After narrowly defeating Henrique Capriles in a hotly-contested presidential election (Capriles is demanding a recount), Venezuelan President-elect Nicolás Maduro will soon have to turn to a more threatening foe: the nation’s economy.
In a time of high commodity prices, why is one of the world’s top oil exporters facing such dire straits?
A lot of it has to do with Hugo Chávez’s socialist legacy.
For years, Venezuela has had a fixed exchange-rate regime. The Chávez administration, eager to control every aspect of life in Venezuela, decided who got how many dollars, and at what prices. Currently, the fixed exchange rate is 6.3 bolívars (BsF) per dollar. A parallel “auction” system is selling dollars at BsF 12, and the black-market rate currently hovers around BsF 23 per dollar.
These deep distortions are the reason why Venezuelans are suffering some of their worst shortages in years. Long accustomed to subsidized greenbacks for importing nearly everything, Venezuelans now find dollars harder to come by. However, the government has other priorities: oil production is stuck or declining, and with the nation’s refineries in bad shape, Venezuela needs to import refined products such as gasoline, which the government practically gives away for free.
Importers lucky enough to access dollars at the BsF 6.3 rate find it very tempting to sell the same dollars at the black market rate instead of using them for their intended use—importing basic staples. That is one of the main reasons why Venezuelans´ shelves are empty.
Untangling this economic crisis will require the skills of a deft politician—something Maduro clearly is not. Likewise, doing away with the regressive gasoline subsidies that threaten to bring down the state’s finances will require a national consensus that seems impossible right now. Meanwhile, generating enough confidence to spruce up private investment is simply not in the cards for Venezuela.
Mr. Maduro is likely to find that Mr. Capriles and the pot-banging opposition are the least of his problems.
Hugo Chávez died today at the age of 58. While many of his obituaries will focus on his voluminous political legacy, the day-to-day issues he leaves behind are enormously complex. Eventually, they are sure to overshadow any historical discussion about the man.
Politically, his movement is orphaned. Chávez was not only president of Venezuela, he was also president of his party, commanding every detail—from which candidates ran where to which judges had to be fired. His tenuous political coalition—made up of community leaders, the military, old-style communists and entrepreneurs looking to make a quick buck—was only held together by the sheer force of the president’s charisma, which punished dissent swiftly and mercilessly. With Chávez gone, it’s not clear who will make the decisions, or who will keep the tensions among these factions at bay.
Economically, the Chávez legacy is horrendous. The Venezuelan economy consists of a series of distortions piled upon further distortions. Price controls, labor rigidities, foreign exchange controls, clogged ports, and crumbling highways are the norm in Venezuela. Together with a rapacious public sector, a crippling budget deficit, and an underperforming banking sector, the Venezuelan economy is a veritable ticking time bomb held up only by sky-high oil prices that, amazingly, are not enough to sustain the ever-growing chavista State. And while poverty has fallen thanks to massive government spending, this cannot survive a slight dip in oil prices.
In addition, Venezuelans are suffering from one of the worst crime waves any nation not engaged in civil war has ever seen. The government seemingly has no clue on how to tackle the problem. As program after program fails, the government blames the media—or some fictional capitalist culture.
Venezuelans have been in suspended animation ever since December, when the president—in his last public appearance—announced he was going back to Cuba for treatment and named his successor. Ever since that day, life in Venezuela has been a swirl of rumors, indecision and surreal policy-making that even saw the Supreme Court decide that Chávez didn’t have to be sworn in, as the Venezuelan constitution mandates.
Now, that is in the past. A glorious funeral will ensue, and Nicolás Maduro may very well ride the public’s outpouring to an election win. But soon, he will have to come to terms with a political system that has stopped working, and with an economy in tatters.
Congratulations on your inheritance, Mr. Maduro.
As Venezuela deals with a constitutional crisis, ordinary Venezuelans may be excused for not keeping up with the developments. They are too busy trying to find basic staples.
It has become increasingly difficult in Venezuela to find essential commodities such as sugar, cooking oil and milk. Corn flour, used to make traditional arepas, is easier to find in Miami than in Caracas. Even certain medicines are becoming hard to find.
The government has responded in typical fashion. It has blamed hoarders, and promised swift action to deal with them. At the same time, it denies scarcity exists, while it promises to continue “looking into the issue.”
The cause of scarcity lies with the government. After turning on the public spending spigot last year to ensure Hugo Chávez’ re-election, the fiscal deficit reached an astonishing 15 percent of GDP. With all that fresh money in the economy, imports soared, causing severe problems in the nation’s ports. In Venezuela, where even gasoline is imported, this is a huge deal.