A Case Study on Venezuela's Shortage

A case study on Venezuela’s shortage

Venezuela, named the Bolivarian Republic of Venezuela since 1999, is located on the northern coast of South America. The country comprises a continental mainland and numerous islands in the Caribbean Sea. It is bordered by Colombia to the west, Guyana to the east, and Brazil to the south.  Columbus explored Venezuela on his third voyage in 1498; the area was inhabited by Arawak, Carib, and Chibcha Indians.

Simon Bolivar, who led the liberation from Spain and much of the continent, was born in Caracas in 1783. With Bolívar taking part, Venezuela was one of the first South American colonies to revolt in 1810, winning independence in 1821. Federated at first with Colombia and Ecuador as the Republic of Greater Colombia, Venezuela became a republic in 1830. A period of unstable dictatorships followed. Antonio Guzman Blanco governed from 1870 to 1888, developing an infrastructure, expanding agriculture, and welcoming foreign investment. In early 2007, Chávez took significant steps to further consolidate his power and move Venezuela closer to becoming a socialist state. He announced the nationalization of major energy and telecommunications companies, nevertheless he shut down the main opposition television station, RCTV, which has been critical of the government. After 14 years at the helm of Venezuela, Chavez succumbed to cancer on March 5, 2013. On April 14, 2013, a special presidential election was held. Nicolás Maduro won by a slim margin. Maduro received 50.8 percent of the vote and continues to rule till now.

 From the 1950s to the early 1980s the Venezuelan economy experienced a steady growth that attracted many immigrants, with the nation enjoying the highest standard of living in Latin America. Because of the oil wealth, Venezuelan workers "enjoyed the highest wages in Latin America." However, during the 1980s, the situation is no longer the case, Venezuela’s economy started to collapse with the decrease of the world oil price and the country begin facing huge monetary problems leading to an enormous shortage of goods later on.

In the beginning of 1980s, the economy contracted, and the number of people living in poverty rose from 36% in 1984 to 66% in 1995. The country suffered a severe banking crisis.  In 2000, oil prices soared, offering Chavez funds not seen since Venezuela's economic collapse since the 1980s. Chavez then used economic policies that were more socialistic than those of his predecessors, using populist approaches with oil funds that made Venezuela's economy dependent on high oil prices.

For about two years, roughly since former President Hugo Chavez was hospitalized, there have been regular shortages of basic products such as milk, sugar, corn flour, and personal hygiene items. These products would be available on the shelves for a time but then disappear. Before elections, there would also be such shortages, but currently the situation has lasted longer.
In December, Maduro, the president, who succeeded the father of Venezuela’s socialist revolution, Hugo Chávez, confirmed that the country was in recession, but blamed an “economic war” orchestrated by political foes.He set off on 4 January on a whirlwind tour of China, Russia and several Opec nations to seek fresh money to shore up the Venezuelan economy .

Exchange controls appeared in 2003 when CADIVI (Commission for the Administration of Currency Exchange in English) the Venezuelan’s national center for foreign commerce adopted new polices to stop the rapid flow of assets and money outside the country after a critical political situation in 2003 which led to a GDP fall of 27% in the beginning of 2003. (Bart, 2008)

         The exchange rate was initially set at 4.28/4.3 Bolivar per US Dollar. (In 2008 the government removed three zeroes from its currency Bolivar and introduced a new currency called Bolivar Fuerte). Since 2012 a scarcity of foreign currencies was formed and was exponentially rising, leading to a huge difference between the black market value and the official value set by the government. In 2015, this difference became remarkably huge, reaching a 300 Bolivar to one dollar in the market as opposed to the 6.3 Bolivar/USD set by the government.

As this difference increased, fraud and the misbehavior of some parties led to the depreciation of the Bolivar value even more; importers for instance, may exchange their Bolivars to dollars under the conditions and regulations of the government claiming the need for hard currency as importers and simply sell it in the black market multiplying their bolivars by a large factor. It was a new sort of “arbitrage” adopted on the currency itself, any powerful man can and did gain advantage from the value difference resulting from the currency controls. (Neuman & Torres, 2015)

One might ask a simple question now, why Venezuela did not face any kind of shortage before 2013? Well the answer for that sort of question is not simple; to begin with, let’s analyze more Venezuela’s economy by looking at its largest revenue, oil.

Venezuela's powerful oil industry, helmed by the state-run petroleum company Petroleos de Venezuela (PDVSA), underpins the economy. The industry, which sits atop the world's largest oil reserves (it exceeded Saudi Arabia in 2012), accounts for about 50 percent of government revenue, 25 percent of Venezuela’s GDP, and 95 percent of its exports. It was one the 9th largest exporter and the 12th largest producer of 2.49 million barrel of petroleum per day in 2013 according to the US Energy Information Administration; moreover the price of the barrel in 2013 was higher than 90$ at all times. High oil prices, in addition to expansionary fiscal and monetary policies, led to average annual GDP growth of 5% from 2005 to 2012. But miserably for any country that depends on oil as revenue such as Russia and Venezuela, price dropped below 45$ a barrel in 2015! As a reaction, growth slowed in 2013 to about 1 percent, and start decreasing since then.(Venezuela, 2014)

Price controls combined with low oil prices led to a depreciation of the Bolivar Value against other currencies, what makes foreign goods and services very expensive for the domestics.  But would that be enough to create the new standing in line phenomena in this country? Venezuela’s people are standing all day in a line, waiting their turn to the supermarket. Some might call it misery, but unemployed Venezuelans are calling it a new profession. It is very true that many unemployment people in that country are taking advantage of this shortage situation just by waiting in line for couple of hours, buying some scarce resources, selling it in the black market; repeating this procedure couple of times a day and the result is a stress-free well paid job.