World Economy
0

Venezuela on Brink of Complete Collapse

Venezuela on Brink of Complete CollapseVenezuela on Brink of Complete Collapse

The only question now is whether Venezuela’s government or economy will completely collapse first.

The key word there is “completely.” Both are well into their death throes. Indeed, Venezuela’s ruling party just lost congressional elections that gave the opposition a veto-proof majority, and it’s hard to see that getting any better for them any time soon—or ever, Business Insider reported.

Incumbents, after all, don’t tend to do too well when, according to the International Monetary Fund, their economy shrinks 10% one year, an additional 6% the next, and inflation explodes to 720%. It’s no wonder, then, that markets expect Venezuela to default on its debt in the very near future. The country is basically bankrupt.

That’s not an easy thing to do when you have the largest oil reserves in the world, but Venezuela has managed it. How? Well, a combination of bad luck and worse policies. The first step was when Hugo Chavez’s socialist government started spending more money on the poor, with everything from two-cent gasoline to free housing. Now, there’s nothing wrong with that—in fact, it’s a good idea in general—but only as long as you actually, well, have the money to spend. And by 2005 or so, Venezuela didn’t.

Why not? The answer is that Chavez turned the state-owned oil company from being professionally run to being barely run. People who knew what they were doing were replaced with people who were loyal to the regime, and profits came out but new investment didn’t go in.

That last part was particularly bad, because Venezuela’s extra-heavy crude needs to be blended or refined—neither of which is cheap—before it can be sold. So Venezuela just hasn’t been able to churn out as much oil as it used to without upgraded or even maintained infrastructure. Specifically, oil production fell 25% between 1999 and 2013.

The rest is a familiar tale of fiscal woe. Even triple-digit oil prices, as Justin Fox points out, weren’t enough to keep Venezuela out of the red when it was spending more on its people but producing less crude. So it did what all poorly run states do when the money runs out: It printed some more. That, in turn, became more “a lot” than you can count once oil started collapsing in mid-2014. The result of all this money-printing,  is that Venezuela’s currency has, by black market rates, lost 93% of its value in the past two years.

But for now, at least, a specter is haunting Venezuela—the specter of failed economic policies.

Financialtribune.com