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“This can’t go on much longer,” I thought to myself as I waited in line in the tropical heat. Perhaps 30 people were still in front of me, and the supermarket guards were letting people in at sluggish pace that just made me want to groan in exasperation. To kill some time while I waited to buy groceries, I decided to try interviewing someone. I picked a middle aged woman behind me, and asked her how she felt about the lines outside supermarkets, the shortages of consumer goods and the general economic downturn. At first she started slowly, muttering about the state of the country, Venezuela. As she gained momentum, her voice rose, and her sentences became disjointed. By the end of the impromptu interview, she was shrieking hysterically about “Castro-comunismo” and some conspiracy theory about President Nicolas Maduro being a Colombian Cuban spy. After a moment of two, it was just pure rage, directed at everything: the country, the government, the people – everything.

Don’t get me wrong, I certainly understood her frustration. Unlike most international journalists who cover Venezuela, I actually lived in the country long term. I lived in a barrio. My income was minimum wage. I drank my beer on the curb outside a bodega.

Inflation had eaten away my savings, making my weekly trip to the grocery store not only time consuming, but also increasingly expensive. It felt like the country was heading into crisis, and it couldn’t possibly go on much longer.

That was Venezuela two years ago.

People like that woman outside the supermarket blame the government’s socialist ideology for the downturn. Government sympathizers often point the finger at an international conspiracy against Maduro, normally hatched in the halls of power in Washington. In general, the two narratives are either: the USSR in the late 1980s, or Chile in the early 1970s.

Reality is comparably boring. To be sure, socialism has gone a long way towards shaping today’s Venezuela, and the US government would no doubt delight in seeing one of its few regional rivals collapse. Yet in reality, Venezuela’s current economic crisis can mostly be chalked up to one of life’s most dreary technicalities: bad currency management.

The ‘Inflation Depreciation Spiral’

Venezuela has a fixed rate currency, meaning the government sets exchange rates pegged to the US dollar. It’s worth noting there’s nothing socialist about a fixed exchange rate. Countries as diverse as Saudi Arabia and Aruba have fixed rate currencies. However, Venezuela’s currency, the Bolivar Fuerte (BsF) also has one other interesting feature: its distribution is controlled by the government. In Venezuela, you can’t just go to an exchange house and buy currency. You either purchase currency from the government, or you resort to the black market. A decade ago, this arrangement worked well, but today things are different.

In the second half of 2012, Venezuela began to experience unusually high inflation. By unusual, I mean unusual for the Chavez years. Under Maduro’s predecessor, Hugo Chavez, Venezuela’s typically high inflation was kept under control. World Bank data indicates that between 2006 and 2011, annual inflation varied between 13 percent and just over 30 percent. This may sound high, but by Venezuelan standards it’s actually pretty low. The year before Chavez was first elected, 1997, annual inflation was 50 percent. In 1996, it was 99.9 percent. Compared to those figures, Chavez did pretty well.

Graph: Venezuela’s Annual Inflation, Consumer Prices

Yet after over a decade of remaining in check, suddenly inflation began to head upwards in late 2012. This was accompanied by a collapse in the black market value of the BsF. For example, in October 2012, I purchased currency on the black market for around BsF13 to the dollar. Six months later, I got around BsF20 for a dollar.

This was the beginning of what economist Mark Weisbrot has described as an “inflation depreciation spiral”. The basic idea is that people in Venezuela saw inflation go up, so they traded some of their BsF for US dollars on the black market. From an individual perspective, this makes perfect sense to anyone hoping to protect their savings from inflation. The problem was that a lot of Venezuelans did this, which meant the value for the BsF plummeted in the black market. Since many businesses in Venezuela use the black market rate to price imported goods, the collapse in the BsF’s value meant consumer goods became more expensive. This created more inflation, which spurred more Venezuelans to sell their BsF. And so Weisbrot’s “spiral” became self perpetuating.

There’s a few different explanations floating around for why this deadly cycle kicked off. Weisbrot himself has argued it was caused by the government reducing the amount of foreign currency it was selling through its official exchange mechanism, thus pushing up black market demand. Other economists have claimed the government printed too much money in 2012, which is likewise a recipe for inflation. There are other long term factors that also made the currency more vulnerable to instability; the right wing will happily point to low domestic productivity, while the left will undoubtedly note speculation and intentional sabotage. There are elements of truth to both these arguments. Whatever the cause, the government failed to nip the currency problem in the bud. At first, this was mostly due to politics.

There’s Always Something More Important…

In the second half of 2012, the government was totally focused on the October presidential elections. Yet just two months after winning the elections by a landslide, Chavez was hospitalized for cancer treatment. This put his then vice president, Maduro, in charge of the government. As a caretaker, Maduro wasn’t about to mess with the currency controls. When Chavez died in March 2013, the government was again thrust into election mode. Although Maduro won snap presidential elections in 2013, it was by a narrow margin of just 1.5 percent of the vote. At the time, observers across the political spectrum agreed Maduro only just survived because he represented the continuation of Chavez’s legacy. Undoubtedly, this contributed to the Maduro administration’s reluctance to make serious changes to any Chavez era policies – including the currency exchange regime. However, there’s more to the story than this.

In December 2013, Venezuela had municipal elections scheduled – meaning the government remained in election mode until the end of the year. If the government has imposed painful currency reform in mid 2013, they may not have seen any gains until after the December elections. So, reform was again put on the back burner.

This isn’t to say there were no changes to the currency exchange regime. In March 2013, the government announced the creation of Sicad, a mechanism through which the state would auction off dollars to private industry. By July, weekly Sicad auctions were being held. At these auctions, BsF were being sold at a rate of around 11 to the dollar. By this point, the black market rate was well over BsF20=US$1, meaning the government was hugely subsidizing access to currency for industry. For every dollar the government sold industry, the government itself was losing a second dollar in its overly generous exchange rate. This is a key piece of the puzzle as to why the inflation-depreciation spiral has become so damaging. For most governments around the world, depreciation of their currency can actually be a good thing. For one, it lowers costs, especially for governments that rely on exports for revenue, such as Venezuela.

The Venezuelan state makes money by selling oil on international markets, meaning much of its income is in dollars. Yet much of the state’s day to day expenditures are denominated in BsF (like wages). So, when the BsF drops, the government’s coffers should suddenly start looking a lot better. Unfortunately, the government has dug itself into a hole by effectively subsidizing the value of the BsF through official channels. By keeping the official exchange rate stable even as the BsF plunges on the black market, the government has to pay out more to maintain the former rate. For example, as mentioned back in 2012 the government was losing US$1 for every US$1 it sold through Sicad (assuming the official rate). Today, the Venezuelan government’s lowest exchange rate sells BsF at around 450 to the dollar. On the black market, US$1=BsF1050. Even from the government’s perspective, it’s still basically losing at least a dollar for every dollar it sells. It shouldn’t surprise anyone that under this arrangement, private industry has repeatedly complained the government has failed to deliver enough foreign currency to cover imports. After all, a system like this isn’t sustainable by any stretch of the imagination.

Worse still is the preferential rate, which was consolidated at BsF10=US$1 in March. At that rate, the government is now selling an entire dollar for the same amount of BsF that wouldn’t even fetch 10 cents on the black market. In the past, the government has said this rate accounts for around 70 percent of all official currency exchanges, meaning the government is likely forking out an astronomically high amount of money to keep its exchange system in place, even as it wreaks havoc on every aspect of the economy.

The Government Has Dug Its Own Grave

The problems caused by the currency mismanagement are vast. Anyone who has read about Venezuela in recent months has no doubt been treated to images of empty supermarket shelves, where even basic products like cornflour can be hard to buy. Right wing pundits love jumping on these images, and drawing parallels with the old USSR. Yet unlike the Perestroika era USSR, this scarcity of consumer goods has little to do with low productivity (though that is an issue we will discuss later). Venezuelans have been importing most of their food and other consumer products since the 1970s. This reliance on imports wasn’t caused by socialist policies, but by some very basic rules of the capitalist market. For decades, Venezuela has suffered from a severe case of Dutch Disease – an economic phenomenon where one extremely profitable sector thrives at the expense of other sectors of the economy. In Venezuela’s case, a booming oil industry meant other sectors of the economy like agriculture have long been neglected. Generations of Venezuelans have avoided this problem by simply importing everything they need from abroad.

However, if private industry can’t obtain foreign currency, then it can’t import goods. This is a huge problem in an import dependent country like Venezuela. On top of this, the discrepancy between official and unofficial exchange rates creates its own unique phenomenon not so different from Dutch Disease. Importers are given an incentive to not actually import anything. A great example of this was a once rampant scam known as the carousel. Popular back in the late 2000s, the scam involved an importer applying for foreign currency at one of the government’s preferential rates, then importing a load of the product (such as medical supplies). However, the supplies were never unloaded. Instead, they remained inside the freight truck, and were again exported. Meanwhile, the importer sold their foreign currency allocation on the black market for a nice profit. The importer then applied for more foreign currency to purchase more medical supplies, and drove their freight truck across the border yet again. Under this scheme, the importer made far more money than they ever could through legitimate business activities by simply buying foreign currency cheap from the government and selling it at a higher rate on the black market.

What happens to an economy if every business simply relies on playing with exchange rates, instead of engaging in productive activities like importing, selling, constructing, manufacturing or providing any kind of service to the public?

In the end, the only game in town is making money off speculation and corruption.In other words, the government has spent an astounding amount of money to maintain a system that is devastating the economy. It makes about as much sense as responding to a burglar in your home by buying him bullets and a baseball bat.

Kicking That Can Down The Road

When looked at in totality, a story emerges not of the USSR 2.0, or imperialist intervention crushing socialism, but of a paralyzed government that kicked the can down the road a little too far. Shortly after Maduro’s allies won the 2013 municipal elections, there were some signs this may change. In January 2014, Sicad was expanded. Then in February, the government created Sicad II, which was basically a resurrected version of a shelved Chavez era bond swap program. Since then, all kinds of supposedly revolutionary exchange systems have come and gone, leaving behind little more than a collection of creative abbreviations.

We’ve seen Cadivi get sidelined by Sitme, Sicad I and Sicad II be unified into just “Sicad” (keeping up with me here?), then there was the creation of another exchange mechanism called Simadi, somewhere around here Sitme was dissolved, then Cencoex (wait, isn’t that just Cadivi?) was replaced with Dipro (head spinning yet?), while Simadi was more or less replaced by Dicom – can you see where I’m going here?

Each new mechanism was touted by the government as a silver bullet to the exchange problem. Then, when six months down the track the mechanism failed to produce results, it was replaced by something else. Nothing ever got simplified, while the overall picture simply became more and more convoluted. How many people can tell their Dicom from their Sicad II? Who can remember the mechanical differences between Sitme and Simadi?

For years, the government has only had two options: either move towards a well regulated, well oiled, simple and loophole free controlled exchange regime, or a free float. Instead, the government has chosen a third option: make currency exchange as convoluted, inefficient and messy as possible, with loopholes and blind spots left, right and center. Nothing makes sense, and everything is open to exploitation. This may sound harsh, but the facts don’t lie.

The Plot Thickens: Musical Ministries

At first it may seem baffling as to why the government has gone down this path, but there is a crystal clear answer.

I briefly alluded to one possibility earlier: the Maduro administration doesn’t want to look like its betraying the legacy of Chavez. If Chavez liked exchange controls, then by God, Maduro will like exchange controls too. Part of the problem is also likely corruption. With so many people both in and out of government profiting off the dysfunctional exchange system, there is probably significant pressure on the state to maintain the status quo. However, these explanations pale in comparison to what I believe is the core problem. This core problem explains the unexplainable far better than nostalgia or corruption.

It’s something I like to call “musical ministries”.

In the next paragraph, I’ve tried to highlight some of the most noteworthy, economics related reshuffles since 2013. This may seem tedious, but it provides a crucial illustration of the style of the Maduro administration.

Some of these notable changes include: in April 2013, Maduro replaced the Marxist finance minister Jorge Giordani with the more pro market Nelson Merentes, with an impossible mandate to bring inflation down to single digits. Meanwhile, the finance ministry was split in half, with Giordani being given the less important half, the “planning” ministry. Then in August 2013, when Maduro replaced his original central bank head Edmee Betancourt with the more pro-market Eudomar Tovar. He then put one of Merentes’ best buddies, Jose Khan, in charge of Cadivi (or whatever it was called back then). So far, it looked like Maduro was heading towards some pro market reforms. Then in January 2014, Maduro booted Merentes off his perch at the finance ministry and replaced him with the notoriously incompetent Rodolfo Marco. He also merged the ministries of finance and banking. Merentes was sent back to head the central bank though, which seemed a bit weird.

In June, Giordani was famously axed from his last outpost in the planning ministry, seemingly hailing a death blow to the PSUV’s economics left wing. In September that year, Marco somehow scored the top economics job, the economics vice presidency, after long time power broker and pro market type Rafael Ramirez was exiled to the icy wasteland of the foreign ministry. Things got really interesting in January 2016, when Maduro appointed the now notorious Luis Salas to head both the economic vice presidency and the new “productive economy” ministry. As Venezuela’s most powerful decision maker on economic issues (after the president), Salas raised eyebrows with his fun ideas, such as a belief that inflation doesn’t exist. For a country facing severe inflation, this was a slight problem. Maduro then once again split up the economics ministry (undoing those January 2014 reforms), handing the second section (finance and banking) to a somewhat middle-of-the-road type named Rodolfo Medina. Meanwhile, Marco was given the all important job of overseeing the food safety ministry. Five weeks later, Salas was spontaneously axed, and replaced by former corporate lobbyist Miguel Perez.

Bear in mind this isn’t even the whole story. I didn’t even touch on the oil ministry or PDVSA, and I’ve probably missed a few other notable reshuffles here and there. If you read through the entire thing, you may have noted some of the most pro market voices oversaw some of the biggest policy blunders. Sufficient to say, I think I’ve illustrated my key point: since 2013, the government’s economics team has been in a state of chaos. With the exception of a calm period in 2015, there have been major reshuffles every few months. I refer to this as “musical ministries” not only because of the constant state of movement, but also because the faces never really change. It’s always a mix of the same old soap opera characters, with fresh blood and new perspectives rarely seen. To put it bluntly, there’s a lot of superficial movement, but no substantive changes. All of a sudden, all those Dipros, Cadivis, Sicads and Simadis make a lot more sense.

Contrasts With The Chavez Era

Since late 2012, Venezuela has had a government incapable of making tough economic decisions. This contrasts sharply with the Chavez era, when the government was willing to make dramatic moves to reshape the economy. From the 2002-2003 oil lockouts to the 2008 currency overhaul, the Chavez administration made a lot of tough calls – many of which weren’t particularly popular in the short term. Meanwhile, the Maduro government has no unique or credible economic policies to its name.

Necessary reforms have gone neglected, and the results have been disastrous.

See for yourself.

Graph: Venezuela’s Annual GDP Growth

Graph: Venezuela’s Annual Inflation, Consumer Prices

Graph: Venezuela’s Poverty Headcount

Graph: Venezuela’s GDP Per Capita PPP

As anyone can see, GDP, inflation and poverty figures were all doing great for years. A deep dive into the data is even more compelling. When Maduro’s predecessor Hugo Chavez was elected in 1998, half of Venezuelans lived in poverty. By 2012, World Bank data shows that figure had dropped to 25 percent, meaning poverty literally halved under Chavez. As previously mentioned, Venezuela’s notorious inflation rate was likewise kept in check under the Chavez years. In 2012, inflation was 21.1 percent. GDP wasn’t much different. In 1998, annual GDP growth was at 0.3 percent, indicating Venezuela’s economy was pretty much dead in the water. In 2012, Venezuela’s annual GDP growth was 5.6 percent. Comparatively, US GDP growth that same year was 2.3 percent, which was pretty much the same as the global average at the time. Neighboring Colombia saw GDP growth of 4 percent. If you think I’m cherry picking data, go ahead and sift through the numbers yourself, and I guarantee you’ll see the same general picture: Venezuela did pretty well under Chavez.

However, after 2012, everything changed. Inflation surged, economic growth collapsed, and poverty made a comeback. In 2013, poverty surged to 31 percent, and independent estimates suggest its now even higher. Data from Venezuela’s central bank shows GDP contracted by 5.7 percent last year, while inflation was far above 100 percent.

The last graph is probably the most illuminating. The data shows Venezuela’s GDP at purchasing power parity per capita. This is one of the best measurements around for determining how well living standards are improving. With the exception of a sharp dip after the 2008 recession, it’s easy to see that Venezuelans saw dramatic improvements to their living standards through much of the Chavez era. Then, around 2012, things start to reverse.

In other words, this isn’t a story of steady decline under the socialist governments of Chavez and Maduro. Rather, the data depicts a country doing well through to 2012. Then after 2012, everything took a turn for the worse. By highlighting this, I don’t mean to place all the blame on the Maduro administration, while depicting the Chavez years as a paradise (an attitude some disillusioned Chavistas have slipped into). As I’ll explain in a moment, the seeds of the current crisis were sown under Chavez. Nonetheless, there is a clear difference in governance style between Chavez and Maduro that often goes unremarked. Just how much this difference contributed to the crisis is debatable, and perhaps Venezuela wouldn’t be faring much better if Chavez was alive. Personally though, I suspect Chavez would have done a better job ensuring reform happened, but regrettably that opinion will never be tested.

Long Term Factors

In either case, although 2012 was the year the flawed monetary policy began seriously impacting the economy, it’s worth noting other long term problems had already become apparent years earlier. These other problems played key roles in setting the scene for the current crisis, and making the BsF so susceptible to collapse. At the heart of everything lies the failure of consecutive governments to wean the economy off oil. Chavez himself recognized the potentially devastating impacts of Dutch Disease, and made serious efforts between 2003 and 2008 to diversify the economy. The results of these efforts speak for themselves in the data.

Graph: Venezuela’s Agricultural Sector, Value Added (% of GDP)

Agriculture, value added (% of GDP) Graph: Venezuelan Industrial Sector, Value Added

Until 2008, agriculture and industry such as manufacturing were become increasingly important in the Venezuelan economy. This indicates the government was actually making some progress in its stated aim of diversification. However, this ended around 2008, presumably due to the impacts of the global financial crisis. Since 2008, Venezuela’s economy has slipped back into its old ways. Data from Venezuela’s national statistics agency suggests the value of food imports roughly tripled between 2008 and 2014. Looking more generally at all goods and services imports as a percentage of GDP, we likewise see a pretty dramatic upwards trend just a few years after the global financial crisis (starting in 2010).

Graph: Imports of Goods and Services (% of GDP)

Part of the explanation for this is actually quite positive. The Chavez years were characterized mostly by rising consumption, including of imported goods. For example, in the 1990s, a bottle of decent Chilean wine was beyond the grasp of anyone outside the business elite. Yet even until late 2013, I could afford to splurge on a bottle a few times a year, while still making ends meet on minimum wage. The looming problem was that domestic productivity didn’t keep up with rising consumer demand, especially after 2008. In the short term, this was likely seen as a small price to pay for the massive poverty alleviation under Chavez. This was epitomized in a now famous Chavista response to an opposition activist complaining of milk scarcity. The Chavista said there was no milk on the supermarket shelves because “it’s in the bellies of the poor”. Where milk was once reserved for the rich, it had become something everyone could afford; even if there wasn’t quite enough to go around.

Today though, we again have an economy dependent on imports, but where the devalued currency makes imports like wine prohibitively expensive. Domestic non oil productivity has relapsed, making milk harder than ever to find. All the while, the economy is more dependent on petrodollars than ever.

When the price of oil slumped, it was therefore inevitable that Venezuelans would see a downturn. Indeed, in some ways, the current crisis isn’t anything new: Venezuela has experienced boom and bust cycles coinciding with oil prices since the 1970s. With historically high oil prices, Chavez had luck on his side during his golden years, while Maduro has drawn a short straw. However, it’s worth noting that no other petro state in the world is facing the same kind of crisis that has hit Venezuela. Back luck aside, the Maduro administration could avoided the current conditions by reforming monetary policy in 2013 or 2014. While low productivity or anti-government sabotage are issues that can’t be resolved overnight with the wave of a hand, monetary policy could have been shored up in a relatively short period of time. Unlike international oil prices or long term issues like Dutch Disease, the Maduro administration had meaningful agency here, but failed to act. If serious reforms had been enacted, Venezuela would still be facing a nasty downturn, but probably not a fully fledged economic and political crisis. Likewise, even if the oil crash never happened, Venezuela would almost certainly still be heading towards a crisis sometime down the road anyway, largely thanks to failed monetary policy.

Some Hard Truths

No matter how we cut it, it’s hard to avoid the conclusion that poor currency management was a pivotal factor in the current crisis. This, in turn, was the result of a government locked in procrastination and disarray, unable to look beyond short term political necessity. The right wing can blame it on the vague specter of socialism, but only if they ignore the successes of the Chavez years. They also need to ignore the fact that throughout the Maduro administration, many of the government’s top economics decision makers have been from the pro business wing of the PSUV. They also need to ignore the fact that no opposition party has offered anything resembling a viable policy solution to the economic crisis. Likewise, the left wing can continue simply blaming the imperialist conspiracy, but they have to ignore the fact the government has made some very obvious missteps. Assuming there is a conspiracy involving the US to crush the Bolivarian movement (which frankly, is already an open secret), the Maduro administration has made life pretty easy for the conspirators. It’s also important to point out there has only been so much the government could have done to prevent sabotage over the past few years, making relatively easily controllable factors like monetary policy all the more critical.

Unfortunately, through procrastination and inaction, poor monetary policy has been permitted to rot the foundations of the economy for years on end, and now a political crisis rages on with no end in sight. The only question left is, can this go on much longer?