How Venezuela Could Come Back from the Brink of Collapse
For more than a year now, Venezuelans have borne economic hardships that have spilled out in the form of food riots, long lines at supermarkets and massive street protests. Underlying all those are an overdependence on oil, weak institutions and political uncertainty, leading to calls for a referendum to replace current president Nicolas Maduro.
Penn’s William Burke-White and NYU’s Alejandro Velasco discuss the crisis in Venezuela.
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The oil-producing country has been battered by slumping world oil prices and excess supply since 2015, and the outlook isn’t encouraging on that front. Maduro has refused foreign aid, presumably because it accepting it will weaken his political credibility. Political uncertainty with the country’s national assembly has also hindered a much-needed overhaul of Venezuela’s institutions and police forces.
Much as it looks doomed, Venezuela could have respite and recovery from its woes, say experts. The time is ripe for the country’s opposition parties to force a recall referendum, preferably this year, says Alejandro Velasco, a New York University professor focusing on modern Latin America. In the short term, the country must also accept foreign aid to alleviate the immediate economic crisis and in the longer term, a new government should focus on reducing dependence on oil, says William Burke-White, director of the Perry World House and professor at the University of Pennsylvania Law School.
Burke-White and Velasco discussed the underlying problems in Venezuela and potential solutions to the crisis on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
A Worsening Crisis
Venezuela’s economic situation is grim, to say the least. The average Venezuelan spends 35 hours each month waiting to buy food, according to a July Associated Press report. A study by Simon Bolivar University found that nine in 10 people say they cannot buy enough food, the story adds. Inflation has reached 700% as the country continues its recession, and basic food and medicine are in severely short supply, according to a September 1 Guardian report. The country’s gross domestic product (GDP) growth rate is the worst worldwide at a negative 8% and inflation is projected to cross 1,600% in 2017 and worsen to nearly 3,500% by 2019, according to the International Monetary Fund.
“If the price of oil continues to be low, the situation might come to breaking point and there might be a popular revolt against the government,” says Wharton management professor Mauro Guillen in an interview with [email protected] “What needs to happen is some kind of an end to the [Hugo] Chavez regime [Maduro is his successor] and for that we need the opposition to continue to play its role.
“If the price of oil continues to be low, the situation might come to breaking point and there might be a popular revolt against the government.”–Mauro Guillen
“What we are seeing is the tail end of the beginning of the end of the Chavez regime,” adds Guillen. “Right now they have the presidency, but in parliament you have the opposition in control. The country is divided into two camps and it is a very dangerous situation and it could degenerate into a lot of violence.”
Velasco cites news reports to say that about 1.5 million people have left Venezuela over the last decade, most of whom were middle-class professionals seeking better lives elsewhere. “The real question is if something resembling a refugee crisis could happen, where working class people who find it difficult to get by flock to places like Colombia,” he says. “Then you have a quantitative shift that you have never seen before in Venezuela.”
Much of Venezuela’s woes are linked to its oil industry, which has accounted for “a massive portion of the Venezuelan economy for 100 years or more,” says Velasco. “That dependency [on oil] has only increased exponentially [in recent years].” Oil accounts for 96% of the country’s exports, according to World Bank data.
“The problem is compounded by the low price of oil,” says Guillen. “If the price of oil were high, it would be a totally different situation. The government could use that money to subsidize prices of essentials and everything would be OK.”
But the country’s woes are not all because of cheap oil. “Venezuela is a country where the oil wealth and the populist government of Chavez has destroyed the institutions and made them puppets,” says Guillen.
eanwhile, Venezuela’s oil production has continued to decline, partly because prices are down and also because of shortages in the equipment necessary to produce oil, according to Burke-White. “Their economy has collapsed and their oil production capacity with it,” he says. “That can rebuild, but it is only going to rebuild to the degree that there is demand to purchase that, and the price point is high enough to justify the new investment that is going to be needed after years of neglect.”
“People who’ve been historically pro-government … they have just had it, especially with [Nicolas] Maduro.”–Alejandro Velasco
Velasco says the government could take concrete action in specific ways that it hasn’t done so far. One of those moves is to correct its “tremendously skewed exchange rate” that it has maintained for more than a decade, which Velasco says has only “aggravated the fiscal crisis in Venezuela.” He notes that a wide gap exists between the official exchange rate of the Venezuelan currency and the black market rate, which he says creates more incentives for corruption and causes shortages.
According to Burke-White, the short-term fix is aid. Although Venezuela has said it will not accept aid, he notes that it is currently hosting a six-day summit of the 120-country Non-Aligned Movement (NAM) that began yesterday in the island of Margarita. He suggests Venezuela should pursue “different kinds of partnerships that could be framed not as aid necessarily” and are not from the U.S. or Western Europe. Those partnerships could bring some temporary relief and economic investments, he adds.
Velasco characterized Venezuela hosting the NAM summit as “political showmanship,” where it wants to convey that Venezuela is not isolated as it is being portrayed in the U.S. and on social media. However, he says the government is in such a weakened position that even former supporters have turned against it. “People who’ve been historically pro-government … they have just had it, especially with Maduro.”
Maduro’s refusal to accept aid from foreign countries is understandable in view of his “domestic credibility,” says Velasco. “To suggest that there is a humanitarian crisis would mean complete failure in every capacity he would have as commander of Venezuela’s economy.” Yet on the other hand, Velasco agrees that the crisis is severe, especially as it relates to shortages of medicines and food.
“If we were having this conversation a few years ago, Venezuela would have been thought of as a developed, largely Western economy and a place where people live normal lives,” says Burke-White. The country has not spent the last 20