The Money-Losing Machine in Caracas

Forget Chávez and his Bolivarian Revolution -- it's oil that wrecked the Venezuelan state.


It had been an unusual session for the members of the Brazilian Senate’s Commission of Foreign Affairs and Defense. The woman seated before them, wearing a white blazer and a flag lapel pin, had urged them to "find solidarity" with the people of her country. Back home in Venezuela, she said, a conflict was taking place "between dictatorship and democracy, between justice and tyranny, between an oppressive regime and a people crying for freedom."

María Corina Machado, the Venezuelan opposition lawmaker recently expelled from the country’s National Assembly, has become the latest high-profile advocate of a values-driven understanding of the crisis now roiling her oil-rich South American country. "How many more human right violations, murders, persecutions, and tortures must Venezuela endure for the democrats of this hemisphere to hear our voice?" she asked the lawmakers in Brazil. She delivered a similar message to the Peruvian Congress, and to a closed-door session at the Organization of American States headquarters in Washington, D.C.

While the narrative itself is anything but new, it has been gathering momentum (especially outside of Venezuela) thanks to the combination of two factors: the biggest wave of unrest the country has seen in recent years, and an effective media and social networking campaign — embodied in the #SOSVenezuela hashtag — that has succeeded not only in raising the specter of U.S. sanctions, but also in sending the rhetoric war all the way to the opinion pages of the New York Times.

But as the battle for Venezuela’s image abroad rages on, an entire side of the story runs the risk of being pushed aside. Consider, for example, the op-ed published by jailed opposition leader Leopoldo López in the New York Times on March 25. From the very beginning, he attributes the "intolerable" situation of his country to "one of the highest murder rates in the Western Hemisphere, a 57 percent inflation rate and a scarcity of basic goods unprecedented outside of wartime." Only after this does he include an "equally oppressive political climate" among Venezuela’s problems.

López’s words strike a significant contrast with Machado’s discourse. After all, he stands accused of several charges stemming from the nationwide protests on Feb. 12, the roots of which can be traced to an attempted rape, eight days earlier, at a university campus in San Cristóbal, the capital city of the western state of Táchira. Táchira, it turns out, is part of the Venezuela-Colombia border region, where the problems López outlined in the Times — crime, scarcity and inflation — have reached dramatic levels.

In many ways, understanding San Cristóbal is the key to understanding the maelstrom of political, social, and economic problems that make up the reality of modern Venezuela. There, more than in any other place in the country, scarcity is the alpha and omega. For years, this and other border regions of Venezuela have experienced problems that are only now beginning to affect the entire country — and that are starting to produce policies so reminiscent of past failed socialist experiments. Scarcity is the latest, most powerful indicator that Venezuela has become a money-wasting machine. Its current situation is the product of its economic irrationality, the criminal structures that have flourished around it, and the powerful people that want to maintain the status quo, even if doing so brings about the epic freedom-vs.-tyranny battle that Machado passionately denounces all over the Americas.

The poster child for Venezuela’s irrational economic policies is the so-called gasoline subsidy. At an average price of $0.085 per gallon, the country sells the cheapest gasoline on planet Earth. And the money-wasting starts right away: production costs run double the retail price, meaning the state incurs direct losses that in 2010 amounted to approximately $1 billion. According to economists, the opportunity cost associated with the subsidy — the difference between selling subsidized oil in Venezuela and selling it abroad — ranges from $25 billion to $32 billion a year.

And that’s only the beginning. Rather ironically, Venezuela imports at market prices up to one-third of the 323,000 barrels of gasoline it consumes every day. In 2013, Venezuela bought an average of almost 900,000 gallons of gasoline every day from the United States, plus a bit more from Mexico and Brazil. All in all, the government makes back an estimated 2 percent of the money it invests, which is as high as $14 billion per year — well over 4 percent of GDP.

The significance of this amount increases radically when put into perspective. In an award-winning study, Douglas Barrios and José Ramón Morales, two Venezuelan researchers at Harvard University, found that the fuel subsidy is larger than the valuation of all social programs combined (2.3 percent of GDP), including primary and secondary education, health, and citizen security. Furthermore, they found that an individual in the richest 10 percent of the population receives an overall benefit from the subsidy 13.5 times larger than what an individual in the poorest 10 percent receives.

In other words, Venezuela spends more money giving fuel for free to its wealthy citizens than fighting inequality and poverty. In so doing, it has become the country with the highest carbon dioxide emissions per capita in the region.

But back in San Cristóbal, the fuel subsidy is much more than just a policy taboo; it’s the cornerstone of an illegal business that defines life in the region. The math is simple: gasoline in Venezuela is some 60 times cheaper than in most of its neighbors, a price differential that allows for up to 1,000 percent profits from smuggling.

Fuel smuggling has been the ugly twin of Venezuela’s gasoline subsidy for decades. According to official figures, up to 100,000 barrels per day are smuggled overland through the jungle to Brazil, in clandestine tanks aboard tuna ships to Aruba and Curazao, and, of course, to Colombia, where it represents up to 15 percent of the gasoline the country consumes.

As dramatic as it is, fuel smuggling is but a drop — albeit a big one — in an ocean of trafficking across the 1,280-mile-lon
g Colombia-Venezuela border. The logic, again, is simple: Most basic products in Venezuela are imported at the government’s preferential, fixed rate of 6.3 bolivars to the dollar, and sold at regulated prices. The price differential has created a black market of jaw-dropping proportions: According to some estimates, up to 40 percent of all Venezuelan imports are smuggled and sold in Colombia. María Ángela Holguín, Colombia’s foreign minister, has said that the scale is "truly scandalous…Venezuela is almost financing Colombia’s food supply."

The cost of smuggling for Venezuela is enormous: the country’s losses are estimated at between $6 billion and $8 billion per year, and the trafficking has fueled nationwide scarcity. In cities like San Cristóbal, daily life is characterized by the long lines outside supermarkets and shops, where locals spend hours — amid heavy police presence — trying to get anything from powdered milk to basic medicines. According to official figures, up to 28 percent of basic products are missing or hard to get in Venezuela. Meanwhile, the government already owes some $2.4 billion to food companies.

The authorities, of course, have been trying to stop the smuggling, using everything from traditional clamp-downs to more sophisticated solutions, including a controversial fuel-rationing system that tracks each car’s consumption with a chip attached to its windshield.

Not coincidentally, the first state to try the new system, in 2010, was Táchira. But far from helping with the smuggling, the system increased the frustration of locals, who felt they were being profiled. And thus the seeds of the current rebellion were sown. "The government doesn’t recognize us as Venezuelans. They call us smugglers, and portray our grievances as a coup attempt led by Colombian guerrillas," Daniel Ceballos, the now-jailed mayor of San Cristóbal, told Foreign Policy at the beginning of March, when his city was in the midst of a self-imposed siege characterized by barricades in every street. A few weeks later, he was arrested in Caracas.

But nothing has helped to contain an illegal business that, according to experts, is as profitable as drug trafficking. And perhaps nothing can. "You can make the Pope handle this situation and he’ll probably end up corrupted," said Harvard’s José Morales, "because the incentives are designed for someone to exploit them." And that someone, it turns out, is an array of well-established smuggling organizations, including Colombian groups like the Revolutionary Armed Forces of Colombia (FARC) and the Rastrojos.

Hovering above all this is the role of the Venezuelan Armed Forces, which control the country’s borders and have long been accused of involvement in organized crime. "There is no way those volumes of goods are getting out of the country without a complete coordination with state authorities," Luis Vicente León, an analyst at Venezuelan pollster Datanálisis, told AFP in February.

All of this is only part of a wider corruption picture that spans the whole state apparatus. Apart from the smuggling business, the other cash cows are the various foreign exchange systems designed to stem capital flight. The distortions and loopholes offered by these systems, which are also supposed to help control inflation and shelter domestic industries, have created almost infinite opportunities for speculation and corruption. According to Economy Vice President Rafael Ramírez, one in three dollars in the country is either misused or stolen.

Beyond all of this, however, lies an inescapable fact. While the biggest corruption schemes in Venezuela are organized and sustained around currency controls and subsidies, neither of these policies was instituted by Chávez or brought about by his so-called Bolivarian Revolution. The gas subsidy has been in place for several decades, with its current price fixed since 1996, three years before Chavez came to power. Venezuela’s currency, meanwhile, was fixed between 1930 and 1983. After that year, in fact, it instituted a multiple exchange regime that, by the time it was lifted in 1989, was characterized by a 132 percent difference between the official and parallel rates. The same could be said of inflation, which averaged 50 percent per year during the mid 1990s and even reached 115 percent in 1996. With the exception of 2013 and 2014, Venezuela averaged 22 percent inflation during the Chávez era.

The point is simple: Beyond the ideological fog in which politicians like María Corina Machado feel so comfortable, Venezuela appears to be confronting the same structural problems that have tormented its economy for at least the past 40 years. And while neither government nor opposition seems willing to admit it, some of Venezuela’s most prominent economists agree that the country is trapped in an oil-driven macroeconomic cycle that started with the mid-1970s oil boom. "Since then," wrote Morales in a 2013 piece, "we have been trapped in the oil political trap." Its logic, he explained, "is based on the opportunistic use of the oil wealth from a position of power."

According to Morales, Chavez bequeathed to Maduro the same ticking time bomb that President Jaime Lusinchi left his successor, Carlos Andrés Pérez, in 1989. "If the country doesn’t use this crisis to understand how its economy works and to break the myths about the oil wealth, we will only perpetuate the wicked cycle of populism and macro-adjustment."

This reality is becoming increasingly evident in today’s Venezuela, and some steps are already being taken: While some form of gasoline price increase seems inevitable, the new SICAD II foreign exchange system is expected to decrease the enormous gap between official and black market foreign exchange rates, which still hovers around 1,000 percent. On April 3, legislator Ricardo Sanguino said in an interview that "the trend in the medium and long term could be that we have an open market for currency."

What Sanguino didn’t mention, of course, is the impact all of this could have on the population if sudden and massive capital flight — induced by the lifting of currency controls — brings about the collapse of the bolivar. Nor did he address what would become of the powerful figures — civilian and military — that control the multi-billion dollar criminal schemes that revolve around the country’s economic distortions. Nor can the proponents of the gas price increase explain how they intend to handle the tens of thousands of people who will be left jobless and desperate after their decades-long way of life comes to an end (in Colombia alone, gasoline smuggling employs some 15,000 people, and up to 75 percent of the population of some border towns.)

Which brings us, finally, to the million-dollar question: In post-Chávez Venezuela, who has the political capital to institute the deep and painful reforms the country requires to break out of this wicked cycle? If Chávez himself — who was the closest to God you can get in Venezuelan politics — didn’t dare to touch the gasoline subsidy or move against the Armed Forces’ involvement in organized crime, who would dare? In the answer to that question, more than in the epic battles painted by the likes of María Corina Machado, lies the key to Venezuela’s long term future.

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