OUGD603 - Research Brief - The Venezuela crisis

OUGD603

Research Brief

The Venezuela crisis

https://www.youtube.com/watch?v=S1gUR8wM5vA&t=375s

 Venezuela was once the richest country in Latin America. It has the largest known oil reserves in the world and its democratic government was once praised worldwide.  But today, Venezuela's democratic institutions and its economy are in shambles. The country has the highest inflation in the world, making food and medicine inaccessible to most Venezuelans. In 2012 inflation rates were at 19%, currently, it is at 946%. Over the last four years, its GDP has fallen 35%, which is a sharper drop than the one seen during the Great Depression in the US. The country's murder rate has surpassed that of the most dangerous cities in the world. These conditions have sparked months of protests against the president, Nicolas Maduro. The country has become measurably worse since his election in 2013. A poll showed that about 80% of Venezuelans want Maduro removed from office. But instead, Maduro has consolidated his power bringing the country closer to authoritarian rule.

Maduro's political ambition became evident in December 2015. Two years after he became president, a coalition of opposition parties called the Democratic Unity Roundtable or MUD, won a two-thirds majority in the National Assembly, putting Maduro's rule at risk. IN response, Maduro quickly forced out several Supreme Court justices and filled the positions people loyal to him. In March 2016, the court rules to strip the opposition-led National Assembly of its powers - a move that sparked massive protests across the country. The ruling was reversed a few days later, but the damage was done - protests continued to grow and have left about 100 dead and thousands injured so far. Despite the violence and public outcry, Maduro held a vote in July to elect a new governing body called the National Constituent Assembly, which would have the power to rewrite Venezuela's constitution and replace the National Assembly and leave virtually no opposition to Maduro's rule.

30th July 2017 - Day of the Vote.

With Maduro's recent vote, Venezuelans didn't have a say in whether the assembly should exist. They only had the option to elect its members. But when Maduro's predecessor, Hugo Chavez proposed a constitutional rewrite in 1999, he first called for a referendum to propose the election of the assembly. After most Venezuelans voted yes, they elected a new National Constituent Assembly. Unlike Maduro, Chavez was a charismatic and beloved leader. He blamed government corruption and Venezuela's elite for economic inequality. His populist message resonated with the country's poor who eventually helped bring him to power. The key moment in his presidency came in 2004 when oil prices surged. Venezuela's petroleum-dependent economy started booming and Chavez went on to spend billions from the profits on social welfare programmes for the poor. He subsidised food, improved the educational system, built an enviable healthcare system and reduced poverty by more than half.
In order to be re-elected, he needed to keep millions of poor Venezuelans happy. So he rigged the economy to do that. He didn't scale back Venezuela's dependence on oil and his unrestrained spending led to a growing deficit. which meant all of these programmes would be impossible to sustain if oil prices fell. After Chavez's death, when Maduro took office as his handpicked successor, that's exactly what happened. Oil prices plummeted in 2014 and Maduro failed to adjust. Hyperinflation has made medicines and food, that was once subsidised, unaffordable for Venezuela's poor, who now make up about 82% of the population. Like Chavez, Maduro has also rigged the economy to keep himself in power, but this time it's not benefiting the poor. He's exploited a complex currency system, put in place by Chavez. Maduro set the official exchange rate at 10 bolivars per US dollar. But only his friends and allies have access to this rate. In reality, the Venezuelan currency has become basically worthless. Most Venezuelans get their dollars on the black market, where the rate is about 12,000 bolivar per dollar. The military which got complete control of the food supply from Maduro in 2016, is reportedly profiting off this currency crisis. They import food at Maduro's special currency rate and sell it on the black market for a massive profit. So for military generals and political allies, the crisis has offered a lucrative opportunity which has helped Maduro stay in power.

Maduro's recent power grab:
The opposition boycotted the vote, but Maduro held the vote for the new constitutional assembly anyway and won a majority. Maduro's government is trying to create the illusion of public support. The government claimed about 8 million people or 40% of the country voted. But experts put that number much lower, at just 3 million. The international community including Peru, Canada, Spain, Mexico and Argentina condemned the election. The US imposed financial sanctions on Maduro and members of his government. But Maduro's assembly, filled with loyalists, convened anyway and it swiftly removed attorney general Luisa Ortega, leader of the opposition.

What is hyperinflation?
https://www.youtube.com/watch?v=ah9i3R9pRpg
Hyperinflation is the very high, rapid and continuos inflation. In hyperinflation situations, the prices of goods and servises in an economy quickly rise to a level so high they become difficult for most people to afford.
ecconimist Michael K. Salemi states that hyperinflation is generally used to describe episodes when the monthly inflation rate is greater than 50%. The hyperinflation in Venezuela is significantly more than the rate cited by Sameni. According to an August 2018 BBC article, prices of goods "have been doubling every 26 days. The anual inflation rate reached 83,000% in July 2018.
The problem comes when the supply of paper money in an economy outstrips demand for goods and services, causing the value of the currency to fall. Venezuela turned to increasing its money supply because it had no other means to pay its debts.

Factors that lead to hyperinflation in Venezuela:
1)high government spending 
The previous president, Chavez, overspent on social programmes. These worked to an extent as it reduced poverty and unemployment rates. However, it resulted in public spending accounting for more than 50% of Venezuela's GDP in 2012. Chavez borrowed money from other coutries to fund the programmes and their foreign debt reached over 106 Billion dollars by 2013. But Chavez continued with these programmes as they won over the people and allowed him to maintain his power. Chavez and his administration failed to save money for future economic crises.

2) Low Oil Prices
Venezuela's economy is mainly based on selling oil. They have the largest oil reserves in the world. Over 50% of its current GDP is derived from petroleum exports, which represents about 95% of total exports. When oil prices where high, life was good, Venezuela was considered rich. It produced more than 10% of the worlds crude. When oil prices dropped life was bad. In 2014 the price of pil dropped sharply from $100 to about $70 a barrel, by 2016 a barrel was worth $33. This slump sent Venezuela into an economic downward spiral. the lower oil prices reduced Venezuela's foreign reseves, this in turn reduced the governments ability to subsidise basic goods and services.

3) Continued Economic Mismanagement
Maduro (Chavez's successor) dealt with the budget gap the way other countries in similar situations did in the past when they had no other way to pay their debts - print more money. This set the wheels in motion for hyperinflation. The budget shortfall was closed by printing more money. Hyperinflation took hold, destroying the savings of individuals and making productive business investment nearly impossible.
Hyperinfaltion continues under Maduro because he is continuing the disastrous economic policies of the late President Chavez.
Maduro refuses to recognise the countries hyperinflation.
Maduro monetary reforms:
1) slash five zeros from prices - and give the currency a different name 'sovereign bolivar'
2) devalue the curency by 95%
3) peg the bolivar to the Petro, Venezuela's digital currency backed by oil introduced in February 2018.

He will then 'hike' the minimum wage by over 3000%, boost the corporate tax rate and increase highly-subsidised gas prices. Experts are cynical these measures will work as they dont adress the problems that caused hyperinflation in the first place. PIIE argues that there is no substantial fiscal reform in the works, no attempt to rebuild dismantled institutions and no announced shifts in economic policymaking.

nearly 2 million people have fled Venezuela since 2015

Further reading:
Times articles - 'In Venezuela, Good Times are Going' (1973). 'Democracy in Venezuela' (1973), Democracy, as Usual, in Caracas.' (1983)
Consumer Price Index?
Gross domestic product per capita?
Maduro's approval ratings. DatAnalysis
Maduro Decrees Venezuelans Will Write New Constitution. (May 1, 2017)
Hugo Chavez
Oil Prices
Venezuela poverty rate
Venezuelan currency rates. CATO institute.
Violence and Claims of Fraud in Venezuela's Controversial Vote. (the Atlantic)
Venezuela Reported False Election Turnout, Voting Company Says. (the new york times)
Venezuela's shameless and colossal vote-rigging. (the economist)
Venezuela called 'dictatorship' by Peru, condemned by new bloc (Reuters)
The US imposes sanctions on Venezuelan leader Nicolas Maduro (BBC)
Attorney general Luisa Ortega
New Venezuelan assembly outs attorney general Ortega (CNN)


Taking it back to the beginning

What is money?
https://www.youtube.com/watch?v=-nZkP2b-4vo

Before the development of a medium of exchange – i.e., money – people would barter to obtain the goods and services they needed. Two individuals, each possessing some goods the other wanted, would enter into an agreement to trade.

This early form of barter, however, does not provide the transferability and divisibility that makes trading efficient. For instance, if you have cows but need bananas, you must find someone who not only has bananas but also the desire for meat. What if you find someone who has the need for meat but no bananas and can only offer you bunnies? To get your meat, he or she must find someone who has bananas and wants bunnies...and so on.

Even if you find someone with whom to trade meat for bananas, you may not think a bunch of them is worth a whole cow. You would then have to devise a way to divide your cow (a messy business) and determine how many bananas you are willing to take for certain parts of your cow.

To solve these problems came commodity money, a type of good that functions as currency. In the 17th and early 18th centuries, for example, American colonialists used beaver pelts and dried corn in transactions; possessing generally accepted values, these commodities were used to buy and sell other things. The kinds of commodities used for trade had certain characteristics: They were widely desired, and therefore valuable, but they were also durable, portable and easily storable.

as trade increased through the centuries, commodity money such as gold and silver was used in most countries. In the 16th century, goldsmiths began storing gold coins for customers and issuing them with receipts, which could be converted back into gold on demand.

The concept of money
Intersubjectivity

other examples of hyperinflation
Yugoslavia - 1994
Zimbabwe - 2008

The Petro

Profiles 
Chavez
Maduro
Juan Guaidó


I began my research project by looking at the Venezuela crisis, however, the topic is so vast and in-depth that I am struggling to cover all bases and am worried that this will result in a shallow and unconsidered outcome. Instead, I will investigate another topic.