For some time I have been fascinated with the economic/political situation in Venezuela. The country for years has lived under a socialist regime which I believe has lead to a major decline in the standard of living (and unfortunately the death of many people). Recent stories about the situation in Venezuela made me want to write this blog post. If you examine the history of Venezuela you will find that the country has never embraced capitalism or free markets. This mindset will continue to drive the country off a financial cliff and ultimately will have disastrous consequences.
Venezuela has a history of not having its act together. In 1875, the finance minister said "Venezuela does not know to whom it owes money and how much. Our books are 20 years behind". During the 1970's Venezuela saw a large increase in the revenue from oil. It was at this time that President Carlos Perez instituted the "The Great Venezuela". The program spent $2 billion and lead to corruption and the state ended up owning 300 companies (none of which made any money). By 1997, it was estimated that Venezuela had blown through $100 billion in oil revenue in the previous 25 years (this makes trust fund kids look frugal). In December 1998 Hugo Chavez was elected president of Venezuela. The economic freedom after Chavez took office declined dramatically as can be seen in this graph. However, this is despite the fact that the country under Chavez brought in $700 billion of revenue (most of this was redistributed to social programs) Like any politician he promised to improve the current situation (fighting poverty, eliminate corruption, and keep the country safe). As Chavez took over the debt increased from $22 billion to $70 billion. The debt situation now is so bad that the country is shipping gold instead of paying cash for debt payments. In 2016, the country will have to pay back $10 billion in debt. Venezuela also became one of the most dangerous countries as well with a murder rate of 82 homicides per 100,000 inhabitants (for comparison U.S. is about 5 per 100,000). No one with a brain even goes out at night in Venezuela. What is even worse is 98% of the crimes in Venezuela don't result in prosecution. After Chavez passed away in 2013 Nicolas Maduro took over. The country recently ranked #1 on the Misery Index. The country also has a low Freedom Index score as well.
The modern day situation of Venezuela is pretty grim. Price controls of many goods have led to shortages nationwide. The country has had shortages of food, medicine, power (the country tried to have their own day light savings time to reduce the amount of energy consumed-I doubt this will work), dirty water, even shortage of tampons! Currently 80% of the people of Venezuela are below the poverty line. As you can see in the pictures there are stores with empty and bare shelves (symptom of price controls). Some people have used cooking oil to pay doctors. Food shortages have reached 85% and medicine 96%. This YouTube video shows how social media is used to basic goods (the same goods are available at any small convenience store in the United States). What would Americans do if this happened?
The government of course blames "greedy companies" for all its problems. The country typically takes private property from large companies and uses it to build its own social purposes. However, anyone who has taken basic economics knows that price controls create shortages. The past week people can't even find toilet paper and phone companies are suspending long distance phone calls. The healthcare system is also crumbling. Hugo Chavez promised that healthcare was a right and should be free. Simple drugs like aspirin, antibiotics, and insulin are scarce. Only 36% of the beds in Venezuela hospitals are in operation. People go on to Twitter and Facebook and try to see who has what drugs. Around 70% of people in Venezuela stopped buying basic food because it took too long to find or was too expensive.
The country has seen a step decline in oil revenue from $37 billion in 2014 to only $12 billion in 2015. The country has seen rapid inflation too. The country is expected to have inflation of over 700% this year! Last year the economy shrank almost 6% .The debt rating is CCC from Standard and Poor's (this means the country has a good chance of defaulting on debt in short period of time). This means that if something were to cost $1 in January by the end of the year it would cost over $8.
The solution for Venezuela is a multi step one that won't happen overnight. The first step would be for the people to throw out who is currently in office (currently trying to take place here) and elect people who will not jail political opponents or anyone else who disagrees with them. Current President Maudro claims that "no one is going to kick [him] out". The next step to reform is to enforce property rights and to privatize all the industries that the country owns. Privatization will lead to efficiency, accountability, and more peace (as trade involves the act of voluntarily cooperation). Companies don't want to do business in countries that are run by dictators who can seize their property at any given moment. If property rights were honored companies around the world would come back to Venezuela to do business. The next step would be to end the price controls of nearly every product which would eliminate the shortages of nearly every product. The mix of private property rights, privatization, and eliminating price controls will create competition, more products, and no waiting lines. The country relies on the oil revenue for about 40% of their government revenue. The oil price that Venezuela needs to balance their budget is about $117/barrel (currently as I write this oil is below $40/barrel). Massive trade liberalization (remove trading tariffs/barriers) would invite more trading partners around the world. The country has revenues of about $143 billion (2014 estimate) but spends $204 billion. This path of overspending can't continue forever. Venezuela needs substantial reforms soon before it falls off the cliff. The country is a perfect case of how socialism does not work.
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