Venezuela: making the Great Depression look like a mild recession

Venezuela: making the Great Depression look like a mild recession
© Getty Images

Imagine going to a restaurant for a relaxed dinner, only to find that when your bill comes, it reflects higher prices than those you saw on the menu two hours before.

Sound far-fetched? Not in the economic basket case called Venezuela.

The International Monetary Fund projected this week that Venezuela’s hyperinflation will soar to 13,000 percent this year, from an estimated 2,400 percent last year. That means prices, on average, will go up by almost 1.5 percent every hour.

ADVERTISEMENT

Incredibly, the IMF may be understating the crisis. Bloomberg’s clever “Café Con Leche Index” tracks the price of a coffee drink many Venezuelans drink daily. Over the past three months, the cost has risen from 5,500 bolivars to 45,000, putting this informal measure of the inflation rate at an annualized pace of 448,025 percent.

 

At that rate, you better spend as fast as you can, because prices tomorrow will be 11 times what they were today. Buying anything is better than keeping your money because its value disappears by the hour. The ensuing surge in demand for goods, any goods, even those you don’t need, fuel the hyperinflationary cycle further.

An alternative is to buy hard currencies, if you can get them. If you can, you better do it fast. When I started writing this column yesterday, you needed 263,000 bolivars to buy a U.S. dollar on the parallel market. Friday, the black-market rate was at 266,300. By Monday, it will probably be 270,000.

Hannah Dreier, who worked for years as a reporter for the Associated Press in Venezuela, describes how she paid 500,000 bolivars a month for a very nice Caracas apartment last summer and how that sum would only buy her a pack of toilet paper today.

When the Venezuelan dictator, Nicolas Maduro, raised the minimum wage by 40 percent as a year-end gift to workers, he didn’t tell them that by the time they got the raise, inflation would have erased any benefit. And, even factoring in food tickets, minimum-wage earners (a large percentage of the population) take home less than $3 a month at the current exchange rates.

That is likely the world’s lowest minimum wage. For perspective, it is less than half what the average worker earned in Cuba in the 1990s when it was emerging from its “special period,” the dramatic economic decline that followed the loss of Soviet subsidies.

The double whammy of ever-accelerating inflation and the rapidly depreciating currency has turned Venezuela into a pauper state, where more than 80 percent of people live below the poverty line, food is so scarce that few can have three meals a day, and even the most basic medicines are unavailable. So much so, former Major League Baseball pitcher Marcos Carvajal died this week of easily-treatable pneumonia. He was only 34 years old.

If IMF forecasts are accurate, the Venezuelan economy will contract another 15 percent this year. That means half of the country’s economy will have disappeared in four years, making the Great Depression seem like a mild recession. No country in the Americas or Western Europe has come close to suffering an economic calamity like this.

This is happening in a country that has the world’s largest proven oil reserves and eighth biggest natural gas reserves. A generation ago, Venezuela was Latin America’s richest country. In 1970, it was among the world’s 20 richest.

Blame lies squarely on the shoulders of former president Hugo Chavez, his successor Maduro and their “Chavista” movement, which have turned Venezuela into a totalitarian, socialist and kleptocratic state. Sure, the decline in oil prices over the past few years hurt, but no other major oil producer has seen economic consequences on a scale remotely comparable to Venezuela.

The reasons are many. First, Chavez and his followers waged war on the private sector. They expropriated and confiscated businesses, factories and farms by the thousands and bankrupted most of them.

Second, Chavez devastated the goose that laid the golden egg, Venezuela’s oil industry. Looking to cement power in 2003 after a coup attempt, Chavez fired 18,000 employees of PDVSA, the state-oil company, almost half its work force and most of its competent managers.

He then doubled down and didn’t reinvest in oil infrastructure. The result is that Venezuela’s oil industry is in a death spiral, producing barely half of what it did when Chavez took power in 1999. In fact, the continuing decline in Venezuelan oil exports is among the factors that are expected to prop up oil prices in 2018.

Third, Chavez squandered the record oil revenues reaped by Venezuela during his 14 years in office. Instead of diversifying the economy, Venezuela is much more dependent on oil than it was in 1999. He and his band of thieves also liberally stole from the Venezuelan treasury.

A former Chavez minister has estimated Chavistas lined their pockets with $300 billion dollars in a decade. Making matters worse, they put no money aside for leaner years. Instead, they borrowed heavily, sextupling Venezuela’s foreign debt and making it the world’s most indebted country, in relative terms.

Fourth, price controls and other arbitrary economic measures have led to predictable shortages. Last week, the country’s vice president (who’s been designated as a drug kingpin by the U.S. Treasury Department) asked two of the few remaining multinationals in Venezuela to lower their prices. He also announced shops would have to drop their prices to December levels.

Think of the fate of a hypothetical shopkeeper who sold milk in December for $1 after buying it wholesale for $.75. A month later, in the face of hyperinflation, where prices of goods have gone up at least 200 percent, it now costs the shopkeeper $2.25 to buy the milk, but the government is asking it be sold for $1. What would any sane person do? Obviously, not buy and sell milk.

Finally, the Chavistas have destroyed the Venezuelan economy with complex currency controls that began in 2003 to stem capital flight. Multiple devaluations have followed, reaching the point where most Venezuelan bills are worth no more than Monopoly money.

When Venezuelan President Carlos Andres Perez was impeached in 1993 for embezzling $250 million bolivars, that amounted to tens of millions of dollars. Today, at the black-market exchange rate and taking into account a 1-to-1000 revaluation in 2008, those bolivars would amount to less than $1. I can see a mystified student asking why a president was jailed for stealing pocket change.

The end result is a crisis like no other this hemisphere has faced. The economic chaos, combined with a political and institutional crisis of comparable magnitude, have turned Venezuela into a failed state. Regional and international leadership has failed to coalesce and put pressure on the Chavistas to exit.

But, even after they’re gone, the world, and especially the Americas, must be prepared to initiate a “Marshall Plan” for Venezuela. Nothing less will be enough.

Antonio Mora (@AMoraTV) is the editor-in-chief of NewsandNews.com and a lecturer at the University of Miami School of Communication. He is a former news anchor for "Good Morning America" and a former host of Al Jazeera America's primetime international news hour. He is both a Venezuelan and American lawyer who appears regularly on television as a Venezuelan-affairs analyst.