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Venezuela: A tale of two economies

Experts complain about a devalued currency and inflation, but government supporters say their lot has improved.
Last Modified: 13 Mar 2013 11:48
Rigid currency controls mean grocery stores often face shortages of basic essentials such as fresh milk [Reuters]

Caracas, Venezuela - Despite a currency facing further devaluation, soaring inflation, and intense capital flight, Mildred Castellano thinks Venezuela's economy is doing better than ever.
 
Like millions of working-class voters who have supported the socialist government during the past four elections, Castellano doesn't care much for traditional economic indicators.
 
"The past 14 years have been unbelievably good for us poor people," Castellano told Al Jazeera while sitting in her modest Caracas apartment. "Back in 1989, people were rioting and looting because they were starving. After we elected [deceased president Hugo] Chavez, the economy improved for Venezuelans… now I have an apartment of my own."  
 
It wasn't always this way. Several years ago, Castellano, a community organiser, was living in a shack perched on a hillside, a common sight around major cities in this oil-rich country. In 2010, torrential rains triggered mudslides, destroying her home.
 
With help from the government, she was given an apartment in a newly constructed public housing complex. "This horrible thing happened and I was homeless," she said. "But look where I am now."
 
While Castellano's support for Chavez, and his chosen successor Nicolas Maduro, is common among the country's poor, many Venezuelans have seen their lives worsen during the transition to "21st century socialism".
 
'Lack of discipline'
 
These should be boom times, economists say, but shortages of basic goods continue and inflation remains above 15 percent.
 
Oil accounts for more than 90 percent of exports, and prices of the commodity have risen ten-fold, from about $10 to $100 per barrel since the socialist government's first election victory in 1998.

Despite an oil windfall, the government's budget deficit ballooned to 17 percent last year, according to CIA figures, while public debt reached 49 percent of GDP.
 
"The lack of government discipline is why the deficit is so high," Luis Angarita, professor of international economics at the Central University of Venezuela, told Al Jazeera. "The government wanted to expand public spending in 2012, an election year, and this increased the fiscal gap."
 
Social spending isn't merely a tactic for winning elections, government supporters say, and most indicators of well-being improved significantly during the Chavez era.
 
GDP per capita rose from $4,132 in 1999, to an estimated $11,131 in 2012, according to the International Monetary Fund (IMF), while inequality decreased sharply.

And social spending as a percentage of GDP climbed from about 11 percent in 1998 to more than 21 percent in 2011, according to government statistics.
 
Black market money
 
But much of this growth can be attributed to high petroleum prices, and analysts worry the country has put all its eggs in one oil-soaked basket.

"The black market has a large, negative impact on the middle class, as the poor classes might be compensated by public spending."

- Luis Angarita, economics professor

"The problem is Venezuela has become more dependent on imports," Eric Olson, associate director of the Latin American Programme at the Woodrow Wilson Centre in Washington, told Al Jazeera.

The government tightly controls Venezuela's currency, the bolivar. It was devalued by 32 percent in February and now officially trades at 6.3 bolivars to the dollar, pushing up prices for most products. "The policy has resulted in greater inflation," Olson said.
 
Black market traders exchange bolivars for dollars at a rate of 24:1, meaning most experts believe another devaluation is likely and trust for the government's ability to manage the economy is low.  
 
"The black market is a reflection of the currency's real value," Angarita said. "Buyers want to convert their bolivars into dollars to safeguard their savings in a stronger currency. The black market has a large, negative impact on the middle class, as the poor classes might be compensated by public spending."
 
Massive differences between official figures and the black market rate present a lucrative business opportunity for financial hucksters, and many believe corrupt socialist government officials, the so-called "red bureaucrats", are making millions doling out dollars.

While devaluation has eaten into savings and wages, rigid currency controls imposed in 2003 are arguably the largest source of stress for middle class Venezuelans and entrepreneurs.
 
Consumers cannot simply walk into a bank or exchange kiosk and convert bolivars into foreign currency.
 
Venezuelans travelling abroad, for example, must apply to CADIVI, a government agency that determines how much cash they will be allowed to convert. The paperwork is exhausting, travellers say, and the government should have no right to tell people when and how they can spend their hard-earned dough.
 
The same complaints come from businesses that need access to US dollars to import products or capital goods in a country dependent on imports for most aspects of daily life. Buying a car can be a huge ordeal because of import controls, and grocery stores often face shortages of basic essentials such as fresh milk.
 
Subsidies

To ease the burden of inflation and shortages, the government has opened a chain of supermarkets called Mercal, providing subsidised food in poor communities. "A whole chicken costs 100 bolivars everywhere else," shopper Victor Aragin told Al Jazeera. "But in here it's 25 bolivars, a 75 percent saving."
 
The government stocks the shelves by trading oil for food with its political allies. "The beef comes from Argentina and the chickens from Brazil," Aragin said.
 
Mercal is open to everyone, but many in the middle class believe it sells poor quality products; fresh fruit and vegetables are rarely available.

 

Stores financed by oil money, such as Mercal, might be popular, but many private companies are scared to hire new workers, or make investments in technology. More than 1,000 firms have been expropriated during the Chavez era.
 
"As young people, we don't know if we will be able to get a job in the future," Jesus Armas, an industrial engineering student and government critic told Al Jazeera.
 
Governments the world over are frequently voted out of office for poor economic management, but the situation in Venezuela is different, primarily because a large portion of the population has not had a stake in the common indicators of monetary policy for decades.
 
"I don't think there have been major problems with the currency or devaluation," Brandon Medina, a pro-government youth activist living in a hillside barrio told Al Jazeera. "The minimum wage has been rising, so it balances out."  
 
Many in his neighbourhood are not plugged into the financial system. They don't invest in the stock market and, unlike the middle class, they certainly don't need access to dollars for vacations in Miami.
 
Sitting on her couch, Mildred Castellano frames Venezuela's divide over how to measure economic changes in a different way from most financiers. "I don't think there are problems with the currency," she said. "I can show you my kitchen shelves, they are full of food."

Follow Chris Arsenault on Twitter: @AJEChris

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