After decades of trying to swallow (then spitting out) socialist governments, South America has finally coughed up its most recent disaster. Through following in the steps of Cuba and Brazil, Venezuela has sunk into an economic netherworld – and experts say socialism is to blame.
Venezuela, once Latin America’s crown jewel and a nation with oil reserves as large as Saudi Arabia’s, is experiencing the worst economic crises in its history. Inflation is up 741% according to economic reports, its literally-starving citizens rummage through trash heaps for scraps of food on a daily basis and Venezuelan president Nicolas Maduro claims to speak with late president Hugo Chavez who he claims appears to him in the form of a bird, according to state-run media.
Meanwhile, the country is alienating the rest of the world. After Mr. Maduro held a country-wide election (which was declared fraudulent by outside analysts) to appoint a new, pro-government legislative assembly, Venezuela was decried by its Latin American neighbors, namely Brazil, Argentina and Mexico. The United States joined the party by slapping sanctions on the country as well as on 13 current and former government officials associated with Mr. Maduro.
So things aren’t looking too pretty.
But Venezuela’s problems have a common source. According to analysts at the Economist, the country’s economic catastrophe can be traced to its government’s socialist policies. The nationalization of its oil industry, years of price fixing, and overvalued currency all contribute to the economic disaster.
Take, for instance, price controls. Price fixing is an economic mechanism whereby a government artificially changes the price of goods in order to increase affordability and accessibility. For instance, if the price of apples is considered too high, a government can artificially lower their price. The problem, though, is that price fixing creates an economic illusion – it’s like telling an economic lie.
Prices are generally regulated by several aspects: the cost of production, material expenses, etc, all play into a product’s total price. But when prices are artificially fixed, according to Thomas Sowell, a Stanford economist, the factors involved in the production of an object are not represented accurately. So when it might have cost $2 to make a bar of chocolate, lowering its selling price to $1 is economically dishonest. Moreover, artificially lowering prices incentivises consumers to buy more of the product which in turn causes scarcity. This is because the selling price of artificially-fixed items is often less than the production costs, so businesses, having sold their products below the price of production are left with insufficient funds to continue their production. Things are no different in Venezuela.
“When oil prices started to fall, harsh economic realities began to surface. Scarcity would soon become a nationwide phenomenon in Venezuela thanks to the combined effects of stringent exchange controls that did not allow for the free entry of dollars and a price control regime that prevents the price system from functioning in the economy,” writes Mises Institute, a libertarian think tank.
Hyperinflation is also a pressing issue. Recent economic data reports that Venezuela’s most recent inflation rate is at 741%. To put that into perspective, here’s an excerpt from CNN Money:
“On Friday, $1 equaled 10,389 bolivars. Earlier this week, on Monday, it was worth 8,820 bolivars. At the start of this year, $1 equaled 3,164 bolivars, according to the unofficial exchange rate calculated by dolartoday.com, which millions of Venezuelans use.”
But Venezuela’s hyperinflation didn’t spring from thin air. Mr. Maduro’s efforts to avoid faulting on Venezuela’s encroaching debt which would lead creditors to seize oil shipments and assets abroad. This, according to the Economist, has lead to a scramble to print more and more cash.
“The government has no clear strategy for external financing, and the fiscal deficit mainly financed by printing money, is out of control,” says Efrain Velasquez, the president of the National Economic Council.