ejspin

Education in Latin America

Waging Economic War on Venezuela

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          Since early February, demonstrations protesting violent crime and insecurity after a rape attempt at the Universidad de los Andes, near the Colombian border, have echoed loudly and persistently across Venezuela. President Nicolas Maduro claims that students and other young demonstrators are “fascist extreme right wing” elements trying to topple his government and that the “Empire and the Bourgeoisie” are waging economic war against Venezuela.  Rather than admit that under the Bolivarian Revolution, Venezuela has become one of the five most violent nations on earth, Maduro, true to form, chose to demonize his opposition as fascist and anti-democratic.  Since Hugo Chavez came to office in 1998, he began to divide and conquer by communicating to the nation in the most confrontational of terms. Now the confrontations have magnified. The country is divided in two halves, with a fifteen-year history of hatred fueled by the discourse of Chavez and now, Maduro.  Up to now, many of the poor in the urban slums and the countryside have stood by the regime. The opposition has strong support among the middle class and is gaining ground amongst the poor in the face of deteriorating institutions, food shortages and rampant violent crime.

Perhaps Maduro lives in the past. He certainly remembers vividly the times when opposition groups waged economic and political warfare on the nation, reaching crisis point in April, 2002, when elements of the armed forces and the Venezuelan private sector staged a coup that ousted President Chavez for two days. Economic warfare from the right continued through the General Strike, a nationwide protest against the Chavez government which closed most businesses including PDVSA (the State Oil Company). The General Strike or “Paro Petrolero” started in October of 2002 and, after a long, economically debilitating standoff, finally petered out by early March of 2003.

The beginning of the end of economic war between the traditional capitalist upper classes in Venezuela and Hugo Chavez came in early 2003, toward the end of the General Strike. The government imposed controls on foreign currency in February, 2003. Venezuela has always required imported goods in areas such as spare parts, medicines and technology to keep the economy afloat and meet the needs of its people. In announcing the measure, Chavez made the statement, “Ni un dolar para los golpistas”, “Not one dollar for those supporting the coup.”  He made it clear that those loyal to the government would be the only ones to get dollars at legal rates. At that point, those with little or no access to dollars had to get them on a developing parallel market at higher rates in order to finance essential imports. At first, the difference was small (2.1 official rate vs. 2.7 on the parallel market). As time went on, the gap between official rates and parallel rates became larger. Since 2003, exchange controls have been the government’s most effective weapon against the opposition. Along the way they blew gaping holes in the nation’s economy.

In 2004, opposition leaders organized a constitutional referendum to revoke the president’s mandate. The referendum failed, and lists of signers of the recall petition were later made public, and blacklisted for government jobs or contracts.

Then the Venezuelan government had a windfall. In 2000, world prices for a barrel of oil hovered between ten and twenty dollars. By 2005, the price had gone up to around sixty dollars and by 2008, one hundred dollars. Production declined because Venezuela became a hostile environment for foreign investment so new projects and even essential oil infrastructure maintenance were spotty. Production dropped from about 3.5 million barrels to close to 2.5 million barrels a day, but revenues were up and the government was flush with cash. Heavy spending was initiated, not for upgrading or even maintaining the country´s oil, electricity and transportation infrastructure, but for social programs called “Missions” that distributed oil wealth among the poor, for electoral campaigns in which government-affiliated candidates had almost unlimited access to state monies, and for expropriating factories and other enterprises from transnational corporations and the Venezuelan national private sector, who had shown themselves to be adversaries of the regime. Other factories were driven out of business by hostile government regulations and exchange controls. When Chavez took office in 1998, there were 14,000 factories and similar productive enterprises en Venezuela. By 2005, only 5000 were left. By 2005, it was clear that Chavez had won his war against the traditional Venezuelan upper classes and those who had nearly succeeded in permanently confining him to a jail cell on Orchila Island in 2002. Chavez had consolidated the reins of power in his own hands. But at what price? The defeat of the capitalist class in Venezuela cost the nation jobs by the hundreds of thousands and required the country to import what it used to produce.  In the short term this economic hole was filled by record oil revenues, but the long term effects are still being felt today. The economic war Maduro continues to wage was won by the government nearly ten years ago. Current economic collapse is the result of Chavista warriors addicted to the adrenaline of battle – unwilling to loosen their choke hold on Venezuela and allow those who think differently to be considered contributors rather than traitors and fascists. On the contrary, the choke hold gets tighter as critical news outlets are silenced one by one. The latest are independent newspapers being denied newsprint.

Windfall oil prices were a trap into which President Hugo Chavez fell headlong. “Because I can” became the mantra as he consummated his revenge against the capitalist class. His hubris grew, fueling ambitions to become a global player, positioning himself as the inheritor of the mantle of the Liberator, Simon Bolivar, in uniting the nations of Latin America against the “Colossus of the North”, the United States. Many of Chavez’ highly-trumpeted initiatives came to nothing, like the oil pipeline that would unite the nations of South America from Argentina to Venezuela. One such initiative, however, was to have a profound impact on Venezuela’s economy. The Charter of the Caribbean Oil Alliance, PetroCaribe, was signed by 13 Caribbean nations in 2005. Venezuela would provide oil on excellent terms to alliance members. The largest shipments of Venezuelan oil under this trade pact went to Cuba – just over 100,000 barrels a day.

Half the price of these oil shipments continues to be paid through bartering the services of Cuban doctors, sports coaches and, increasingly, military advisors in Venezuela. These same military advisors are currently reported to be providing advice in repressing student demonstrations to their Venezuelan counterparts. The other half was to be paid in thirty years at two percent interest. Similar agreements were signed with the other Central American and Caribbean nations of the PetroCaribe group. Whether any cash payments for Venezuelan oil by Petrocaribe countries have occurred to date is unclear. By July, 2013, Petrocaribe nations, principally Cuba and Nicaragua, owed Venezuela 5.7 billion dollars.  PetroCaribe lowered government income considerably as oil exports paid for by cash on delivery dropped by about 180,000 barrels a day.

From 2005 to 2009, the government’s economic war on Venezuela continued. Expropriations of factories and other productive assets such as oil tankers and infrastructure increased. Some expropriated factory owners were paid fair price, others took what they could get, and others have yet to be paid anything. Since the government managed these expropriated firms politically rather than competitively, almost all of them soon went deep in the red, further bleeding the economy, and many later ceased operations. The productive private sector in Venezuela practically disappeared. Many of those not expropriated were forced out of business by adverse government regulations and by price and exchange controls, which allowed firms connected with the regime to import goods essential for the economy with dollars at low official rates, while Venezuelans who produced the same goods had higher costs which continued to rise at inflation rates of roughly 30% per year, highest of any country in the Western Hemisphere. Venezuelan chicken farmers, for example, were undercut by government imports bought with dollars at official rates. This amounted to a government subsidy for chicken, because importers could sell it at low prices in bolivars and still make a profit. Based on costs for subsidized imports with official-rate dollars, government agencies set market price limits for chicken and other products in the basic family food basket.  Venezuelan chicken farmers were not in business to lose money selling at these prices.  Few Venezuelans noticed the disappearance of local chicken producers, and eating out at cheap roast chicken restaurants became a national pastime.

Papeles Maracay, C.A., was one of the expropriated companies. It supplied toilet paper and other paper products for the national market and for export. After takeover by the government, production plummeted. Today Venezuela’s only important export is oil, and it imports toilet paper, sugar, cooking oil, rice, beans, corn flour, beef, chicken, coffee, construction materials and gasoline, as well as everything that was traditionally imported, (spare parts, medicines, technology). Today’s student protestors may not recall the time when a Venezuelan company provided toilet paper to the rest of the continent, but today, being the butt of jokes by other Latin Americans about toilet paper shortages is irritating.

A new private sector emerged, dependent on government contracts and/or access to dollars at official rates: the Bolivarian Bourgeoisie, or “boliburgueses”.  It is widely reported that many of these individuals can get dollars at official rates by presenting falsified receipts, then sell the dollars on the parallel market. This kind of arbitrage is a fine way to get rich if you have the right connections. The currency controls established earlier became an important means of centralizing all power in the hands of the government. Friends of the government were rewarded, and those not with the government were simply not in the game.

Another drag on the economy was the populist decision by the government to freeze gasoline prices, despite 30 per cent yearly inflation. In 2000, Venezuela boasted the cheapest gasoline in the world, and with no price increases and the continuing erosion of the value of the bolivar, gasoline in Venezuela literally became free for all. After a decade of 30% inflation, a full tank of gas cost less than a dime purchased on the parallel market for dollars. And as lack of appropriate maintenance to Venezuelan refineries cut into capacity, production of gasoline in Venezuela was no longer sufficient to supply the national market. It became necessary for the government to import gasoline at world market prices, mostly from the United States, in order to continue giving it away at gas stations across the country. This was a black hole for the Venezuelan economy. How many hospitals, highways and schools could have been built with what has been spent on giving away gasoline?

By 2010, as the productive capacity of Venezuela disappeared, it became clear that income from dwindling oil sales was not sufficient to provide food, employment and other necessities for a growing population. Shortfalls in hard currency were covered by borrowing, mostly from China in exchange for future oil sales. Early into the second decade of the century, Venezuelan national debt had ballooned from 25 billion dollars when Chavez took office to 225 billion dollars. Abruptly, in 2012, with Chavez weakened from cancer and the nation facing an uncertain political future, China decided to discontinue further lending to Venezuela and began demanding payment of previous loans secured by future oil shipments. PDVSA continued shipping oil to China for payments which had already been spent. At that point, dollar reserves plummeted, all the bills came due and it was pay-as-you-go for the Venezuelan government with little access to international credit markets. Without enough foreign exchange to continue importing chicken, Venezuelans woke up to the realization that local chicken farmers had long ago gone out of business. Without enough hard currency, subsidized imports withered away. Shortages of essential items in the family grocery basket became acute. Long lines of people waiting to purchase such common items as milk, toilet paper, flour, sugar, chicken, beef, and cooking oil were common. By 2013, international airlines canceled the majority of their flights to and from Venezuela when the backlog of dollars owed them by Venezuelan government for tickets paid for in bolivars reached three billion dollars. The official dollar was devalued from 4.3 to 6.3, and the cost of a dollar on the parallel market went from 9 bolivars in late 2012 to 64 bolivars a year later, climbing further to 82 bolivars in February, 2014 (dolartoday.com). Inflation in 2013 was far higher than the 52% reported by the Central Bank, because calculations were partly based on official prices of items in the essential family food basket that were rarely available on supermarket shelves. Car manufacture came to a virtual standstill as assembly plants in Valencia were denied dollars to import parts. Oil services companies became highly selective about taking on new contracts because of a backlog of unpaid PDVSA accounts and oil production continued to suffer.

The Venezuelan government’s economic warfare is no longer against the traditional capitalist class. It’s driving the nation into poverty, despite Venezuela controlling the largest petroleum reserves in the world. And the poorer Venezuela becomes, the less the poor will support the current regime. The disintegrating economy is only one of the causes of political and social unrest today. Add deterioration of the transportation, electricity, communications and oil production infrastructure from lack of investment, high indices of violent crime and rampant corruption, lack of any recourse against government abuse against citizens through courts routinely taking orders from the executive branch, and silencing of practically all media critical of the government (highlighted by the recent government shut down of Twitter and the only TV station covering opposition demonstrations, Colombia’s NTN24). Maduro and followers can no longer credibly don the mantle of defenders of democracy battling extreme right-wing fascist opposition elements, after widely perceived fraud in the April 2013 presidential elections won by Maduro by the slimmest of margins, despite heavy campaign spending bankrolled by PDVSA and a near monopoly on television campaign coverage. Venezuela is a nation divided against itself. Demonstrating students across the nation are not a fascist fringe. They have grown up with the Chavez revolution. They’ve not experienced any other system but can imagine a brighter future. Until now, Venezuelans have surprised and impressed us with their patience as they waited hours for the chance to buy a tin of powdered milk or a few rolls of toilet paper, and reacted calmly to frequent outages of electricity. Now they are surprising us in the depth, breadth, and tenacity of their protest.

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Author: ejspin

He sido Director General de Colegios Internacionales en Mexico, Bolivia, Colombia, Paraguay y Venezuela y he participado en reforma educativa en todos estos paises. Middle School Principal en Estados Unidos. Doctorado en Liderazgo Educativo. Actualmente vivo en México.

3 thoughts on “Waging Economic War on Venezuela

  1. Great article Eric….greetings from Vzla…Enrique Damasio (CIC)

  2. This is an amazing piece Eric. Well done!

  3. Thanks, Matt, I hope my understanding of the Venezuelan economic situation contributes to the general reflection on why things are the way they are.

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