by Clifton Ross
In the currency market the difference between the official value of the bolívar, set by the government, and the market rate, that is, what people in the real world of buying and selling with that very currency determine its value to be, began to diverge early on. But with increased state expenditures, especially on social and development programs so crucial to keeping Chávez and his people in power, the government financed its overspending (“monetized debt”), by essentially taking over Venezuela’s Central Bank and running the money-printing presses 24–7 to cover those internal obligations. The Venezuelan Central Bank, for instance, increased money supply by 70% in the year from November 2012 to November 2013 and has since then continued a similar policy,22 essentially guaranteeing inflation and inducing hyperinflation.23 By early 2016 the government would effectively double the money supply with an order of 10 billion bolívar notes (adding to a late 2015 order of 5 billion notes). By then not even those bills would be produced in the country: They would be printed outside, and flown into Venezuela on some three dozen 727 cargo planes. This mountain of money would surely “stoke inflation,” which, in 2016, economists agree would be at least 720%.24 Such monetary policies have resulted in a dramatic loss of wealth to inflation for Venezuelans: since 1999 when Chávez came to power, combined inflation has been an estimated 34,258%.25
At the same time the government relied heavily on price controls to keep inflation down, but in a context of constantly increasing money supply, with decreasing success. In other words, Chávez and Maduro both seemed to believe that by decree they could win a war against the “law of supply and demand.” They didn’t need an economist to tell them that if you increase the money supply, and decrease the supply of commodities (by restricting your imports to save your foreign currency, for instance) you’ll have both inflation and scarcity.
Scarcity was further exacerbated when those price-controlled items increasingly became attractive as contraband to be sold at market prices across porous borders. But of course there were also ways to make those same commodities magically reappear in disguised form as commodities without price controls. Rice, for instance, was a price-controlled item, but flavored rice wasn’t.
But price controls also led to scarcity by destroying national production. As inflation hit the prices of non-controlled items related to production like insecticides, fertilizers, tractor, or factory parts, inputs for manufacturing, etc. it increased the costs of production beyond the controlled price of the commodity. Gradually, farmers, manufacturers, industrialists, small craftsmen, and all other productive members of the economy found they couldn’t afford to produce rice, corn, milk, cheese, or just about anything that was under price controls. As a result, Venezuela began to rely even more heavily on imported products. When it costs twice as much to raise chickens as you can [legally] sell them for in the market, due to price controls, it becomes more profitable to traffic them. As one Venezuelan complained to me, “they import chicken from Brazil and subsidize it so that the price is lower in Venezuela than it is in Brazil. So it’s no surprise, then, that this food then becomes contraband, sometimes returning to its country of origin to compete as a lower-priced ‘import.’” You could find it all in Cúcuta, for instance, feeding the thriving black, gray, and legal markets with corn, coffee, rice, and anything else you might want.
There was another element to the growing scarcity, besides trafficking goods out of the country, “disguising” price controlled items, and overpriced inputs that destroyed national production. Currency control effectively centralized control of imports and put it all in the hands of the government. Let’s say, a manufacturer needs screws to make widgets, and those screws are no longer being made in Venezuela because the screw manufacturer can’t compete with cheaper screws imported from Colombia. So the widget maker also needs to import screws. But he can’t pay the Colombian manufacturer in bolívares (bs.) since international transactions have to be made in the reserve currency of the world (US dollars) or, in this case, Colombian pesos. But with currency controls, he has only two options: either he can change his bs. on the black market, where the screws would cost him an arm and a leg, buying dollars at well over 1000 bs.; or he can try to get dollars through the government at 10 bs. to the dollar (or the SIMADI, another official rate, at 400 bs. to the dollar). Either way, he now stands before the gates to two parallel hells. The process of getting dollars from the government has a distinctly Kafkaesque quality, and it’s far from guaranteed that, after submitting all the forms with dotted “i”s and crossed “t”s, that the government will approve your request.26 And even with the approval, it might take a very long time to receive the money. Meanwhile, production could come to a full stop, making it necessary for the country to look elsewhere for widgets. They could, after all, be imported… and probably at a lower price! But to import them, the widget importer would need foreign exchange to pay for the widgets.
If you have a direct line to the government or if, for instance, you happen to be in the PSUV, or know someone in government, or you’re an important person, this whole process suddenly can become very simple, and very easy. In that case, the approval, and timely delivery of your dollars are suddenly streamlined and practically guaranteed.
And so while price controls, especially when managed by a corrupt and incompetent government, became a convoluted way of “solving problems” that resulted in exacerbating them, currency controls became the “seedbed for corruption in the country” which has been used as “an assault mechanism on the public treasury for the benefit of a few.”27 That is to say, the corrupt officials who had surrounded Chávez all those years, were invested in keeping the currency controls so as to make their huge fortunes with shell companies, or by one of many “import-export” schemes.28 As the discrepancy between the black market and the official rate grew, so did currency arbitrage, that is, the buying of money at one rate (as of February 2016, 10 bs to $1), and selling it at another (over 1000 bs. to $1).29
It’s common knowledge in Venezuela that this is a problem rampant among the Chavista hierarchy, the military and Bolivarian-connected (“enchufados”) business people privileged to get cheap dollars. Fitting that profile to a “T” was long-time “Number Two” in the government, Diosdado Cabello—a military man of the Chavista hierarchy with many businesses. Diosdado was fingered by none other than rojo rojito (redder than red) Chavista talk-show host Mario Silva in a private conversation Silva had with a Cuban intelligence agent, later obtained and released by the opposition.30 Among Cabello’s many lucrative activities, is alleged to be drug trafficking, which is increasingly taking up the slack for the government’s need for foreign exchange as oil prices drop.31
Although the possibility of a family dynasty in Venezuela was complicated by the early death of Hugo Chávez, his family and associates have their fingerprints on all the goods of the country—including suitcases full of cocaine shipped through the country.32 Drug traffickers connected to the present First Family gain access to hangars reserved for government officials; their pilots are active duty military, and they’re given diplomatic passports to carry out their work.33 In Chávez’s place is his handpicked successor, Nicolás Maduro and his wife, Cilia Flores (both of whom have moved their family members into positions of power), while former Vice President Jorge Arreaza, is Chávez’s (ex) son-in-law, formerly married to Rosa Virginia Chávez. But it’s really her younger sister who was closest to daddy President, María Gabriela Chávez, and reputed to be the wealthiest person in Venezuela with a net value of US $4.2 billion.34 María Gabriela, who filled in as ersatz First Lady until her father’s death, is known in Venezuela as “the Rice Queen,” since she has been “accused of pocketing illicit income by overpricing Argentine rice imports at a time when food shortages are rampant in Venezuela.35 There is speculation that this was the reason she was made Venezuela’s deputy permanent representative to the UN, to give her immunity from prosecution in the case. Brothers, cousins, and a coterie of friends of th
e “Comandante Eterno” still occupy other posts and no doubt the case of María Gabriela offer them encouragement to follow in her footsteps to success, given that the risks to those associated with the Chávez family name are few, and the currency controls can be worked any number of ways to almost guarantee jackpot winnings.
Honest Chavistas, including Felipe Pérez Martí, former Minister of Chávez who actually helped design the currency controls, now argue against them. Martí says that the “controls are designed for the corrupt” politicians. Nicmer Evans, one of Chavismo’s most astute and serious intellectuals and member of the left opposition, Marea Socialista, claims some $259 billion has been taken out of the country through the controls themselves, facilitated by the Bolivarian bureaucracy (Boligarchs) and their favored (Bolivarian) capitalists.36 Chávez’s former economic minister Jorge Giordani and former minister Héctor Navarro quibble with Evans on the number: they put the money gone “missing” at $300 billion dollars, or roughly a third of all the money Venezuela took in over the course of the decade-long oil boom.37 If any explanation is needed for the troubles Venezuela faces today, and will surely face for many more years, one need look no further than the currency controls and the way it has enabled the Boligarchy to strip the nation of its wealth.
In this dysfunctional economy where the elite has decreed a system of robbery for itself, those without access to dollars have been forced to make their living working the price controls in contraband and smuggling of goods, or by becoming “rent chasers,” getting scholarships or grants from studying or otherwise engaging in government social programs.
As if all this were not enough, in addition to the many minor factors contributing to the destruction of Venezuela under the Bolivarians there were two major factors which we might mention here: Nationalization of industries and massive borrowing—and the two issues are often intimately connected.
Nationalization isn’t necessarily a bad move, depending on the enterprise, how it’s carried out, and administered, and other factors. However, in Venezuela, with a government so rife with corruption, riddled with cronyism, and basically inept, the nationalizations of industry have been an unqualified catastrophe. One could select any example to demonstrate the case, but PDVSA stands out both for its importance to the country in obtaining dollars and for its symbolic status as representing Venezuela to the world.
That Venezuela now is forced to import oil and gas and that PDVSA’s output has dropped at a rate of 3 to 4% per year during the years of the oil boom only hint at the gravity of the problems the nation’s most important company faces. The debt the company has accrued precisely during the oil boom itself is a slightly better indicator of the depths of decay to which this once stellar international actor has fallen. The company now teeters on the edge of bankruptcy due to enormous debts that Chávez and Maduro took out to fund social programs they knew would win them reelection.38 In 2014, when the government was still releasing economic information, debts then totaled some $43.8 billion.39 Summing up the situation of PDVSA, Venezuelan economist José Toro Hardy said “we’re not producing the gasoline that we need. Crude oil drilling plants are not operating, and we’re importing crude oil to be able to meet international deals … PDVSA is the example of a true disaster.”40
While other oil-producing countries like Norway, Saudi Arabia, and even Trinidad and Tobago were putting money in the bank for the rainy day when oil prices would tank, Chávez was spending wildly on clients at home and abroad, shoring up his loyalty with petro-dollars. And when oil prices dropped, Venezuela’s bank accounts were not only empty, but in deep red: rojo-rojito red.41
PDVSA’s biggest debt is to bondholders, but Chevron (at $2 billion) and Chinese loans ($7 billion) are also outstanding. And to simply service the debt in 2016 and make the $5.2 billion debt payments42 with oil prices around $30/barrel is going to require around 90% of what the country takes in from oil sales,43 leaving only 10% of the petro-dollars to run the country and buy the needed imports. Since oil exports now account for somewhere between 95–98% of all export earnings (up from 70% when Chávez came to power), the government is increasingly relying on taxes to maintain its domestic obligations, including the feeding of its citizens.
And that brings us back to the problem of scarcity, which is directly tied to the massive debt obligations of the government and its prioritization of debt payments over the welfare of its people. The Bolivarian government by 2013 began saving its dwindling foreign currency reserves to pay Wall Street bond-holders rather than making that money available for necessary imports, and in the process, worsened the scarcity of basic necessities in Venezuela, especially medicines.44 As Venezuelan economist Ricardo Hausmann put it, the fact that Maduro’s “administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude. It is a signal of its moral bankruptcy.”45 It’s ironic and even comic that an elite economist would find it incumbent on himself to make such a statement to a “worker” president like Nicolas Maduro. Maduro’s response, in turn, would be reminiscent of that of the Queen of Hearts in Alice in Wonderland.46
February 17, 2016 Maduro took five hours airtime to announce a few minor economic changes that amounted to a devaluation, wage and price adjustments, but nothing that would seriously address the nation’s economic problems. Rather than taking responsibility and much-needed steps toward a functional economy, such as removing currency and price controls, he used his air time to continue pushing the narrative that Venezuela was fighting an “economic war:” he blamed a news aggregator website, Dolar Today, for the country’s “induced” inflation, national capitalists, smugglers, and hoarders for the scarcity of food, and the United States for the low price of oil. Meanwhile, earlier the same day, Alfonso Riera, vice president of the National Council of Commerce and Services (Consecomercio) had called for an end to the currency and price controls, saying that in some regions of Venezuela 20–40% of businesses had permanently closed this year—that is, in the first six weeks of 2016. Riera went on to point out that six of ten jobs in the country are in commerce.47
Chapter Twenty-One: Chronicle of a Suicide Foretold
In the years just before his death, Chávez had already begun to lose his electoral edge, which was the major reason for throwing the country into debt as he tried to continue and expand his policies of patronage and maintain an advantage in the elections.1 This spending reached “extreme levels,” according to Chávez’s own Minister of Planning, Jorge Giordani, in the lead-up to the elections of October 2012.2 When the electoral competitiveness of the Bolivarian/Chavista movement was further damaged as it lost the physical presence of its symbol and leader, there was nothing left for Chávez’s handpicked successor to lean on but the use of force.3
Nevertheless, Nicolás Maduro still had one electoral card to play in the pending December 8, 2013 mayoral elections, and that was his ability to pillage a still relatively intact private sector. In these crucial elections, economic problems and a limited budget to entice Chavistas to vote, polls signaled potentially big losses for the Bolivarians. Nevertheless, despite bad poll numbers just a month before, the PSUV pulled forward in the end with a six-point lead over the opposition. The victory, according to the Economist, could be attributed to “the efficiency of the government’s electoral machine and to its lack of scruples in employing all the resources of the state for partisan advantage.” The Economist article went on to say that “Vicente Díaz, the only opposition-leaning member of the five-strong board of the National Electoral Council (CNE), said this was the most unfair election in modern Venezuelan history. With the government’s grip on radio and TV now almost complete, the opposition was rendered virtually invisible in media terms.”4
But there was another reason for the victory of the Bolivarians, and it appears to have been far more significant. Exactly one month before the mayoral elections, Maduro went on the offensive and called on electronics retailers, specifically the Daka chain
, to lower their prices and sell at “just prices.” He ordered the Daka stores to be occupied and that everything be sold, “nothing should be left on the shelves.” Within no time looting occurred all around the country at the Daka chains where, indeed, soon nothing remained on the shelves.
The people lined up around the country at stores that were forced by decree to sell out their stock at “just prices,” in some cases amounting to 77% discounts. It was a brilliant way for a bankrupt populist government to continue its patronage, by privatizing it and making its enemies pay the bill. The fact that, as I wrote at the time, “Maduro was throwing chunks of the business sector to the mobs to tear apart” gave the Bolivarians a leg up on the elections, so they won most of the rural areas, and a majority of the mayoral races, even though the opposition nevertheless consolidated its hold on the major urban centers of the country.5 The “Dakazo,” as it came to be known, had a lasting impact on suppliers and manufacturers of electronics and home appliances: Two years later there was a 95% scarcity in this economic sector.6
But the discontent was building, especially after the January 6, 2014 murder of beauty queen (Miss Venezuela 2004) actress and model, Monica Spear, and her ex-husband, by a band of malandros (gang-bangers). Maduro’s response to the murders was viewed as inadequate (he blamed telenovelas for their deaths) and it left many outraged. The murders touched a nerve in Venezuela because, in addition to the economic disaster, Venezuelans are extremely disturbed by the escalation of violent crime in the country. In this fifth most violent country in the world (and second only to Honduras in the Americas), the government has been seen as doing nothing to stop the violence that has increased dramatically since the Bolivarians came to power.7 To cover up the gravity of the problem, the government quit keeping statistics on the murder rate in 2003, but the number ranges between the official (as of February 2016) number of 18,000 per year (or 58 per 100,000) and nearly 28,000 (or 91 per 100,000).8 Either way, Venezuelans put “insecurity” as their top concern, and Gallup ranked Venezuela the most insecure country in the world in 2013.9