And the government is to blame.
Now, more than anywhere else, socialism should have worked in Venezuela. After all, it has the world’s largest oil reserves, so it should have had more than enough petrodollars to finance a generous safety net. But rather than creating a Norwegian-style state, Venezuela has opted for a more Soviet one. It started when the late Hugo Chavez turned the country’s state-owned oil company from being largely autonomous to being little more than his personal piggy bank. Profits came out, but new investment didn’t go in, and, as a result, oil production fell 25 percent between 1999 and 2o13. Oil exports plunged twice as much, because so much of the country’s crude stays home at the extremely subsidized price of 1.5 U.S. cents per gallon.
But Venezuela’s government didn’t want to just control the petrodollars. It wanted to control all the dollars. That would give it the power to tell businesses that need dollars to, well, stay in business what kind of prices, profits, and production they could offer. So, to that end, the regime has set up a three-tiered exchange rate that let companies and cronies—is there a difference?—get a hold of dollars for what is now 100 times less than the black market rate, which they are then supposed to use to buy imports with.
The only problem is this creates shortages when it works and worse ones when it doesn’t. That’s because the government doesn’t just decide who gets cheap dollars, but also how much they and everyone else can charge. Companies that don’t get dollars at the official exchange rate would lose money selling at the official prices, so they don’t—they leave their stores empty. But even ones that do get low-cost dollars would make more money selling them in the black market than using them to sell goods at the official prices, so they don’t as well—their stores stay just as barren. In other words, it’s not profitable for unsubsidized companies to stock their shelves, but not profitable enough for subsidized ones to do so, either. That’s why Venezuela’s supermarkets don’t have enough food, its breweries don’t have enough hops to keep making beer, and its factories don’t have enough pulp to produce toilet paper. That’s left Venezuela well-supplied with only one thing: lines.
But now Venezuela is facing a new shortage. Oil is back down to around $50-a-barrel, which means the government barely has enough dollars to pay back what it owes, let alone dole them out to companies. So it’s had to print more money than usual—which was already a lot—to try to paper over this problem. The result, as you can see above, has been a complete collapse in Venezuela’s currency, the bolivar. Going by the black market rate, which is the closest there is to an actual one, the bolivar has plummeted from 79 per dollar last August to 687 today. That’s an 89 percent drop in the last year, with 40 percent of that coming in the last two months alone.
At this rate, hyperinflation won’t be far away, if it isn’t already here. Venezuela officially had 68.5 percent inflation last December, the last time it published any numbers, but that figure should be much higher now that import prices are. It’s just another default, as Ricardo Hausmann points out, in a long line of them on Venezuela’s people. The lack of food, medicine, and any other basic item you can think of is, in part, the result of the government using what dollars it does have to pay foreign creditors instead of domestic ones. Making the currency worth little more than the paper it’s printed on is just another way of doing that.
The question now is whether Venezuela will run out of the last thing it has left, besides day-long lines. And that’s people’s patience with an economic system that could hardly fail more than it already has. With elections looming, the government has gone back to doing what it always has, stealing from the few to give to the many, this time commandeering food warehouses to turn into cheap public housing.
Venezuela’s government can’t afford to say let them eat cake, because Venezuela’s people actually can’t afford to.