Venezuela has one of the most dysfunctional economies in the world. It has an abundance of inflation (currently 185 percent) and a surplus of exchange rates (two, besides the black-market rate) — and a dire scarcity of necessities like rice, eggs and diapers. The local economy relies almost entirely on oil, whose price has nose-dived, and the government is married to a model of socialism that has long since ceased to exist.
This is the dysfunction the very functional Luis Vicente Leon — Twitter star, government critic and one of Venezuela’s most respected voices on the economy — confronts daily. Over cold, sweet ice tea (and sugar is not easy to find!) Leon sat down with us to discuss the origins of Venezuela’s economic crisis, the hard remedies required to turn the situation around and the risks that linger in the interim. We rightly assumed that, as an economics professor at two local universities, a regular contributor to six national publications and president of Datanalisis, a company that produces financial-market intelligence, he wouldn’t be short on explanations. What follows has been edited and condensed.
OZY: How did the economic situation in Venezuela get so bad?
Luis Vicente Leon: The crisis in Venezuela is a mix of a lot of things, but the most important manifestations are scarcity and inflation. During the Chavez era, the government thought the private sector was putting them at risk, so they adopted a primitive strategy of interventionism and began interfering in companies and expropriating part of the economy. They controlled prices, which made the cost of production higher than the revenue companies could earn, and they overvalued our local currency to stimulate cheap imports. In 2008, the government was responsible for 8 percent of total imports. Today, they import 50 percent.
Before, people didn’t realize there was a crisis because the government had money and could import things with dollars. But as oil prices plummeted — oil revenue has declined from $100 billion in 2014 to a projected $24 billion this year — the government defaulted internally on commercial debts, and suppliers abroad stopped providing goods. Local production, meanwhile, is nonexistent, and all government companies are a disaster.
We have shortages of whatever the government has expropriated — sugar, milk, coffee, cement, iron, etc.
OZY: Is socialism to blame?
L.V.L.: Modern socialism recognizes the necessity of the private sector and the need to make agreements with producers. You don’t close the country to the rest of the world or control exchange rates. The problem is not socialism. It’s the government’s implementation, which is absolutely irrational, and trying to go back to primitive socialism.
OZY: What can be done to fix the situation?
L.V.L.: The government needs to recover confidence in the economy and recognize its mistakes; without confidence, people won’t participate in the marketplace. People don’t want to put their money in a jail, and right now Venezuela is a jail. The government is essentially telling investors, “Bring your dollars, but you won’t be able to bring them home. Bring your dollars and I’m going to control prices and you’re going to lose money in order to help the country.” No investor is going to go for that.
It’s also not enough to say we’re going to change. To change, you must change everything — including the model and maybe even the government. You need to open the market, open exchange rates — allow it to go up, devaluate and recover its real value — and you need to negotiate with the private sector to reprivatize the economy even though prices will increase. At the same time, the government must create a mechanism to subsidize poor people directly to allow them to surf the crisis.
But none of this is possible without money, whether from oil revenue or assistance from international lenders such as the IMF, International Development Bank or China. But nobody will provide financial help without confidence.
OZY: Does (Venezuelan President Nicolas) Maduro ever call you for advice?
L.V.L.: The government has asked me in the past but not now because they think I’ve become very critical. But I’ve always been like that; it’s just that now there are bigger problems to criticize. But I have to recognize that as much as the government also criticizes me — Maduro singled me out in his last nationally televised broadcast — they’re nice to me. I’m not an enemy.
OZY: You’re in the business of predictions. What’s on the horizon for this tumultuous country?
L.V.L.: There are two scenarios. The first is anomie: The country becomes more primitive but the people accept it. The government continues to provide cheap essentials to maintain the poor people and allows the middle and high class to create a dual economy where you can use your own dollars to bring in goods and live with it by paying a lot of money. Consumption will be less. People will live with less. This is not popular but is very important and has a huge probability.
The second possibility entails a radicalization in society before presidential elections in 2019 and a social explosion that leads to agreements between the military sector, some members of the government and some opposition members to kick Maduro out.
Thursday, March 31, 2016
Tuesday, March 22, 2016
Tuesday, March 15, 2016
WASHINGTON (Reuters) - U.S. President Barack Obama, in an interview that aired on Monday, voiced concern about the struggling Venezuelan economy and said he did not want to see the country fail despite the tense relations between Washington and Caracas.
"It's not in America's interest to see Venezuela fail, because if Venezuela fails then that could have an impact on the economies of Colombia or Central America or Mexico, and that in turn can affect U.S. economies," Obama told CNN Espanol.
A year ago, the United States declared Venezuela a national security threat and ordered sanctions against seven officials who Washington said had violated human rights or engaged in corruption.
Venezuelan President Nicolas Maduro denounced the sanctions as an attempt to topple his Socialist government.
Venezuela's economy suffers from runaway inflation and chronic product shortages that critics blame on the government's heavy-handed policies.
Maduro points to the global oil price collapse as the main source of Venezuela's woes. The OPEC nation depends on crude for more than 90 percent of its export revenues.
An opposition alliance won control of the Venezuelan National Assembly in a vote at the end of 2015 and has launched a campaign to remove Maduro via street rallies, a recall referendum and a constitutional amendment.
"The sooner the Venezuelan people can determine a government that they have confidence in that is legitimate, and that can start instituting economic policies that pull them out of the spiral that they're in, the better off it's going to be for all of us," Obama said.
Tuesday, March 8, 2016
CARACAS, Venezuela — Camimpeg, a new company formed by Venezuela's military, will begin providing state oil producer PDVSA with services including drilling, logistics and security in less than a month, a senior defense official said in an interview.
Deputy Defense Minister Alexander Hernandez said Camimpeg would have a commercial relationship with PDVSA [PDVSA.UL] and work alongside foreign companies.
Hernandez's comments came after speculation among investors and foreign oil partners that Camimpeg could be a means to shield assets from seizure in the event of a debt default.
PDVSA has a heavy repayment schedule this year, and Venezuela's economy is in crisis.
There are also fears that the military already has too much power and influence in Venezuela, where a deep recession, shortages of basic goods and triple-digit inflation are eroding the popularity of President Nicolas Maduro's government.
"Security will be associated because the company is made up of the armed forces," Hernandez said at the Fuerte Tiuna military base in Caracas. "It's an obligation."
Crime is a major problem for the oil industry in Venezuela, which has the world's largest crude reserves. Foreign companies, especially those operating in the vast, isolated fields of the Orinoco Belt, have long been clamoring for more protection..
"Camimpeg's services are broad, from exploitation and drilling of oil wells and distribution of their product to the treatment of raw materials, preparation of the area to be exploited, support, logistics, extraction of minerals, transport of valuables," Hernandez said.
The Fuerte Tiuna base, replete with apartment blocks, a shopping center, lake and parade ground, also houses warehouses where the military works with private companies to manufacture items such as uniforms and bottled water.
"This is an example of what can be achieved when the armed forces work with private companies," said Hernandez.
However, manufacturing across Venezuela is largely paralyzed due to shortages of raw materials, machinery and other items.
Companies from China, India, Russia and other countries had expressed interest in working with Camimpeg, which will begin operating in late March or early April, said Hernandez, without adding further details of specific projects.
"I wouldn't say this is a company in parallel with PDVSA," he said. "Rather a company at the service of PDVSA."
Thursday, March 3, 2016
CARACAS, Venezuela — Venezuela’s opposition coalition has decided on a triple-barreled strategy to oust President Nicolas Maduro before the end of his term.
The opposition will simultaneously pursue a constitutional amendment, a recall referendum and a campaign to push for the resignation of the embattled socialist president.
Opposition leader Americo De Grazia tells The Associated Press that the coalition of more than a dozen parties reached the agreement on strategy after a long day of meetings Wednesday.
Opposition spokesman Jesus Torrealba is expected to officially announce the plan on Thursday.
Maduro’s six-year-term ends in 2019. The opposition won a landslide victory in legislative elections in December, and promised to find a way to remove Maduro from power within the first half of 2016.