Francisco A. Laguna & Jennie Linder Cunningham
Today, we start a 4-part series on South American countries that self-identify as socialist or that have certain socialist characteristics. This first blog focuses on Venezuela.
Recent developments in Venezuela appear to be evidence of the difficulties of maintaining an economic structure heavily influenced by socialism in an (oil) resource-rich nation – particularly in the midst of widespread political protest against the most socialist of economic policies. The past months have witnessed food and other staple shortages, a flourishing black market for basic staples and hard currency, including U.S. dollars, rapidly increasing inflation, persecution of political opposition and other factors indicating an unsustainable situation. President Nicolás Maduro has, depending on one’s point of view, both exacerbated the situation and tried to remedy certain aspects of it. Critics fear that the country is headed towards a Cuba-style rationing system and increased political persecutions. Optimists point to measures that may remedy the dangerous economic position of Venezuela.
In mid-March, Central Bank President Nelson Merentes acknowledged that Venezuela was indeed experiencing an economic crisis, including a rampant inflation rate (56-57%: the region’s highest), shortages, power blackouts, and low levels of economic growth.
In late March, the government announced that it planned to ease controls on currency in the interest of combating the rapidly increasing price of dollars on the black market, which had been selling for almost 90 Bolivars to the dollar, a result of government policies fixing the price of dollars and limiting the quantity available to the public. The new intended base exchange rate is 6.3 bolivars to the dollar.
President Maduro, who succeeded President Hugo Chavez in 2013 after the latter passed away while in office, has continued a number of the socialist-style policies implemented under Chavez, while allowing some aspects of a free market economy to exist. Chavez imposed controls over foreign exchange in 2013, “to avoid capital flight and to control the prices of food staples”, and the amount of dollars available at the official rate is severely limited, hampering the ability of the country’s merchant class from effectively doing business on an international level. Moreover, the economy is heavily dependent on the petroleum sector, which accounts for approximately 95% of export earnings, 45% of federal budget revenues, and between 12% and one-third of GDP, depending on reporting. Petroleum is highly subsidized, which keeps prices artificially low.
The informal economy is a crucial part of the economy overall, and has developed primarily due to the extent to which basic household items and food staples are sold at huge markups over the subsidized state prices (originally set under President Chavez). The black market has become the secondary and sometimes primary source for such goods, including toothpaste, infant formula, diapers and toilet paper, many of which are originally purchased at subsidized prices set by the state and later marked up to several times the original price and sold at local bodegas. Many others are smuggled across the border to / from Colombia and sold at much higher prices.
In the beginning of April, the government began implementing an electronic ID card system meant to address the food shortages. Critics argue that this is the beginning of a Cuba-style rationing system. The cards will limit citizens to shopping once a week and will trigger alarms if shoppers purchase repeat items in bulk, particularly those typically resold on the black market, such as “milk, sugar and toilet paper”.
The situation in Venezuela is evolving daily and bears monitoring, as we observe an oil-rich and politically volatile nation attempt to maintain or even increase potentially unsustainable socialist-inspired market and economic policies. It is a sad social and economic commentary that a country once heralded as one of South America’s strongest economies finds itself in its current situation.
Contact TransLegal consultants to discuss the impacts of doing business in Venezuela or any other South American Countries.