Venezuela is burning

The problem with a cult of personality is what happens when that person dies.

For example, the successors pass protectionist legislation on money transfers, don’t follow it themselves and exacerbate a long-time issue of rampant inflation and shortages of basic goods.

Some good links;


http://news.yahoo.com/venezuela-threatens-cut-off-fuel-protest-areas-205822959.html
http://www.theguardian.com/world/guardianwitness-blog/2014/feb/21/venezuela-protests-demonstrators-tell-us-why-theyre-taking-part

“One vetted iReport video begins by showing a contrast: President Nicolas Maduro speaking on television about how things are under control, while outside a window, national guard troops are firing tear gas.”

A shame. If only they were more like Uruguay and less like Zimbabwe on the sliding scale.

It was always going to be a messy ending. Chavez’s economic policies were simply unsustainable in the long term. Due to price controls nobody makes anything in Venezuela, everything is imported except for oil. And with the country’s foreign reserves rapidly declining to pay for all the imports it is just a matter of time until the economy collapses. Then there will be hell to pay.

It seems the problem now is they have fallen into what amounts almost to civil disorder, so it’s not just a question of parties and ideologies but of quelling chaos. No one can really do that without using force. But such use of force to suppress dissent is obviously not the basis for a peaceful society. So whether Maduro retains power or someone else takes over, the result will almost necessarily be another repressive authoritarian government, whether of the right or the left.

Yea, see, there’s plenty of oil to actually pay for things, but it’s not reaching workers. Moreover, they have hydroelectric power for most of their needs, manufacturing is 19% of the GDP…and industrial exports are rising rapidly.
Agriculture? Yes, sure, there’s an issue there, in terms of self-sufficiency.

The main problem is the type of command economy which they’re trying to run - without someone REALLY skilful doing it, it falls apart rapidly. (Again with the cult of personality issue…and I’d also note that the pre-Chavez economy was also pretty terrible, with major inflation)

Nope, that would be wrong:

Venezuela’s reserves of gold and foreign currency, which stood at nearly $30 billion at the end of 2012, were down to just over $21 billion by last week. Only about $2 billion of that is in liquid assets. Ecoanalítica, a research firm, estimates that the government can also dip into around $13 billion of opaque, off-budget funds.

Venezuela is running out of dollars to pay its bills. Although payments to its financial creditors of around $5 billion this year do not appear to be at risk, the country’s arrears on non-financial debt are put at over ten times that sum. These include more than $3 billion owed to foreign airlines for tickets sold in bolívares, and around $9 billion in private-sector imports that have not been paid for because of the dollar shortage. “Under the current economic model, and with this economic policy,” says Asdrúbal Oliveros of Ecoanalítica, “this [debt] looks unpayable.”

The effects are already apparent. Foreign airlines have placed tight restrictions on ticket sales; some have suspended them altogether. Many drugs and spare parts for medical equipment are unavailable. Car parts, including batteries, are increasingly hard to find; newspapers are closing for lack of paper. The country’s largest private firm, Empresas Polar, which makes many basic foodstuffs, is struggling to make some products. In a statement Polar said the government owed it $463m and that production was “at risk” because foreign suppliers of raw materials and packaging were threatening to halt shipments.
Track global exchange rates over time with The Economist’s Big Mac currency index

The government blames the crisis on private businesses and “irresponsible” use of hard currency by ordinary Venezuelans. It has ordered drastic cuts in dollar allowances for travellers, especially to popular destinations like Miami. Remittances to relatives abroad have also been slashed. In a bid to curb runaway inflation, it has introduced a new law restricting companies’ profits to 30% of costs. Long jail sentences await transgressors.

Without a big injection of dollars from the state oil company, Petróleos de Venezuela, which brings in 96% of foreign earnings, the crunch will continue. Better terms for foreign investors in the oil industry would bring in much-needed cash and boost stagnant production. But unless the government abandons its antipathy to private capital, the prospect of new investment is dim. Shortages of goods are only likely to worsen. If Argentina is an outlier, Venezuela risks straying into a different category entirely.

Moreover, they have hydroelectric power for most of their needs, manufacturing is 19% of the GDP…and industrial exports are rising rapidly.
Agriculture? Yes, sure, there’s an issue there, in terms of self-sufficiency.

They won’t be able to export their way out of this and when there’s no more money to import food, what then?

Nothing there said actually contradicted what I said. In fact, the article agrees with it.

“…Without a big injection of dollars from the state oil company…” - that is, allowing state oil to subsidise workers and basic goods!
“Under the current economic model, and with this economic policy…” - and I’ve just been criticising their command economy!

This is the “what then”, right now. On the streets, as basic shortages have hit. Venezuela really is the sort of stateist command economy which some right “small government” wingers caricature the entire left for. (And which I myself oppose strongly as a mutualist).

The reality is they have a strongly positive balance of trade, in fact, and it could be far better with some different policies. There is no chance of mass, prolonged food shortages without outright sanctions or totalitarian actions on the part of the political leadership, now minus the Dear Leader who held them together.

The problem is they can’t do it:

At the same time, PDVSA sends oil to Cuba and has a preferential payment agreement with 16 other countries in the region under agreements made by Mr. Chavez, which accounts for a total of 500,000 of each day’s production. Another 200,000 are used to pay down the firm’s $80 billion in debt (including hefty loans from China).

Yet another critical chunk of production is siphoned off to feed high domestic consumption. Petroleum products are heavily subsidized. A typical driver spends more to fill up once in Canada than Venezuelans do in a year. The subsidy costs an estimated $16-billion (U.S.) per year. And some 100,000 barrels a day are smuggled to Colombia. That means that only a bit more than half of PDVSA’s production is generating cash flow, Mr. Hernandez pointed out.

That leaves PDVSA little to spend on boosting production, said Richard Obuchi, a professor at the Instituto de Estudios Superiores en Administración in Caracas. At the same time, inflation is running at more than 50 per cent, and the bolivar’s value has collapsed on the black market. PDVSA must pay for imports at the black market rate, but sell its precious dollars to the central bank at the posted one. The company is reported to be months in arrears on paying for everything from chemicals for refining to food for the workers’ canteen.

If the state oil company can’t pay it’s own bills, how it is going to continue to subsidize the economy?

The reality is they have a strongly positive balance of trade, in fact, and it could be far better with some different policies.

You sure about that? I think you need to check again:

From the chart, there if you select 1998 through 2014, they’ve been in a trade deficit since about 2005. That’s why they are running out of dollars.

What, they can’t crack down on the massive corruption and wastage and end the state “projects” the money’s spent on? They can’t end the over-the-top petrol subsidies, and terminate some of the outright abusive (to Venezuela) special oil deals? …They certainly can! (WILL the current government? No, hence we’re here!)

Moreover, the current Venezuelan system causes inflation, which would ease if the leadership stopped certain kinds of controls! (PDVSA being able to use their earned dollars for the foreign purchases they need and to pay the debt directly would save them a LOT of cash, alone…). And the trading economics figures don’t match the WTO ones.

Sorry - I’m not writing off the country on some belief things can’t change, how many closed dictatorships (which is the only way the current lot can hang on, given their own former base is largely rising against them) last these days? And don’t say NK, really - indeed, the rhetoric coming out of the Venezuelan government is markedly similar to that from the (fallen) Ukranian one…

Duh, no one is arguing that their current problems couldn’t be fixed. The point is that as long as the current regime is in power, nothing will change. THey are ideologically and indeed politically committed to the current course and will stay on that course until things collapse. They have the tiger by the ears and can’t let go.

Well, the thread’s kinda about the people rising there.

The Ukrainian leadership was also ideologically and politically committed, and started with greater public support (indeed, there’s major problems with the veracity of the last election in Venezuela!) than the Chavistas ever did! There is, unfortunately, much greater state control of the media in Venezuela than the Ukraine, but the nature of the internet means the stories are getting out anyway.

I’d add that it’s amazing how many socialists drop their brains for ideology for when Chavez’s Venezuela is the topic. I can make myself really, really unpopular with them in a hurry on the topic of Venezuela. (heck, I got called a Tory in the pub last week on this topic. I cracked up laughing, which was not perhaps quite what they expected…)

The sad thing about some socialists is how any state that merely calls itself socialist becomes golden and irreproachable in their eyes. But Venezuela is pandering populist, not socialist. Uruguay is socialist.

The government has been hinting that it may be time to raise the (heavily) subsidized cost of gasoline. It’s 6-cents-a-gallon gas. That’s not a typo. It’s more expensive to buy a cheap donut than it is to fill an SUV’s tank, but the populace has been spoiled for so long that they’ll riot if it suddenly costs them $2 to fill up that damn SUV gas tank.

Speaking of other subsidized industries, I heard from a friend in Miami the other day that every flight on the Venezuelan national airline is completely booked solid for months – mostly by foreigners (or natives with foreign relatives). Due to the weird exchange rates and subsidization, airline tickets from Venezuela to Miami cost the equivalent of about $10 each way.

It’s not the cheapness of flight that makes them sellout, it’s the arbitrage. You can buy dollars with a valid plane ticket at govt offical rate. So buy the ticket, get your hard currency and don’t fly.

Some good news - intelligence agents who reportedly shot students have been arrested - http://www.theguardian.com/world/2014/feb/27/venezuela-intelligence-agents-arrested-murder-protesters

The Government’s also brought forward the start of Carnival…which might backfire. People will be on the street one way or another, this week.

Meanwhile, in Venezuela…

Maduro’s government is acting increasingly paranoia as demonstrations against it continue. Last week it started expelling diplomats, including the Panamanian Ambassador.
Also last week, as basic shortages continue to increase, and armed forces were deployed to block a protest route against food shortages.

The government’s response is a system which is going to devalue the currency by about half against the dollar, in practice.

I don’t know much about Latin America, but BBC was reporting today in a feature on Venezuela that the country has something like 25,000 murders per year now, up from 5,000 a couple years ago. Apparently, 1 in 10 is actually ever solved, and the whole place is dangerous as hell.

The economic implosion of Venezuela is near at hand. Default, hyperinflation, and an epic devaluation all loom. That this should be possible in a country with the worlds largest oil reserves is astonishing. Ironically (or perhaps not) it will be Venezuela’s poor who will suffer the most when it occurs.

The only positive out of this is that the country has made itself a useful object lesson for Hayek’s Road to Serfdom.

More like it shows the perils of currency manipulation. China should be watching.