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Minimum Income Scheme: A Lesson To Learn From Venezuela

Hyper-inflation hits Venezuela due to the socialism programs executed in 1999. Mega-starvation erupts among the people of the South American country.

 

Venezuela’s economic condition has made headlines all over the world. Hunger is widespread and people are left with no option but to eat garbage and even animals by barging into the zoos to survive. The food crisis has overshadowed the education crisis because the children are not able to attend school due to mega-starvation and hyper-inflation hovering around the country.

Moises Rendon and Mark L.Schneider of the Center for Strategic & International Studies provide a bleak assessment of the Venezuelan Crisis, saying that the country is suffering “an unprecedented and man-made humanitarian crisis”. The country is facing extreme food and medical shortages, rampant corruption and crimes in every city, constant electric blackout, looting and repression. How could a country that was once one of the most affluent countries in the South America reach such a sorry state? The prime factor which led to this crisis is the out-of-control inflation.

 

What is hyper-inflation ?

 

Simply put, hyper-inflation is the extremely high, rapid, and continuous inflation. In this condition, the prices of the goods and services quickly rise to a level where it is impossible to afford for most people. Economist Michael K. Salemi states that hyper-inflation occurs when the monthly inflation rate is greater than 50% (And this rate is very less than what is prevailing in Venezuela right now). He gave an example that “at a monthly rate of 50%, an item that costs $1 on 1st January would cost $130 on 1st January of the following year. The prices of goods are doubled every 26 days in the country. A cup of coffee which used to cost 450 Bolivars 2 years ago is now rated 2.5 million Bolivars this year. In July 2018, the annual inflation rate reached 83,000%, whereas IMF estimated a shocking 1,000,000% inflation this year.

So, what went wrong? Many economists suggest that the excessively huge supply of money in the economy out-numbered the demand of the people. Inflation is imminent when each and every individual is able to afford the goods but the production and supply of those goods are not increased relatively. This happened when the Venezuelan government decided to follow the footsteps of Zimbabwean government policies in order to pay its debts.

First, President Hugo Chavez ran Venezuela from 1999 until his death in 2013. His government came up with socialism programs called the Bolivarian’s Mission that aimed at improving the living standards of the poor by redistributing the wealth (18,000 Bolivars per person) and reforming the way lands were used. Many international data reveal that Chavez actually achieved success through his programs. He reduced unemployment from 14.5% in 1999 to 7.8% in 2011, minimized poverty rate from 50% in 1999 to 31.9% in 2011 and eradicated extreme poverty rate from 20% in 1999 to 8.6% in 2011. But, this prosperity came with a tremendous financial cost. The social reforms were very convenient for the people but toxic for the economy. Chavez spent more money on these programs than the country could really afford. According to CNBC, public spending accounted for more than 50% than the Venezuelan GDP. Chavez even borrowed money from International Institutions to keep the programs running. This hyped the debt of Venezuela to $106 billion (40 billion Dollars more than its current GDP). Advisors of Chavez warned him about the deadly consequences like fiscal deficit but it all went in vain. For Chavez, these reforms were a way to win public support and increase his popularity to maintain his power. To make matters worse, Chavez and his administration failed to save money for future, crisis.

Second, Venezuela’s economy is mainly based on selling only one commodity i.e. Oil. Venezuela has the largest oil reserves in the world with 300,878 billion barrels of proven reserves. The Orinoco Petroleum Belt (with 1.2 trillion barrels of oil) and basins of Lake Maracaibo (supplies 2/3rd of the Venezuelan output) are some of the oil-rich areas in the country. With the discovery of oil in Venezuela in 1900s, the country relied more and more on it for its revenue source and today, it derives 50% of its GDP from petroleum exports. According to a Forbes article, this indicated that when oil prices were high, life was good. Venezuelans enjoyed a high quality of life when oil prices were high in 1960s and 1970s. At that time, the country was considered rich because oil prices were high and it produced more than 10% of the world’s crude oil and had a per capita GDP many times higher than that of its neighbors – Brazil and Colombia. Eventually when oil prices degraded, life in Venezuela became vulnerable. In 2014, the oil price dropped from $100 to $70 per barrel and further declined to $33 per barrel in 2016. Lower oil prices brought with it a reduction of Venezuela’s foreign reserve, and this made the government incapable to subsidize basic goods and services for its people.

Third, the Venezuelan government, now under Chavez’s successor Nicolas Maduro, dealt with the crisis in a same manner the other countries with similar situation did in the past. He started printing more money. American Institute for Economic Research (AIER) states that printing money can set the wheel of hyper-inflation in motion. The budget shortfall was closed by printing money. Hyper-inflation took over, destroying the savings of individuals and making productive business investment nearly impossible. A nurse named Maigualida Oronoz said in an interview with the Guardian, “We are millionaires, yet we are poor…. We can just about eat, but if some health emergency happens we will die because the prices of the medicines are sky high and rise every day.” According to economist Theodore Cangero, hyper-inflation continues under Maduro because he is not putting a stop on the disastrous social reform of the late President Chavez. Earlier this year, Reuters reported that Maduro seemed to neglect and denies recognizing any sign of hyper-inflation in the country and has no plans to address it. However, the Peterson Institute for International Economics outlines his plans for the dying Bolivar. “His proposed monetary reform has three pillars: (1) Slash five zeroes from prices so that if a product that costs 100,000 Bolivars would now cost 1 Bolivar and giving the currency a new name- Sovereign Bolivar. (2) Devalue the currency by 95% and (3) Peg the Bolivar to the Petro, Venezuela’s digital currency backed by oil introduced in 2018”, said PIIE. But PIIE and other economic experts are skeptical about the success of these measures in reducing hyper-inflation because they don’t address the underlying problems that are causing the hyper-inflation in the first place. PIIE even forecasts that Venezuela is all set to beat Zimbabwe, a country that managed to have an annual inflation rate of 79,000,000,000% ( Yes, you read that right. 79 billion percent) in November, 2008.

The economists interviewed by CNBC said a bigger crisis awaits Venezuela. “Amid this aggressive devaluation and monetary expansions due to salaries and bonuses, we are expecting a much more aggressive stage of hyper-inflation”, said Venezuelan economist Asdrubal Oliveros of Consultancy Ecoanalitica. Today, the Venezuelans have decided to no longer live in this country where all of the social gains of low poverty and high unemployment recklessly brought by Hugo Chavez have been wiped out by incompetent leadership, poor financial planning and widespread corruption. They are fleeing from Venezuela in clusters. According to the Guardian, “Nearly 2 million people have bolted from Venezuela since 2015. The exodus will continue unless some drastic monetary and political changes are made.”

It’s too late to blame it on anyone and we better come up with solutions. So, what do you think can be done to fix this messed-up hotchpotch? Let us know in the comment section.

Written by Reincarnating Raipur

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