We all have heard about what’s happening in Venezuela.
Inflation is skyrocketing, and the country’s GDP has fallen significantly over the last years.
There is political unrest. The country is starving. It’s currency is worthless, worth less than a piece of paper of that size.
To get a gist of how it went from riches to rags, we got to jump onto its History.
Venezuela’s economy is based on oil. Venezuela’s oil revenues account for about 99 percent of export earnings. That makes Venezuela incredibly dependent on oil.
Venezuela was un-noticeable until the 1970s before it nationalized all oil production and became one of the known faces for oil supply in the world.
It all started when President Hugo Chavez took office in 1999 till 2013. Venezuela’s economy was booming.
As it has the world’s largest known reserves for oil, more than Saudi Arabia, UAE, or Kuwait.
In 10 years, oil prices rose from $7-9 /barrel to $100 /barrel
Venezuela rode the luxuries of massive reserves of government income and transformed the quality of life in the country. The government went on a spending spree and cut poverty by half. Venezuelans were happy.
But then all that mis-planned spending backfired and hit the country hard.
Let’s dive in
By the early 2000s, Venezuela had become the richest country in Latin America. But things started getting worse after Chavez died in 2013.
All government’s income was being spent in social programs like subsidies on food, medicines, and for lowering taxes.
Chavez didn’t develop the country by investing in infrastructure, creating jobs, and making other sources of income for the government.
He capped the prices of essential commodities, thereby discouraging producers to produce.
The controls meant that many Venezuelan businesses stopped production because they no longer made a profit, eventually resulting in shortages and the economy’s production tanking.
Venezuelan’s government with all that money, ventured into every sector including FMCG, telecommunication, utilities, finance and tourism which , again,discouraged private players and foreign firms to invest in the country.
As in the case of every booming economy, People had money.
People spent it on luxuries, and as a result Import increased and Trade Deficits started zooming.
There was also immense corruption which led to income and fiscal loss.
There was no way Venezuela would sustain all this, without oil prices increasing. But the contrary happened?
When in 2013, Chavez died and oil prices tanked, Venezuela started to struggle.
New president, Nicolás Maduro, took the office. Under his leadership, the economy went into a freefall.
These all government-run companies oust all other players by decreasing the products’ price to such levels that resulted in other businesses going into losses, and as a result, ran into huge losses themselves. These companies kept swallowing all the government’s money.
Despite all this, the government didn’t stop borrowing to fund all the social welfare projects.
They absorbed all the money from the market leaving behind nothing for loans to small and large industries.
Inevitably, this all increased govt.’s interest expenditures even more.
Things got worse after the US imposed sanctions on Venezuela over improper trade activities and rigging of the economic figures.
Government just started printing money- day and night, in the name of quantitative easing, resulting in Hyperinflation which the last time Venezuela would need to become a nightmare.
From there, Venezuela has experienced a lot of turmoil and hardship.
The price of a coffee is 1.55 Million Bolivares. Its currency is basically worthless. Moreover, GDP has dropped more than 30% ,crime rates are up by 40% and 96% of the country is living in poverty.
And there is political unrest over Maduro’s 2018 election, which is deemed as fraud by many major countries and nearly all of Venezuelans. All this has started violence and street protests against the government, destroying millions worth of property.
With everything going on, Venezuela’s problems are uncountable. We’ve discussed few of them.
There are many solutions Venezuela can take such as- using all government’s revenue for developing the nation’s infrastructure, privatizing the public sector, inviting foreign investments, promoting private players, imposing sanctions on imports, and increasing production in the economy.
All these solutions may not turn the Venezuela fortune but will set the right path to follow.
In a time when People are blaming Maduro, it is crucial to note that seeds to prosperity must have been sown way before Maduro even took the office.
I guess, having wealth is not the answer, but managing it is.
Venezuela has become a guide book on ‘How not to run a nation’?
Yes, what they say is true.
Luxuries of today should not come at the cost of tomorrow’s misery.
Anyways, that’s from us for this Thursday.
Let us know your thoughts too……
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