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Venezuela's Economic Troubles Continue

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For the past few months, the eyes of Latin America have been fixed on the ailing Venezuelan President Hugo Chávez. As news regarding his health does not improve, speculation has swirled about whether the three-term president will ever recover. For average Venezuelans, however, the more important debate concerns not whether the man himself will live out his fourth term in office, but whether the economic malpractice he has subjected on Venezuela -- and which has wrought so much economic pain on the country -- will be allowed to endure.

Chávez, first elected in 1999, proclaimed that his new political/economic doctrine of "21st Century Socialism" would provide a more equitable distribution of wealth for Venezuela's poorest. After fourteen years of economic experiments; the economic model has been demonstrated as self-defeating. More than a decade of expropriations, government harassment of the private sector, and price and currency controls in fact proved disastrous for Venezuela's economy and its people. Venezuelans have spent that decade struggling under the yoke of high unemployment, rampant inflation and crippling shortages of everything from rice to flour to coffee. It has left Chávez in the awkward position of blaming Venezuela's hobbled private sector for the failure of his own socialist policies.

As the situation in Venezuela has deteriorated, Chávez has used private enterprise as a scapegoat -- reinforced by Chavez's near-total control of the country's media -- to maintain his hold on power. Yet there is no escaping the fact that the private sector in Venezuela is in a bad way, and it is only getting worse.

Expropriations have long been Chávez's favorite tool to suppress the private sector. The government has seized almost a thousand companies over the past decade, in industries as varied as agriculture to tourism. Most of them are now state-owned and unproductive. Since Chávez was first elected, the number of private companies in Venezuela has dropped from 14,000 to 9,000 in 2011.

Chávez insisted such measures were necessary because private companies were "hoarding" their products to intentionally reduce supply. He claimed that seizures would boost productivity and reduce Venezuela's dependence on imports. Not surprisingly, as has become evident in other countries that decide to nationalize large swaths their economy, the opposite has happened. Dramatic declines in productivity, shortages and inflation have ensued. With general shortages at an alarming 16.3 percent -- the highest level in five years -- the government's excuses are simply no longer credible.

Those businesses that have escaped expropriation are subject to government threats and an ever-tighter regulatory environment. Widespread and arbitrary price controls govern nearly all goods and services sold to the public, including imports. The government has no methodology when determining whether a company's earning is, according to them, "excessive," giving them the power to subjectively decide prices.

Pharmaceuticals will soon become the latest target of price regulations. The government has ordered the country's price controls agency to establish maximum prices for all medications. As the agency finalizes its decision, pharmacies will have to report their current selling prices to the authorities. The reports issued by pharmaceutical companies and laboratories illustrate the troubling fact that drug shortages in January stood at 40 percent. Once the new price controls come into force, that number will likely continue to rise.

Such stringent controls force many companies to operate at a loss, discouraging investment and bankrupting more of Venezuela's remaining businesses. Companies that reduce their inventories in order to remain in business are threatened with expropriation or may see their wares confiscated on charges of "boycotting", exacerbating the shortages of goods. Indeed, Venezuelan authorities seized 3,088 metric tons of food in January alone. According to AP, "Over the weekend, National Guard troops entered one market in downtown Caracas and confiscated 20 tons of beef, 15 tons of corn and four tons of garlic that allegedly violated price controls."

Compounding the impact of price controls are equally stringent restrictions on foreign currency. As Chávez's domestic policies crippled purchasing power and caused inflation to skyrocket, businesses turned to foreign reserve currencies, like U.S. dollars, to remain viable. But the Venezuelan government severely limits the supply of dollars, depreciating the value of private currency reserves and preventing companies from importing the goods that Venezuelans need. It typically takes between 180 and 250 days for foreign currency to be delivered, putting an additional strain on the balance sheets of both Venezuelan businesses and private citizens.

Add in the effects of a recent labor law, which forbids employers from laying off any worker who does not agree to resign, and the situation for business in Venezuela is indeed bleak. Chávez has succeeded in marginalizing the free market in Venezuela. The socialist utopia that he promised would follow, however, has failed to materialize.

Even as the rest of the world slowly emerged from the global recession of 2008, Venezuela's economy decelerated. Unemployment tops eight percent (even after counting informal workers such as street venders). Inflation, currently at 22 percent, has soared. Venezuela sits atop the world's largest proven oil reserves, yet the state-owned oil company PDVSA continually operates under capacity and in the red. An election-year spending binge has left the government drowning in debt, and without adequate resources to update Venezuela's crumbling infrastructure.

In a tacit acknowledgement of its own failure, the government recently announced that it would devalue Venezuela's national currency, the Bolivar, by nearly a third. After hearing the news, regular citizens raced to the streets to purchase anything they could find before the devaluation crippled their purchasing power still further. Private businesses quickly did the numbers as well, predicting even more losses in 2013. For example, Colgate-Palmolive expects an after-tax loss of approximately $120 million, while Halliburton anticipates a $30 million related charge.

The government announced the devaluation without warning, clearly hoping it would go unnoticed by a nation still fixated upon their president's illness. Try as they may to scapegoat the private sector, the fact remains that this is precisely the society that the revolutionaries betted on. Their top lieutenants can no more ignore the consequences of their own actions than wish their ailing president back to health.

Recent reports indicate that Chávez has now returned to Venezuela, where his condition has not improved. No one knows for sure what will become of Chávez. His country, however, stands at a crossroads. And the eyes of the world will be watching.