What went wrong in Venezuela

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The best insider description I've read on what went wrong with Venezuela's leftist experiment - by Ryan Mallett-Outtrim for Counterpunch. A catastrophic currency control system that led to speculation and corruption on a grand scale and emptied the shops. Essentially for fear of changing the Chavez legacy, the government of Maduro acted like a rabbit in the headlights - failing to radically reform or abolish the currency controls that were spiralling toward a full blown crisis:

After over a decade of remaining in check, suddenly inflation began to head upwards in late 2012. This was accompanied by a collapse in the black market value of the Bolivar Fuerte (BSF). For example, in October 2012, I purchased currency on the black market for around BsF13 to the dollar. Six months later, I got around BsF20 for a dollar.

This was the beginning of what economist Mark Weisbrot has described as an “inflation depreciation spiral”. The basic idea is that people in Venezuela saw inflation go up, so they traded some of their BsF for US dollars on the black market. ...

In March 2013, the government announced the creation of Sicad, a mechanism through which the state would auction off dollars to private industry. By July, weekly Sicad auctions were being held. At these auctions, BsF were being sold at a rate of around 11 to the dollar. By this point, the black market rate was well over BsF20=US$1, meaning the government was hugely subsidizing access to currency for industry. For every dollar the government sold industry, the government itself was losing a second dollar in its overly generous exchange rate. This is a key piece of the puzzle as to why the inflation-depreciation spiral has become so damaging.

The Venezuelan state makes money by selling oil on international markets, meaning much of its income is in dollars. Yet much of the state’s day to day expenditures are denominated in BsF (like wages). So, when the BsF drops, the government’s coffers should suddenly start looking a lot better. Unfortunately, the government has dug itself into a hole by effectively subsidizing the value of the BsF through official channels. By keeping the official exchange rate stable even as the BsF plunges on the black market, the government has to pay out more to maintain the former rate. For example, as mentioned back in 2012 the government was losing US$1 for every US$1 it sold through Sicad (assuming the official rate). Today, the Venezuelan government’s lowest exchange rate sells BsF at around 450 to the dollar. On the black market, US$1=BsF1050. Even from the government’s perspective, it’s still basically losing at least a dollar for every dollar it sells. It shouldn’t surprise anyone that under this arrangement, private industry has repeatedly complained the government has failed to deliver enough foreign currency to cover imports. After all, a system like this isn’t sustainable by any stretch of the imagination.