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Venezuela’s economy is a tangled mess

Venezuela’s economy is a tangled mess

Venezuela’s economy is in an endless state of disarray. Inflation is soaring, and basic staples are increasingly harder to find. Electricity blackouts are frequent, and crime presents an enormous problem for citizens and companies crazy enough to do business there.

The problem for Venezuelans is that their government has no clue as to what to do.

The dire state of the economy is the one thing both sides of Venezuela’s contentious political scene can agree upon. Yesterday, the Central Bank announced that the monthly inflation rate for April was 4.3 percent, up from 2.8 percent in March. These monthly rates are higher than what many countries see in an entire year. In fact, accumulated inflation for the first four months of 2013 has already reached 12.5 percent, and it shows no sign of slowing down. Crucially, the prices of "food and non-alcoholic beverages" segment — which affects poor consumers the most — grew by 6.4 percent last month.

Venezuela’s persistently high inflation has several root causes. Because of repeated elections and populist tendencies, the government continues to spend much more than it earns via taxes. Since it has few options to finance its deficit, it has been forced to devalue the currency twice this year, and this means producers – who mostly rely on imports to supply the market – are forced to pass this on to consumers.

Taming inflation would require the government to order their finances, but the administration seems reluctant to do so. For example, according to government sources, giving away gasoline for (practically) nothing costs Venezuelan taxpayers $24 billion in direct subsidies and lost revenues. This amount represents roughly a quarter of all spending included in the 2013 budget. But regardless of how dire the situation is, the government refuses to consider decreasing subsidies because it is fearful of a public backlash.

Unsurprisingly, it is getting harder to find items such as sugar, cooking oil, and corn flour — an essential part of any Venezuelans’ diet. According to latest figures from the Central Bank, scarcity peaked in April to reach a historic record of 21.4 percent. This means that roughly 1 of every 5 products consumers want to purchase is missing from the shelves. Not surprisingly, Venezuelan consumers are being forced to queue for basic staples, sometimes in an undignified manner. The photo above shows shoppers noting their place in line while shopping for corn flour.

Rolling electricity blackouts continue to be yet another thorn in the government’s side. They’ve been the norm following the complete state takeover of the electricity industry in 2007. Sadly, newly appointed Electricity Minister Jesse Chacón has already shown signs that he does not have the understanding or the willpower to seriously address the problem.

Chacón has hinted that part of the issue is the bloated workforce in the state electricity companies, which currently has at more than 50,000 employees. However, he has vowed not to let workers go. Instead, he proposes dividing the state-owned electricity holding into different subsidiaries, something that will clearly not alter the underlying financial realities of the company.

He has also announced a rise in heavily subsidized electricity rates, although several details — such as the amount of the rise and who it would apply to — remain unknown. This might make sense in theory, but in practice will do nothing to inject fresh cash into the sector, since the country’s soaring inflation will eat away any short-term financial benefit from the rate hike.

On the issue of crime, the government is also showing little creativity. They have publicly met with gang leaders, and are calling out to them, urging them to change their ways. Sadly for the government, they do not seem to realize that gangsters are not susceptible to persuasion or public pleas. The government’s other response — putting the military on to the streets — may create more problems than it solves, since the military is not adept in law enforcement tactics, and is corrupt anyway.

Noted Mexican journalist Alma Guillermoprieto recently wrote in the New York Review of Books that the Venezuelan government is collapsing "into a scary collective insanity." She adds that "the growing tumult and disorder is so extreme, so clearly provoked, and so destructive that one must at least consider the possibility that it is being encouraged by defeated chavista rivals now smelling wounded prey, or from those sectors of the military who have never welcomed the Cuban presence in Venezuela, or both."

Whether the chaos in Venezuelan society is provoked or not, the fact remains that ordinary Venezuelan citizens are suffering the brunt of these mistakes. The problems currently accumulating are so large, so seemingly intractable, it’s not a stretch to say that solving them will be a task for an entire generation.

Juan Nagel is the Venezuela blogger for Transitions. Read the rest of his posts here