Venezuela’s Struggle Towards Economic Stability

“Henceforth, $20 bills will be sold here for $1.”

In Francisco Toro and Dorothy Kronick’s article “Venezuela’s Currency Crisis” (New York Times), they make light of the backwards economy that has plagued Venezuela for the past 12 years. President Hugo Chávez imposed currency controls in 2003 that were ment to control inflation and postpone the demise of the Venezuelan currency (bolívar). Post-currency control evolved into a tiered system that sold the government’s “oil dollars” at three different official prices; while hard-currency dollars were bought at a higher price on the black market.

This system “gives rise to a mind-bending tangle of economic distortions”, and adds incentive for Venezuelans to trade in black-market currency (cheap dollars), rather than bring in goods. By doing this, it creates an imbalance. For example, a new Toyota Corolla is worth roughly $300,000 (1.9 mil bolívars), but if one was trading in black-market currency, that same Corolla would cost about $7,200. So, theoretically speaking, if one had a $100 bill traded at black market rate one could buy enough gasoline in Venezuela to “drive a Hummer around the world 28 times”.

With this imbalance comes devastating hyperinflation. Hyperinflation, in the words of Micheal K. Salemi, “is generally a term that economists use to describe episodes when the monthly inflation rate is greater than 50 percent. At a monthly rate of 50 percent. [Therefore] an item that cost $1 on January 1 would cost $130 on January 1 of the following year.” For the past couple weeks, the bolívar’s worth has been falling at rapid rates, which has evoked some fear from the Venezuelan government. This sort of hyperinflation has rarely been seen in Latin America, the last recorded incident was at the turn of the century.

Similar to the Venezuelan economy, Greece has also been experiencing some detramental economic downfalls. However, unlike Greece, “which simply doesn’t have the money to pay its debts”, Venezuela’s economic decline is completly self-induced. According to Kronick and Toro, the “solution to Venezuela’s disaster is a desk reform well within President Nicolás Maduro’s power: Just stop handing out twenties for a buck.”

A simple step in the right direction for Venezuela could dissolve a sizable portion of its enormous budget deficit, because the government would attain more local currency for every barrel of oil that was sold according to economist Francisco R. Rodriguez. This move would lower inflation because there would be no need to print excess bolívars in order to operate as a state, and importers would no longer feel the urge to attain cheap dollars and instead would buy imported goods which would assist the economy tremendously.

Even Harvard Professor Ricardo Hausmann, whos ideas have clashed with that of Mr. Rodriguez’s, agrees that “unifying the exchange rate would be an important first step in reform”. He goes on to say that “[Venezuela] has the most ridiculous exchange-rate differential ever in the history of mankind,”

The question therin would be ‘why doesn’t Mr. Maduro do something?’ While Maduro (elected in 2013) takes his time on taking action, the multible exchange rate system currently in place is begetting police-state activity. As discontent within the state escalates, the struggling government is becoming paranoid in that they are jumping to persecute even the slightest protest or discontent. For example, in January, the Venezuelan police detained an student “activist” named Daniel M. Yabrudy and his collegues for distributing water and coffee who were in line at a supermarket (Caracus) to purchase food. The student’s “mistake” was the cups in which the goods were distributed. The cups read “Don’t get used to this, we can live better.”

Venezuala has taken steps to improve its system, but to no noticable avail. Dominated by the oil trade, its methods of statecraft have rested predominately on the sole value of oil in the international marketplace. This single-minded material interest could prove dangerous if oil prices continue to drop world-wide. The U.S, China, Germany, and other importers benefit from this decline in oil price, however, economies such as the Venezualan, Nigerian, Russian, and Iranian’s suffer because they are the producers and exporters of this resource. This causes falling exports, which leads to inflation and eventually rising rates. By being domesically forced to improve its economic system, and internationally pushed to lower its crude oil output, Venezuela also creates environmental challenges.

In reviewing the current Venezuelan crisis over the bolívar in the black-market place, in everyday life, and dipping a toe into the vast and complex international networking complexities of the crude oil marketplace, it’s clearly seen that Hugo Chávez’s currency control plan in 2003 did not pan out as planned; therefore, new action needs to be taken to ensure the stability of the bolívar in the domestic and international marketplace. The questions that remains then, would be; how will President Nicolas Maduro act on this matter? Will he succeed? Would it be wise to add a select council of economists to the Venezuelan cabinet? Furthermore, is now the right time to take action?

 

 

SOURCES:

1] Venezuela’s Currency Circus by FRANCISCO TORO and DOROTHY KRONICK. MARCH 6, 2015. New York Times.

http://www.nytimes.com/2015/03/07/opinion/francisco-toro-dorothy-kronick-venezuelas-currency-  circus.html?rref=world/americas&module=Ribbon&version=context&region=He            ader&action=click&contentCollection=Americas&pgtype=article

 

2] Venezuela – New York Times:

http://topics.nytimes.com/top/news/international/countriesandterritories/venezuela            /index.html

 

3] Micheal K. Salemi. “Hyperinflation”. The Consise Encyclopedia of Economics. Library of Economics and Liberty. Web. March 10th, 2015.

http://www.econlib.org/library/Enc/Hyperinflation.html

 

4] Fidelity Investements – Oil. Web. March 10th, 2015.

https://www.fidelity.com/viewpoints/investing-ideas/oil-spillover

 

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s