WORLDPOST

Why Venezuela's Economy Is Such A Disaster

05/17/2015 02:08 pm ET | Updated May 18, 2015
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Every week, The WorldPost asks an expert to shed light on a topic driving headlines around the world. Today, we speak with Chris Sabatini about the politics behind Venezuela's unusual economic policies and why the Obama administration is facing a backlash for sanctioning Venezuelan officials accused of abusing human rights.

Venezuela's socialist government has long been one of the region's most controversial. Former President Hugo Chávez, who died in March 2013, launched a left-wing, nationalist political movement that defined itself in opposition to U.S. influence in Latin America, which he derided as "Yankee imperialism."

Since Chávez's successor Nicolás Maduro has taken the reins of government, however, Venezuela's economy has spiraled out of control -- partly due to the declining price of oil, its most important export, and partly due to unusual economic policies first put in place by Chávez. Shortages of food and other consumer products, and the gaming of a complex currency control system have become common. The country's ever-contentious relationship with the U.S. government has continued to slide, with the Obama administration announcing in March that it would sanction seven military and elected officials over human rights abuse allegations.

To understand what's driving Venezuela's unique economic problems and their political significance, we spoke with Chris Sabatini, a foreign policy expert with two decades of experience focusing on Latin American affairs both in government and as the former policy director for the Americas Society, a New York-based think tank. Sabatini, who teaches at Columbia University's School of International and Public Affairs, will officially launch a new digital publication covering the region called Latin America Goes Global on May 21.

We read a lot in the press about Venezuela's unusual currency system, which can be confusing to outsiders. What is the Venezuelan government trying to do?

Basically there's a three-tiered system and a black market system. At the top tier, the rate is about seven [Venezuelan] bolívares to the dollar, while on the black market it's about 300 bolívares to the dollar -- so you can see the huge level of overvaluation of the bolívar. One reason they do it is they give food imports a generous rate. Venezuela imports almost all of its food. It imports a lot of things because the oil-based economy has squeezed out other sources of production. So they ensure favorable rates to hopefully make food available and cheaper for Venezuelan citizens.

How is it working out for them?

It's working horribly for them. First of all, they have to spend a lot of dollars to keep that rate up. Consequently, their central bank is really strapped for hard currency. Second, it's created a whole system of corruption -- a three-tiered rate and a black market in which people, often times close to the government, are arbitraging these different rates. So people will claim they're going to import, say, foodstuffs and get dollars at the official rate, the best rate, and then they'll turn around and sell the dollars on the black market for 300 bolívares to the dollar. It's a huge windfall, as you can imagine. There are huge opportunities for corruption.

We also see a lot of reporting about shortages of everything from corn flour to condoms. Why does Venezuela keep running out of things?

The preferential rates they're giving to people allow importers to game the system. They're not actually importing those things or not in the quantities they're claiming because they're then turning around and making a much better profit by doing currency arbitrage than by importing condoms or diapers or what-have-you.

The second reason though is that the government, first under Chávez and then under Maduro, has expropriated [taken control of] a number of production facilities -- everything from soda and beverage companies to dairy farms to supermarkets, food production, and they've basically created all these bottlenecks. It creates inefficiencies. And because of different price controls ... particularly in the public markets, it actually isn't profitable for some people to produce these things. Inputs are sometimes as expensive or more than the prices they could charge for the product on the market. The government likes to claim that the elite are hoarding goods and to a certain extent they are, in the sense that they're not producing to their full capacity. But largely that's because of the price controls that [the government] has created.

The Obama administration imposed sanctions in March on seven Venezuelan military and elected officials over allegations of human rights abuses. Obama's faced a lot of criticism in the region for that. In your view, were those sanctions justified?

The sanctions were very targeted. There's only seven officials. It only yanks their visas, their ability to enter the United States. And it froze any assets they had in the United States, under the assumption that they may have been ill-gotten gains, from corruption or even narcotics trafficking.

Yes, it was likely justified. But was it politically wise to do it when they did it? Probably not.

These are only sanctions that limit people who are alleged to have been human rights abusers or to be corrupt to enter the United States. We've done the same thing in Russia, after the crackdown with the annexation of Crimea and the civil war in Ukraine. We did the same thing in Honduras after the coup d'etat of 2009, in which we imposed very similar sanctions on de facto government officials. It's certainly within the scope of a government's rights to be able to say who should enter its borders if it has serious doubts about the moral qualities of these people, these violators of international norms.

Now, was it politically wise is another matter and the answer, clearly, is probably not. The Maduro government is on a downward trajectory in terms of its political support, its economic management, its ability to control the country. This provided a very opportune distraction for him. As a result, he didn't get a huge bump in his approval ratings -- about 6 percent probably, [from] about 22 to 28 percent, is what I saw. Still pretty low, but it gave him something else to talk about other than of why people don't have corn flour or don't have condoms.

How effective were they?

I think it sent a message, but the timing was off. And it probably should have been coordinated better with other countries in the region, because it made it more difficult -- although it shouldn't be an excuse -- for [those countries] to speak out about cases of political prisoners, detentions, violations of freedom of expression.

The Maduro administration has faced strong criticisms over its handling of the economy. How will that translate politically? Does Maduro face serious opposition in the Venezuelan legislature?

Economically, this government has been a disaster. People are talking now about inflation maybe by the end of this year reaching 200 percent, reaching hyperinflation proportions. There are questions about whether it can make its external sovereign debt payments over the next few years. There's going to be a serious fiscal shortfall. And of course, there are shortages in the supermarkets. And that's clearly taken a political toll on this government. Its approval rating is in the 20s -- very low.

But that hasn't necessarily translated into a direct groundswell of opposition to them in the way one would expect. The political opposition has for a long time made its opposition to the Chávez government, the Maduro government, about the political, about "la salida," the exit. It was much more of a partisan effort. So it's been difficult for them to now capture this economic distress, which includes former supporters of this government but who are not as comfortable with the overtly partisan nature of what the political opposition has traditionally been selling as an alternative.

Because of some electoral shenanigans, some gaming of the electoral rules, chavistas [supporters] maintain a majority in the National Assembly despite the opposition gaining a majority of votes in the last election, and they've removed several opposition legislators. So, typical of this government, they have manipulated institutions to marginalize opponents and to consolidate power in way that has really weakened what could be, potentially, a mediating space between the opposition and the government.

This interview has been edited and condensed for clarity.

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