Miércoles 23 de Mayo de 2018

The Venezuelan tragedy

Por: Fátima Chirinos Alva - 27-07-2017

Throughout Venezuela a surge of protests and looting are taking place as the population claims for access to food, to medicines and a decent life. A surge that derives from the impossibility that most citizens have to meet the price of the few available foodstuffs with their current incomes. Inflation in Venezuela is so high that ten minimum wages are needed to have access to the basic food basket.

A terrible crisis that has resulted in a civil uprising of more than a hundred days, leaving eleven people dead. To understand it better, it is necessary to go beyond economics and analyze its social and political roots first.

The political crisis

In the last legislative elections (held in December 2015), all political parties of Venezuela opposing chavismo composed a large alliance called “Mesa de Unidad Democrática” (MUD, in Spanish). That undertaking, plus massive scarcity and high inflation resulted in the government losing said elections by a wide margin. Then, knowing that the opposition would win the absolute control of the National Assembly (the Chamber of Deputies), and before the new elected deputies took oath, Nicolas Maduro decided to reform the Supreme Court (Tribunal Supremo de Justicia, in Venezuela) to increase the number of judges and consolidate control of the judiciary.

The conflict escalated to the point that, by April 2017, the Judiciary decided to annul the powers of the National Assembly and pass them onto them (along with a decreed increase in extraordinary powers in criminal, military, economic, social, political and civil affairs by Nicolas Maduro). Thus generating an institutional crisis not seen before, which brought about a civilian uprising characterized by, mostly, peaceful demonstrations.

Amid the protests and profound social and economic crisis, portrayed by the scarcity of basic foodstuffs and medicines, increased insecurity and the longest and deepest recession in contemporary history of Venezuela, the government has resorted to a new strategy to cling on to power: a call for a National Constitutional Assembly. In hopes to transform the State and create a new legal architecture [1]. However, such call is unconstitutional as it violates the right of a popular referendum to decide whether or not there should be a National Constitutional Assembly.

How does institutional weakness lead to social crisis?

The literature states that weak institutions are at the core of a fragile State, as stable political systems require institutions that reinforce themselves and are capable of handling tensions without the population resorting to violence. To understand this better, it’s important to highlight where instability can be observed, which can be related to incentives on different social groups, particularly those that hold political power. As such, the theory shows that the way power is assigned, the control of the State by the Executive branch and public participation in the political process are three key components explaining institutional weakness.

Along with institutional weakness, economic factors have great impact in State fragility but the effects are less relevant than the impact of institutions, because economic development is not a requisite per se for preventing State fragility. However, dramatic declines economic growth rates would result in complicating the institutional development in the country. As example, graph 1 shows how has fared the deterioration of the quality of institutions in Venezuela in 2006.

Graph 1. Institutional Quality and Political Participation in Venezuela

Source: World Bank, World Economic Forum.

As it can be observed, the quality of institutions has declined since 2010, when a significant drop in the indicator is observed. Deviations from the Constitution, permanent pressure of the Executive on other branches of government, the double-headed functioning of the Executive, and open (or indirect) attacks on free press, among other factors; are manifestations of State fragility. These, increase the vulnerability not only of institutions but also of society. As a consequence, current afflictions suffered by citizens, in areas as basic as security, employment, economics, education and health; remain unresolved.

Therefore, social and violent conflict is the last manifestation of State fragility. Which, in turn, can also further reinforce the dynamic of fragility and inoperativeness. Violent conflict can further reduce GDP growth, increase pressure on unresponsive political institutions and increase social tensions. This is portrayed in graph 2, as increasing levels of GDP per capita result in a decrease in social instability, and the other way around.

Graph 2. GDP per capita vs Number of Protests in Venezuela 2010-2017

 Source: Venezuelan Observatory of Social Conflict, IMF.

The economic crisis

The Venezuelan crisis is of terrible proportions. I’ll provide some comments on production, inflation and oil dependency to grasp a better understanding of it. Although the Central Bank of Venezuela has not published detailed statistics on these and other macroeconomic figures, day to day observations show that the crisis continues to escalate.

Economic growth means stability. In other words, more income generates investment, and thus, more employment and production. In Venezuela, growth has always been uncertain, particularly since the economic crisis erupting in 2014. In the last four years, GDP evolution in Venezuela is increasingly worrying. According to the IMF the production of goods and services will fall 7.4% towards the end of 2017, while next year an additional contraction of 4.10% is expected.

Monetary policy has been another casualty of economic mismanagement. Among the functions bestowed onto the Central Bank by the Constitution is price stability and internal and external value of the currency. On this, clearly the Bank cannot achieve its purposes by itself, as a relevant part of economic policy befalls in the Government, particularly national production, social expenditures, exchange regime, imports, exports and fiscal expenditures.

In an economy where there is more money than goods to purchase, scarcity increases prices, as shown by inflation indexes for the country. Although the Central Bank has not yet published statistics on the National Index of Consumer Prices (INCP, in Spanish), simple observations show that inflation accelerates and continues to be a grave problem, particularly in regards to printing of paper money (or monetary liquidity).

According to the price index published by the National Assembly, inflation accumulates 176% in 2017, averaging monthly 18.5%. The IMF projects an inflation of 720.4% for 2017, while for 2018 it should rise up to 2,068.49%. This, exclusively due to a massive increase in monetary liquidity, as a constant increase in the quantity of money, amid a profound recession, results in more bolívares chasing less products and services.

In the first semester of 2017 the growth of liquidity accelerated, from Bs. 10.4 billion in December 2016 to Bs. 20 billion in June 2017. So, in only six months, liquidity doubled in size. Also, between the first quarter of 2016 and the first quarter of 2017, liquidity increased by 299%, as shown in graph 3.

Graph 3. Variation (%) of monetary liquidity in the first semester

Source: Central Bank of Venezuela

Additionally, fiscal policy emerges from the consideration of public expenditures, taxes and budget. As Venezuela has been impacted by important variations of oil prices in recent years, fiscal management has become crucial. 

Countries as Chile, Peru, Colombia, Brasil and Argentina generate stability and opportunities through coherent economic policies. In Venezuela, the contrary has been the case throughout its history, from the beginning of oil exploitation booms were not managed by efficient fiscal policies, lacking continuity between governments. In other words, policies changed within a government term or as soon as a new administration arrived. Therefore, an unstable system has been set throughout the years that has not allowed the economic structure to generate long term growth.

Another example are variations of the Value Added Tax (IVA, in Spanish, used as imposable base for prices of goods and services. The variation of VAT revenue is an indicator of the direction and magnitude of price variation. Although June statistics are not yet published, revenues from VAT to May indicate that, during the first quarter of 2017, the biggest inter-quarter growth was experienced, at 177%.

Graph 4. Inter-quarter Variation of VAT

Source: Central Bank of Venezuela. (until May 2017 only)

In an economy suffering a profound recession, such as Venezuela, tax receipts should be falling, as a consequence of depressed commercial activity. However, the accelerated growth of the money supply alters the prices of the economy and pushes tax receipts upwards - artificially. It’s not possible to know how real tax receipts have varied, as the INPC is unknown, but taking as reference the index published by the National Assembly, tax receipts should have contracted by 40%.

Fiscal policy has achieved little given inflation rates that are the highest in Latin America. Constant price controls and the consequential scarcity of goods has shown the lack of effective governmental policy. And more importantly, it has impacted on life standards of Venezuelans.

Moreover, the government focuses public policies on the predominance of the public sector over the private. The fall in receipts of foreign exchange, due to declining prices and production of oil, have drastically reduced imports. In those conditions, the supply of goods and services has not recuperated, while the money supply continues expanding at a higher pace, consolidating expectations that in 2017 the economy will end up worsening more than in 2016.

See in Spanish / Ver en español

Nota al pie

[1] Chavismo is far left-wing political ideology that also functions as a cult of its creator Hugo Chávez, who ruled Venezuela from 1999 to 2013.


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