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The End Of An Era In Venezuela

220px-Chavez-WSF2005The end is near for the Bolivarian Revolution in Venezuela after a disastrous 16 years. The country now faces bankruptcy, after destructive economic policies that have taken a resource rich nation to the edge of ruin. The government is finally running out of financial resources to simply paper over the nonsensical fiscal actions, taken by former President Hugo Chavez and his successor Nicolas Maduro. Ideology and politics always triumphed over economic common sense in this collectivized experiment, which is now mercifully coming to an end.

The investors and wealth creators of Venezuela became the pariahs of society. Step by step, the government moved to transform the country from a capitalist to a managed economy. The dream of a new nation free from poverty and want, has ended in an era of declining standards of living and collapsing infrastructure. Government largesse to the masses, has plainly become unaffordable.

Inflation In Venezuela

Inflation In Venezuela

In 2012 it was estimated that 25% of the population in Venezuela was living in poverty. The following year that grew to nearly 33% of the total. One can only guess that this rate is still increasing, given the dire straits the country is now in. It is estimated that the economy contracted by at least 4% in 2014. The forecast for this year is even worse. Inflation, as best as can be measured by economists is in excess of 60%. The country now has the distinction of having the worlds highest rate in price increases.

Since the domestic production of so many basic goods have been diminished or wiped out, it has led the country to become overly dependent, on increasingly unaffordable imports. In the beginning there were shortages in select items dealing with personal hygiene, beauty enhancement and diapers. Then came the shortfalls in electronics and appliances. It has now escalated to include essential items like dairy products, flour, cooking oil, meat, and even fresh fruits and vegetables.

Shortages Of Goods In Venezuela

Shortages Of Goods In Venezuela

The country is now witnessing hundreds of customers lining up outside stores, especially supermarkets on a daily basis to purchase dwindling supplies of groceries. The situation is even worse for a number of needed medical supplies and medicines. In some areas it has become critical, as hospitals are no longer equipped to deal with standard medical practices and procedures.

How can this happen in a country that has the largest proven reserves of oil in the world? At 297 billion barrels, it is an incredible source of wealth for Venezuela. It is true that oil prices have come down some 50% over the last 6 months, but what happened to all the money generated from the boom years from the time Chavez took office in 1999? Nearly 1 trillion USD (United States Dollar) has come to the country since the Chavistas have been in power. Where did all this wealth end up?data=U4aSnIyhBFNIJ3A8fCzUmaVIwyWq6RtIfB4QKiGq_w,sXcobMpQJ8NoL96ShhukGLD-YG_Wpo07e22cMm_x6k_1ERjLzWYqmVMXYjFhs14CIPF28Bax-T8RkOMuUUhPz4zTJuA92LrPNRab6eTl9Am1cGM

One of the first problems for Venezuela is that the country has become overly dependent on oil exports, which is the only real export left. Worse yet, the country needs oil prices to be at least double what they are at the present time. The government of President Maduro needs world prices to be at least $120 USD in order to balance the books. That is continuing to pay for necessary imports, social entitlements and crushing foreign debt.

220px-Citgo_bostonVenezuela is paying the price for years of government corruption and mismanagement. The collapse in the oil market, has only hastened the end game for this absurd regime. Where did all the oil money go? A portion was indeed spent, on improving the lives of the poor. Low cost housing, health care and subsidized food made the Chavez government popular with the masses.

A dismal amount was spent on infrastructure. If more of the oil revenue had been spent in this sector, there would have been enormous benefit to the country. As is, just a few new projects were actually completed mostly metro lines and some new roads.

Hugo Chavez And His Foreign Political Allies In 2008

Hugo Chavez And His Foreign Political Allies In 2008

Mr. Chavez also used the wealth generated by oil, to buy friends in Latin America. Special oil deals were made with countries that maintained good diplomatic relations with Venezuela. This was particularly the case with Cuba. These countries received lower prices for oil than could be bought in the world market. He even offered lower prices for hard pressed customers in the United States, at one time. It did buy good will in a number of nations, that is as long as these trade agreements continued.

The biggest portion of oil revenues cannot really be accounted for. It was dissipated in the pursuit of pet projects, helping political allies and simple corruption. The dishonesty has permeated throughout the society. The best example of this, is in the energy industry itself. Since gas prices are artificially kept at absurdly low levels in price, it encourages smuggling. It costs the country billions in lost revenue by selling the oil below market prices, and then billions more through the illegal exportation. The biggest customers for this illegal oil are found in Brazil and Colombia. To make matters worse, public officials and even the armed forces are involved in the scheme.

National Legislative Building

National Legislative Building

Another drain on government resources, is the large inefficient bureaucracy. The size of this institution has doubled under the Chavistas. To add to the problem was the steady expropriation of private businesses and companies, by the government during the last decade. Well over a thousand establishments suffered this fate, across a wide variety of industries. As is often the case with government ownership, most of these businesses are now losing money. In order to continue operations, they collectively need a regular infusion of government loans and subsidies.

The private sector is gradually being smothered by government imposed price controls. It not only discourages future production, it basically shuts down any new investment. So as stated earlier, it is gradually shutting down domestic output, of an ever greater share of the marketplace. Many businesses find themselves in the impossible position of where they are forced to sell their inventory, for less than what it would cost to replace it. The end result is not hard to fathom. The concern either goes bankrupt or is taken over by the government. This is the driving force behind the ever increasing market demand for imports.

Former President Chavez Meeting Foreign Leaders

Former President Chavez Meeting Foreign Leaders

The most ill considered action by Chavez and to a lesser extent his successor, was not only in allowing the oil wealth to be squandered, but acquiescing to the rapid accumulation of sovereign debt. More debt was issued towards the end of the Chavez Administration in Venezuela, than for any other emerging nation. The fiscal deficit alone is estimated to be heading towards 20% of GDP (Gross Domestic Product) in 2015. This rate is unsustainable, for an economy that is in a state of free fall.

If this was not bad enough the government also engages in currency manipulation on a large scale. This has been the habit of other nations encountering monetary problems in Latin America. One only has to look at the history of Argentina to see not only how bad it will get, but also how it will end. Until this month there were 3 separate official exchange rates. Of course none of them have any reality to the real currency value, so black market activity is rampant.

Currency Value For Venezuelan Money

Currency Value For Venezuelan Money

There are 3 immediate major issues that President Maduro must contend with. The first is coming up with the money to continue necessary imports. The military is already involved in the regime of rationing and maintaining order in stores. Shopping has become stressful and there are often civil disturbances as customers become impatient and angry, at the growing shortages. Harassment by public officials and the military keep a lid on the situation for now, but for how much longer?

The second challenge will be to continue to service the burdensome debt incurred in previous years. The interest on this liability, is estimated to be over $10 billion USD in 2015 alone. The central banks international reserves are rapidly dwindling. They will be insufficient to pay for the debt payments and needed imports.

President Nicolas Maduro

President Nicolas Maduro

The third issue will be how to continue the payments to all the supporters and constituents not only within the government, but those on the outside as well. Mr. Maduro has seen his approval slide ever lower, since his election 2 years ago. He has responded by tightening the grip of the government on the Venezuelan economy and society. As the country slides towards totalitarianism, the pressure of repression continues to mount.

The judiciary system has already been comprised and neutered. Cuban intelligence agents are everywhere, including in the military. High ranking officers there as throughout the government, have been replaced by more loyal individuals, as a way to deal with the rising opposition. The independent media has been all but demolished. Regardless of the tightening grip, the hold Mr. Maduro has on power seems to actually be weakening.

At this point there are 3 possible outcomes. None of them are absent of risks or dangers. The first would be the electoral way. It is mostly likely that the last election which brought Mr, Maduro to power, was fraught with corruption and manipulation. In order to win the parliamentary election later this year, the government would have to engage in outright fraud. Everyone knows this. If as expected the opposition wins, there is no doubt that a recall referendum will follow, to oust President Maduro. He would not survive such a vote. By 2016, the whole Chavista movement would be in retreat.

City Of Caracas

City Of Caracas

The second outcome could well be a military coup. Rumors are already widely circulating throughout Caracas, the capital of the country, about this possibility. The problem here is how to organize and move quickly, with so many spies and Chavista supporters about.

The third and most troubling option, would be a total collapse of the economy and with it a breakdown of society. There would be open rebellion in large swaths of the country. Civil war and domestic disturbances would threaten the cohesion of the country. Martial law could not in itself prevent this. In addition, there would be segments of the army that could not be relied on by either side in the ensuing conflict.

The next 18 months will determine the future of Venezuela. The country is at a crossroads. An era is coming to an end. As much as President Maduro would like to keep his socialist revolution alive, this will no longer be possible. He does not possess the political acumen of his predecessor, nor does he inspire unquestionable loyalty. What he is selling is simply, no longer affordable. As an ever greater number of Venezuelans understand this reality, the more his days as president become numbered.

1 Comment

  1. Good to hear the truth about what communism can do to a country instead of some glossed over left wing propaganda/scapegoats everywhere cover-up like the Maduro government is spewing. Venezuela is most likely going to have a military coup. Large elements of the military are sick of Cuban interventionism in their country and one only has to look at the long lines at supermarkets to see that 21st Century Socialism is just tired old 20th Century communism – shortages, economic deprivation, government repression, police state politics and lie after lie from Big Brother Maduro. Just like Castro uses the US embargo as an excuse for his idiotic failures, Maduro seeks to pin it all on the wicked gringos out to kill him and steal the oil.

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