country’s history. The problem is concentrated in unproductive public spending, accompanied by transfer of income to particular groups without transparency mechanisms. Also, generalized subsidies as fuel and electricity, among other basic goods and services, involve increased public spending. The result of the high deficit spending is shown for 2012 the budget deficit was 16.6 % of GDP plus another 15.1 % in 2013. The total deficit continues to grow in a serious way.
The last detailed information provided by the Ministry of Finance of Venezuela (2012) indicates that the central government had a deficit of 4.9 % of GDP, accounting for 30 % of the total ; the remaining 11.7 percentage points are explained by the autonomous institutions and mainly PDVSA. High fiscal deficits involve increasing public debt in a country where there is no capital consumption and generation of wealth translates into a path of economic unsustainability. It is financed by printing money without backing, increasing inflation disproportionately (2015 inflation projection is 200 %). The situation is made more critical because there is a serious shortage of commodities almost all areas.
Exchange controls have distorted economic activities in Venezuela for over 10 years. The controls have encouraged the mis-allocation of scarce resources in the economy towards certain sectors, industries and preferred groups of the Chavez regime. The government has chosen to assign winners and losers in the currency market. In Venezuela there is a complicated exchange system currently consisting of four rates of exchange :
CADIVI (US $ 6.3 Bs.) : In 2003 the Foreign Exchange Administration Commission (CADIVI) was created as a centralized mechanism to control supply of dollars with an official exchange rate. With the poor monetary and fiscal policies the government has adopted, the exchange rate was soon overvalued and it was obvious that the controls had failed. This rate is used for certain imports of essential goods, currencies for travelers and students abroad. Many of these dollars from the government go to "ghost" companies which create black market millionaires in a short time. These companies are of course owned by the Policital-military elite.
SICAD (Bs 12.3 US $.) : Because of the distortions created by the exchange controls and the centralization of the foreign exchange market, in late 2013 the Foreign Exchange System (SICAD) was created. The idea was to create an alternative system for introducing an auction mechanism with foreign exchange trading desks where certain suppliers and purchasers participate in the market (businessmen and traders). The most important thing is that the above mechanism remained for the import of certain goods and services, creating major price distortions and this new mechanism eventually led to more controls, greater currency mismatch and corruption since in many cases like previously, only the "Friends of the regime" actually benefit.
Simadi (Bs 200 per US $.) : Marginal currency system. After the failure of Sicad 2, which was an appendage of Sicad 1 and did not resolve the situation, Maduro’s government has increasingly improvised plans to create a new exchange rate which will give "priority" to the exchange for certain companies or private persons. These exact same measures were, until recently, condemned by the Chavista government.
For the Simadi to function there must be some correspondence between the flows of demand and supply.
The demand is constituted by all those who have balances and income in bolivars and want to convert them into foreign currency and it is represented by savers, whom inflation is completely ruining, companies which need to import at a prime rate of exchange and do not have dollars, and foreign companies which have a large amount of bolivars in Venezuelan banks and have nothing to do with so much money. That is, the demand is almost infinite, because current trade liquidity is estimated at US $ 25 million a day, more than US $ 5 billion annually.
The inflow of dollars comes from non-oil exports. In 2015, it will only reach US $ 2.5 billion, and the household income and remittances of foreign tourists plus capital flows from oil companies for new investments will provide another US $ 800 million at most.
This is clearly an insufficient amount leaving a trade deficit in dollars each year of approximately 30 %-35 %.
Someone must meet the mismatch between demand and supply. This function should be met by the Banco Central de Venezuela. Obviously the BCV is not doing it’s job and therefore the black market in dollars has rebounded sharply, to act as an outlet to meet the demand for dollars.
The tendency of the black market dollar exchange rate is to rise further, due to two circumstances : The first is that the BCV is liquidating dollars at the official rate or marginal rate in the market and the second is that it is the same BCV who is creating enormous pressure on the dollar also has control of the machine to print bolivars and it is doing so at an increasingly rapid pace.
For these reasons the Simadi basically died at birth.
4 Black Market (Currently approx. 700 BSF per Dollar) : Most personal currency transactions are carried out on the parallel market or black market. You can not call the normal market free because it is restricted by state regulation and penalized by the authorities. Transactions in this market involve a very high hidden cost and increase the difficulty of doing business and production planning in Venezuela.
This uncertainty in turn causes lower investment, production, employment generation and wealth.
Particularly striking is the difference between the initial rate of exchange controls (CADIVI) at Bs. 6.3 per US$, versus the parallel market at Bs. 700 per US$.
This difference in currency rates introduces incentives to get income out of the state controlled market to try to sell in the black market.
Also, the part of the market controlled by the state lends itself to corruption and political patronage.
To try to keep the artificial exchange rate stable, they have used international reserves of the Central Bank of Venezuela (BCV). At the same time, many imported products such as milk, flour, oil, toilet paper, auto parts, medicines and medical equipment have become extremely scarce due to restrictions on importing companies’ access to foreign exchange.
Several airlines have suspended operations and many others are threatening to do so. CADIVI and now the CENCOEX (New state exchange office) have a continuing debt with them of more than US$ 3.7 billion.
In conclusion, exchange controls and multiple exchange rates distort all economic activities in Venezuela.
Venezuela’s international reserves backing the issue of the national currency (Bolivars or Bs.) have declined in recent years. In December 2011 net international reserves (NIR) stood at US$ 32.9 billion. On 28 May 2014 NIR were US$ 24 billion and currently 2015 international reserves are just US$ 15 billion.
Unlike other countries in the region, most of the monetary reserves of Venezuela are accounted in gold to back their issue. Indeed, 72 % of Venezuela’s international reserves consist of gold for monetary purposes. Unfortunately, the BCV has accumulated securities of PDVSA and government bonds to finance the fiscal deficit overriding international reserve assets.
In recent years, printing money without backing has increased as international reserves have declined. According to the BCV, monetary liquidity or money supply (M2) increased by 205 % since December 2011 April 2014, from approximately Bs 446 billion in December 2011 to Bs 1362 billion in April 2014 -more than three times in these few years. In 2015 money supply continues to increase.
The main factor that has led to the growth of the money supply are the loans that the BCV has granted PDVSA : they went from Bs 96 billion to Bs 481 billion since 2011.
Thus, PDVSA’s debt with the Central Bank was multiplied by 5 times during this brief period and the acquisition of the debt involved injection of new liquidity in the economy. The monetary indicators show that Venezuelans are likely to keep their cash and when placed in financial intermediaries (banks), most are placed in the short term investments. Long-term deposits or in bolivars and dollars are very low.
With a monetary policy that creates money while reducing international reserves you would expect that inflationary pressures are presented in prices. Indeed, inflation in Venezuela reached 56.1 % in 2013, according to statistics from the International Monetary Fund (IMF), the highest inflation rate in the world for that year. 2015 is expected to end with close to 200 % inflation.
The Chavistas say that price inflation is the result of "economic war" by the opposition and the private sector against the government. Statements like this demonstrate that the authorities either do not recognize, or wish to conceal the reality of the situation that has resulted from misguided public policies based on utopian ideologies.
The main factor leading to high price inflation in Venezuela today is printing money to finance the PDVSA deficit and government spending. Credit to the government and other public entities necessitate the creation of new money.The reduction in international reserves implies that the issuance of new money is unsupported, and the new liquidity entering the economy is causing increases in cash volumes, all seeking the same goods and services. Exchange controls, disincentives to produce and the resulting shortages all accentuate the inflationary effect of the monetary issue.
Given the increasing price inflation, the regime decreed a law on Profit, Costs and Fair Prices. Production costs are regulated and capped at 30 % profit margins. Manufacturing controls have been established and all goods and services are declared to be for the public utility. Such policies are counterproductive, because they discourage investment and production. The law makes it even more difficult to gain access to foreign exchange, as companies need to present a certificate of assessment of fair prices for access to the markets.
The implementation of the law intended to regulate profits, costs and prices of various products has further exacerbated price inflation that exists in Venezuela. A state that spends 16 % of GDP above his income, has increasing debt, multiple overvalued official exchange rates and also an expansionary monetary policy to finance the government financial deficit creates an almost inevitable hyperinflation in the coming years, unless policies conducive to economic freedom are taken in the very short term. We believe that this is unlikely to happen.
For several years, Venezuela has endured a severe crisis in the electrical system, causing blackouts of several hours at a time in large areas of the country. These areas are mostly outside the metropolitan area of Caracas. This crisis is caused by technical problems due to the lack of investment in maintenance and improvement of the transmission and distribution networks. Since Venezuela is an oil producing country, we would expect no energy crisis. However, the current institutional order where the state owns the electrical system (after nationalization from private enterprise) does not lead to an efficient management of the electricity system since there is no incentive to minimize losses. Electric power cuts occur across all sectors of the economy, and this is a service required for almost all economic activities : consumption, investment and production.
It is estimated that more than one third of the electricity is lost in transmission and distribution due to obsolete and inefficient networks, and electricity theft. Another problem is the distribution companies supply electricity to users who simply do not pay. Energy losses and nonpayment of users imposes a high burden on public finances, since the government provides large subsidies to many users. These resources come from oil revenues, taxes and government borrowing.
According to official information, the installed generation capacity totaled 24000 MW ; hydroelectric generation accounts for 62 %, 35 % is thermal and the remaining 3 % comes from other generation sources. With high dependence on hydroelectric generation, during times of drought the power situation worsens. Current distribution remains about 16000 MW (when there is no drought).
With an estimated 17500 MW usual demand, it is evident that there is a serious problem facing the electricity sector.
Definitely, the nationalization of the electricity sector has represented a high cost for Venezuelans when the cost of the bill to final consumers plus the cost of self-generation during blackouts, generalized subsidies and opportunity costs of not having a reliable basic service are added.
Venezuela is undergoing an economic, social and political crisis caused by public policies that have produced more violence and greater friction between different groups in society. History shows that collectivist ideologies in human societies need necessarily authoritarian or totalitarian regimes to implement them. An institutional order that does not protect property rights, exercises highly discretionary use of power and privileges, and has high levels of corruption, demonstrates the real exploitation of man by man.
The stubbornness of the Chavez regime under the umbrella of collectivist ideologies, cash handling and the centralization of political and economic power are not good omens for a free Venezuela in the short term.
The possibility of hyperinflation is a very real possibility in the coming years, given the high fiscal deficit financed by the Central Bank, foreign exchange restrictions and price controls. In fact, hyperinflation is almost guaranteed to happen unless there is a radical change in public policy to promote a more free-market economy.
It would seem certain that the radicalization of the people in power will continue to deepen. Currently, we have current and former military officers occupying most main public offices and much of the leadership of the armed forces has been politicized, combining this with the influence of the Cuban regime.
All of this has been done under an ideological trend called "Socialism of the XXI Century" but is merely a disguise for an authoritarian regime.
My personal experience is that in the previous democracy it was possible for an average working person to buy a new car, you could access credit to buy housing with a reasonable level of effort and sacrifice and you could travel freely. We could go shopping in the supermarket and there was food in the quantities normally required and average people could afford to pay the price for this food. We could buy good quality items like perfumes, clothing and shoes on a normal wage.
In big cities the violence was focused in just a few sectors and I could walk or go out with friends late into the night. You freely picked the TV channel which you liked or the material that you wanted to read. There were medicines in pharmacies and today there are about 70 % less. Shortages are now so severe that it is difficult to get milk or diapers for children.
We all had more civil liberties. Today, the state has created a gigantic police/military monitoring, control and intelligence system to coerce, intimidate, expel, imprison and place under executive control anyone who disagrees with government policies. People have been caught in the political police system (SEBIN) just because of tweeting against the government.
We have had some very hard years, and today 80 % of the population opposes the government, but people are immersed in fear, hopelessness and insecurity. We live in a state controlled chaos and most are trapped in a subsistence level existence.
Our light at the end of the tunnel should be the elections of December 6 to change the National Assembly (now controlled by the ruling party, the Chavistas) but the problem is that the electoral referee the CNE is also controlled by the government and does not guarantee free and transparent elections.
The government is a huge publicity machine. Many lies have been told to make people believe that this is not true, but the reality is different.
As we say in Venezuela : “Come the dawn and we will see”.
We still have a long way to go as a society. This is a sad learning experience for all.
I have personally seen dozens of friends, family and acquaintances emigrate to seek opportunities in other countries, fleeing a place that every day takes away opportunities and sinks further into violence.
As a reporter, I have been into riots and also closely experienced street violence, all produced by bad politics.
It has touched me to see people near death or suffering imprisonment because of this, but the honest Venezuelans will try to keep fighting for the country where we were all once foreigners who came to "take root".