The benefits of diversification are well known among finance and investment pundits, and they can be best summarized in the old adage “never put all of your eggs in one basket”: you should always spread your investment risk out as much as possible. However, sometimes some opportunities just seem too inviting in the short run, and many impatient investors fall into the temptation of going all-in in the most profitable asset. This usually turns out to be a very poor decision in the long run, and while die-hard Keynesians might not mind too much about that, the welfare of an entire country can be severely hindered by myopic trade policies.
According to the World Bank, crude oil constituted about 96% of Venezuelan exports and about half of its tax revenues as of 2012, through the state-owned company PVSDA, which sends its revenues directly to the government. This means that even the slightest swing in the price of oil could significantly affect the country’s economic performance at any time. And it is more or less what has been happening since 2013. Back then, a falling demand for oil, consequence of the Great Recession, combined with the decision of OPEC (an association of oil-producing countries) to keep supply stable, led to a steady decline in world oil prices, and therefore crippled Venezuela’s main life source. Unlike many other oil-exporting countries, though, the very peculiar social and political order of Venezuela made the repercussions of this shock much harder.
Venezuela is a presidential republic, but it wasn’t always one. The current democratic order was only established in 1958, after a coup led by general Wolfgang Larrazábal overthrew the last of the military juntas that had pretty much ruled the country since its very foundation. Since then, Venezuelan politics have become increasingly democratic, and the country has evolved into a more modern welfare state. But let’s flash-forward a few decades, to 1999, when Hugo Chávez was elected to office as President of Venezuela. He served three terms, briefly interrupted by a coup that was later reversed, during which he basically kicked the country into the new century by all means necessary: he implemented a new Constitution via a referendum, eradicated illiteracy, founded the Banco del Sur with Argentina and Brazil and even provided universal healthcare for his citizens. He was an old-fashioned socialist, perhaps inspired by Ernesto Guevara and Simon Bolivar, who never hid his hatred for imperialism and globalization, and used his country’s resources to finance his reforms and build up consensus. He died of cancer in 2013 and was replaced by his designated successor, Nicolás Maduro.
Under Maduro’s rule, many of the issues that had been edulcorated by Chávez’s propaganda finally came into the spotlight. To begin with, the country’s finances have been drained by the many social programs run by the Socialist party to redistribute wealth and land among the poorest classes: this investment didn’t prove very fruitful, as the new land owners lacked the skills and capital needed to put those lands to profitable use; in addition, the nationalization of the food industry, typical of socialist regimes, didn’t help create a healthy and productive competition. Furthermore, corruption is running rampant among Venezuelan leadership, which means that a significant share of government revenues just “disappears”. Finally, the country’s economy ended up relying solely on the fate of its oil exports, or in other words, putting all of its eggs in one basket. And we know how that turned out.
As a result of the fall in oil prices, the Venezuelan economy simply crashed: the government ran out of liquidity, and responded by printing more money. Inflation spiked, and is still on the rise at an alarming rate, reaching 800% in December 2016 and threatening to turn the country into the new Zimbabwe. The national currency, the bolivar, depreciated dramatically, and the credit rating of Venezuela’s sovereign debt was downgraded to junk status by Standard’s & Poor’s. The consumer price index in bolivars is so high that most people have resorted to the black market to buy consumer goods in foreign currencies, fostering the informal economy and thus depriving the government of even more revenues, in a vicious circle that is causing whatever was left of the welfare state to fail too. Little did the decision to raise the minimum wage by 60% help the new government gain consensus. Maduro now faces the lowest historical approval rate among Venezuelan presidents, and in a country built on coups and revolutions that is not a sign to be taken light-heartedly.
The decision, on March 29, to revoke the powers of the National Assembly in favor of the Supreme Court, de facto centralizing legislative power, finally triggered the protests, that have been ravaging the streets of Caracas throughout the month of April, calling for the abrogation of the March 29 ruling, immediate elections, and the creation of a humanitarian channel to help those left behind by the crippled welfare state. The government responded as expected, by deploying its over-maintained military to the field, and even providing weapons to militia groups to support the establishment. There are 33 confirmed deaths so far in the riots, and the conflict seems nowhere near a resolution.
Venezuela may very well be a case of the infamous “Dutch disease”: overconfidence in the country’s natural resources resulted in an underdeveloped industry and an insufficient agricultural production, combined with an increased conflict of interest between the government and the oil industry. Unfortunately, the longer the crisis continues, the harder it will be to find alternatives. Many argue that at this stage the only solution might be for Maduro to step down and finally end Chavismo, going to immediate elections to restore confidence among the population. To fight hyperinflation, Venezuela is going to have to invest in a more credible financial system, like Germany did in the 30s, or give up on its currency, like Zimbabwe did: measures that are neither popular, nor easy to accomplish. And there is no way of predicting when the military might see fit to step in once more and pull the plug on Venezuelan democracy.
Bewaren