Venezuelans are queueing for toilet paper and throwing poo bombs at politicians. How did things get so bad?
Here’s three reasons why Venezuela’s economy is in such serious trouble
Venezuela is in crisis. People are so desperate for change and frustrated at those with the power to make it happen that they are literally throwing poo bombs at politicians – some might say for good reason.
“The economic situation has contributed to shortages and government policies have aggravated them,” says Tamara Taraciuk Broner, a researcher for Human Rights Watch. “The shortages have had greater effects on those who have the least.”
“The poor have to rely on government set prices, they can’t afford to go to the market and buy goods at inflated prices. They stand in line for hours, looking for things like cooking oil, pasta, rice, and toilet paper. They often get to the front of the line and find there is nothing left.”
Here's three big economic factors that played a part in making all this happen.
Rule number 1: Don't rely on just one thing to keep your whole country going.
Theoretically, Venezuela should be loaded. The country sits on the world’s largest source of oil.
But the problem with relying so heavily on one source of income is that if the value of that good goes down, you don’t really have a fallback. Oil prices go up and down for all sorts of reasons – if a major government starts investing more in renewables, the price might go down, while if another oil producing government is having difficulties making as much as usual, the price might go up.
The level of oil prices around the world has a direct effect on the day to day lives of Venezuelans. When oil prices increase, life is good. When they plummet, things get ugly.
It’s not just the fact that low oil prices means you get less money for selling the same amount of oil – the value of Venezuela’s national currency itself, the bolivar, drops when oil prices go down. This happened in the 1980s, in 2008 and - most recently - 2014. Since then, prices have remained low.
We tend to think of money as something you use to buy other things, but for a lot of people around the world who work in the financial industry, money is a product in itself.
But when Venezuela’s economy is doing badly, people sell the bolivars they own, which makes the currency’s value go down, which is bad news for everyone who earns their wages in it.
Rule number 2: Don't spend all your money.
Okay, so Venezuela made much less than it should have on oil. But they still made quite a bit. Where did it all go?
A lot of people say the crisis is down to ‘Chavismo’ – the ideology of the former president Hugo Chavez, who made a lot of private businesses government-owned instead, and put very high taxes on oil companies.
“During a period of high oil prices the government went on a spending spree,” says Raul Gallegos, who just wrote a book on Venezuela called Crude Nation. “People can argue back and forth that the spending spree benefited a lot of the poor but, in the end, whatever the government did, essentially was the equivalent of a spending spree and no money was saved.”
Realizing that a) relying on oil wasn’t the best idea, b) especially not if you’re going to spend all your money on big projects and forget to keep some backup funds stored under your pillow, Venezuela tried another little economic trick: currency controls.
Rule number 3: Don't mess with the money you have.
A currency control is basically when instead of letting people buy and sell your currency as usual, the government sets a limit on the price at which people are allowed to trade the currency. Some say it’s an awful idea because it’s essentially lying about the ‘true’ value of the currency – but others say it’s sometimes necessary to protect yourself from the ups and downs of the way the economy works.
The initial idea behind these controls in Venezuela was to stop too much money leaving the country. What ended up happening is that Venezuela was trying to operate with four dollar-bolivar exchange rates; three legal ones and one black market rate.
The top two rates put the value of the bolivar way above what people are actually willing to pay for it. Friends of the government could basically re-sell their dollars at the artificially high rate and make massive gains, something which regular Venezuelans would never be able to do. The problem with this is that because no other country agrees the value of the bolivar is that high, it can become very difficult to sell for foreign currency, which is essential for imported goods and raw materials.
As if they hadn't played with things enough, the government also decided to impose something called a 'capital control' – which is basically a limit on how much money can come in and out of the country. This quickly turns into a game of loyalty – if the government likes your business, and you are loyal to it, you get access to the limited amount of trade that's allowed – if not, you don't.
Rule number 4: If you've screwed up on rules 1-3, it's not too late to fix it.
“Countries that have done things properly are not superhuman,” Gallegos says. “They just happen to have had the foresight to adopt sound economic policy.”
Venezuela should try and do the same. Of course, there are no hard and fast rules in economics – and situations change for all sorts of reasons. But it seems like it'd be a good idea to at least store some money for a rainy day – just in case.