Going Backwards: The Crisis in Venezuela

Talking with a Venezuelan seeking political asylum in the U.S., we asked her why she was leaving her country. “Venezuela does not offer a future anymore” she said. It once did.

Chavez’s 21st century socialism has failed and (sadly) has pushed Venezuela to the brink of one of the major humanitarian crisis in the region. There goes another lost decade for a Latin American country.

Between 2004 and 2008, Venezuela experienced an economic miracle. Its economy grew 10% per year on average, while GDP per capita expanded by 26%. Now Venezuela is going backwards. By 2018, the country is expected to return to the GDP levels of 2005, but with an additional 6 million people, a 20% population increase. Thus, GDP per capita will fall to 2000 levels by 2018, as if 18 years of economic activity had never occurred.

Venezuela’s economic crisis will have unprecedented consequences in terms of poverty. Encovi, a local survey on life conditions shows that in 2015, 76% of Venezuelans lived in poverty, up from 52% in 2014. The extremely poor increased by 9 million through 2015, or 25% of the population.[i] The local universities conducting the survey warn that this is a conservative estimate, for they are only assuming a 170% inflation.

On October 15 of 2014, surrounded by supporters of the PSUV and with a loud round of applause, President Maduro announced a 30% increase in the minimum wage bringing it in VEF$9,648.2 a month—or $9.95 taking the 968.8 USD/VEF exchange rate used in black market by most Venezuelans. The problem is that with the 205% inflation estimated for 2015 by the local think tank Ecoanalítica, a monthly food basket now costs eight times the minimum wage according to the NGO Center for Documentation and Social Analysis (CENDAS). The IMF estimates that inflation could reach 720% this year.

Venezuela based its economic model on public expenditure supported by oil revenues, which constituted 96% of the total country’s exports in 2014. According to ING Group, Venezuela needs a $125-dollar barrel to balance its budget, but its mix currently trades at around $24. Venezuela has no money; this is problematic in a country that imports pretty much everything. The port of Guaira, one of the main three trade ports in the country, now looks empty.

Tariffs and price controls have also triggered shortages of food and essential products. CENDAS reported at the end of 2015 that 38% of the products that form the basic food basket are not available in the stores anymore. This includes milk, beef, poultry, sugar, wheat flour, pasta, sardines and canned tuna. Last year, the Venezuelan Pharmaceutical Federation reported that 70% of medicines are in short supply.

The drastic deterioration of life conditions is the reason why Venezuelans voted to end the hegemonic control of the PSUV, giving the opposition control of the National Assembly. However, in recent days, there has been an increasing confrontation between the two sides. The Assembly wants to pass an amnesty law for political prisoners. Maduro threatens to veto it. Following the initiative, Maduro declared a state of economic emergency—promptly blocked by the Assembly. The current political impasse has done little to provide any sign of relief for Venezuela’s economic implosion.

Now, the most important question is whether or not the opposition’s supermajority in the Assembly will call a referendum on Maduro’s continuity later this year. The opposition (MUD), formed by a coalition of more than 20 parties, is showing a lack of unity on the issue. Without the support of every single MUD’s deputy, the referendum will not be held. In the meantime, Maduro has threatened to take the fight to the streets, if necessary.

LATAM PM’s View: With or without referendum, the probability of a major social and political crisis will continue to grow, which in turn could have important implications for the region. Wealthy Venezuelans are already leaving their country in search of opportunities in Colombia and Ecuador. But as life conditions deteriorate fast, the risk of a mass exodus increases too.

[i] Extremely poor people are defined as those who do not have the income to eat 2,200 calories every day. Poor are those who cannot acquire that same basic basket plus essential services such as electricity and transport.