An Alternative Analysis
1. Venezuela at Face Value
Have you ever asked yourself why current affairs in Venezuela are reported by major Western based media outlets the way they are?
Headlines leave much to be answered for. Last year for example, morning commuters were greeted with, ‘Hungry locals break into zoo and butcher horse’, in the Metro and Guardian readers saw ‘Venezuela on the brink’, before browsing paragraphs on commodity inflation, malnutrition and crime waves.
The Economist ran headlines of, ‘The angry 80%: How a much-loathed regime hangs on to power’, which detailed how ‘the regime shows no desire to correct policies that have wrecked the economy, such as price controls and artificial exchange rates’.
Courtesy of the Social Workers Party, the left gave us an apparently alternative perspective: ‘Venezuela election shakes left government’. The origins of which it directed at Hugo Chavez’s and Nicolas Maduro’s, ‘tight alliance with some bosses and corrupt figures of the old guard, demobilising the support they counted on from ordinary people’.
2. Christmas Toys Sabotage
Much of Venezuela’s situation referenced above can be seen in basic commodity shortages. Recently, Venezuelan officials confiscated nearly 3.8 million toys from Kreisel, accusing the company of planning to sell them at inflated prices during the Christmas season. Statistics, show that Kreisel intended to hoard the commodities for profits as high 25,000%, and Government officials claim that Kreisel have held some of the toys since 2008 to do so.
Reporting on this example via citing anonymous critics and two random individuals Twitter accounts, one of which ‘expressed surprise that her tweet inspired a CNN article, adding, “Aunque, no soy venezolana” — “Although, I am not Venezuelan.”’ CNN presented a double glazed, yet highly relevant window into Venezuela’s current crisis.
2.1. Food Sabotage
Nevertheless, situations like this are familiar to Venezuela. Sometime after the 2015 parliamentary elections, – where The Democratic Unity Roundtable (Mesa de la Unidad Democrática, MUD) gained a 112 out of 167 majority in the National Assembly – basic food products then in shortage began reappearing back on the shelves of stores.
Products such as floor and mayonnaise produced by the The Heinz Kraft Company started reappearing 5 months past their sell-by date. At the same, Officials from the National Bolivarian Guard of Venezuela uncovered more than 50 tons of food, including detergent and toothpaste in the north-western port of Maracaibo. Other products included sugar, rice, coffee, noodles, beer, soda, detergents, chlorine, guns etc. In addition, around 300 identity documents used to purchase the goods from stores.
President of Heinz Food of Venezuela, Alexandre Magno Reis, in an interview for the World Economy and Business said that, “we are taking a big bet to guarantee production. The important thing to is understand well what is happening, from the hand of farmers. We must do more and produce in the country. I believe in the team formed by the government, the farmer and the company”.
Now, one cannot deny that currently – as was the case in the past – there are serve food and commodity shortages in Venezuela. However, I is not reported honestly by major Western media outlets who see ‘Socialism’ as the go too cause; ‘Thanks to Socialism, Venezuelan Parents Giving Up Children They Can’t Feed’.
For example, a conveniently overlooked observation regarding these commodity shortages is that they only affect poor areas whilst more wealthy areas appear to overstocked. Basque executive, Agustin Otxotorena (who lives in Caracas) grew tired of phone calls from friends and relatives in Spain telling him that there was no food in Venezuela. So, on the 20th May 2016, Otxotorena photographed his local grocery store. Surprise, surprise, they were fully stocked.
“If you have money there is champagne … vodka, Belgian chocolates … lobster, brand-name clothes, exclusive restaurants … nightclubs, beaches … yachts, golf clubs—a whole country within a country where there are no poor, women and children are blond, go to exclusive schools, exclusive universities, and vacation, where Blacks or poor are the waiters …” he posted on his Facebook page.”
Whilst the remaining class divide in Venezuela has not yet dealt with by the Bolivar Revolution, plenty of facts do remain unreported, unexplained or not analysed correctly. If there was a general commodity shortage in Venezuela, shouldn’t everyone being feeling it’s affects? I sincerely doubt that Socialism is benefiting the rich and destroying the poor. It is not the, ‘magic realism of Hugo Chavez’s great Bolivarian socialist revolution’, that has turned Venezuela into ‘a crumbling socialist-run petro-state’. So, what has? And why has it?
3. Venezuela in the Crosshairs?
Firstly, arguing in favour of Venezuela collapsing based on the above would be somewhat historically incorrect. Since of the 1950-1953 Korean War, it has also been stated that the Democratic People’s Republic of Korea is on the verge of a collapse that has never happened.
As an OPEC member, Venezuela is granted it a certain power in the world via oil prices and has traditionally been an economic colony of the United States through the purpose of supplying oil to the country. The coming to power of Hugo Chavez and the nationalization of Venezuela’s oil via Petróleos de Venezuela (PDVSA), gave new oil revenue to the United Socialist Party of Venezuela to begin producing alternatives to U.S. owned corporations and domestic oligarchies. Mass mobilization turned entire shanty towns into mini enclaves which were given loans to begin infrastructure development. These semi-communities gave a new autonomy to the poor. Slum-lords, who had brutalized their tenants for years had their buildings confiscated and handed to a council of tenants These tenants, then had the option of taking a loan to improve their collective home.
In response, money began flowing from the United States Central Intelligence Agency to non-government organizations in Venezuela. The National Endowment for Democracy began efforts to destabilize the country via disinformation campaigns. As the Bolivarian Revolution continued, the United States restored to using terrorist attacks against the country’s oil industry. This effort, to bring Venezuela to ruin continues to this day with the economic sabotage by Citi Bank. ‘”With no warning, Citibank says that in 30 days it will close the Central Bank and the Bank of Venezuela’s accounts,” Maduro said in a speech, adding that the government used the U.S. bank for transactions in the United States and globally.”
During late 2015 until present there has been a food crisis in Venezuela. Simple mindedly, Socialism as a system is being blamed via low-brow explanations that equate to, “they always run out of other people’s money”. Those that bother to look for an actual explanation are meet with claims such as, “a significant proportion of oil revenues were stolen”. Cato Institute’s Juan Carlos Hidalgo however, gives no actual explanation of how this caused food shortages. Other sources claim that the Venezuelan Government simply allowed production of food to fall, whilst not providing anything too demonstrate this. Wouldn’t proponents of this argument support the government in not monitoring things like that if this were the case? The reason is because they can’t.
Venezuela is held as a single crop economy in terms of oil, most food in Venezuela is imported. These circumstances are not an economic coincidence. A United States embargo against Venezuela’s single commodity export could seriously damage economic growth. This is not uncommon for many developing countries placed under imperialist pressure, but this is particularly the case for Caribbean and Latin American countries.
Since the history of imperialism in Venezuela has forced a neglect of other industry, it exacerbates the problems it faces now. President Nicholas Maduro has already called for changes in the economy to include necessary goods.
“The Bolivarian Economic Agenda has several branches, the first is urgently address the crisis, another one is lay the foundations for the new economy, our country must find the accurate road to national development, looking for exits in complicated times and searching ways out of the pit where we fell due to the neoliberal model,” The new policy involves a “specially centralized plan, which favors domestic production and stimulate] both national small and medium industry, and the social economy.”
However, this move could take quite a while to bring into full swing.
5. Monetary Manipulation Caused the Shortage
So… what is caused (and are still causing) the shortage itself? The culprits are the large grocery chains and importers which remain in the hands of the economic elite. The weapon they are using is the multiple exchange rates. Essentially, this conversion of Bolivars into U.S. Dollars (USD) facilitates the great import fraud by the capitalist class. Currency manipulation is used side-by-side with falsehoods about the importation of food.
The trick work like this:
There are multiple exchange rates in Venezuela that convert the Bolívar to USD. The idea, was to give a preferential exchange rate to importers so that they could purchase imports more easily. This preferential exchange rate and the growing gap in exchange rates, is what is allowing large retail businesses and importers to cause the shortage.
When a company wants to import essential goods i.e. food, they’re required to go to the central bank to purchase USD at the preferential rate for necessary imports. The rate is about 6.3 Bolivars to the USD (current figures put it around 10 Bolivars.) The company then gives those USDs to whomever they wish to import from. Alongside this exchange rate is the illegal parallel market rate. This rate is set at 500 Bolivars per USD. This difference is where the swindle takes place.
A private importer goes to the central bank and requests to exchange Bolivars for USD.
To do this, he claims he purchased 100 cases of groceries for $1000 USD. In actuality, he only purchased only 50 of them.
The 50 he did import, he sells to businesses at the illegal parallel market rate. Each case cost him 10$ USD or 63 Bolivars, but he can sell each one at 5000 Bolivars due to the parallel rate. This massively inflates the price of necessary goods, while allowing the importer to pocket a gigantic profit. So, what about the other 500 USD? Usually, the importer will exchange those USD at the illegal parallel market rate for 250,000 Bolivars.
In many cases the importer doesn’t exchange the left-over Bolivars. Instead, they take the money overseas for investment, or they place it in a hidden account. In other cases, they take the whole $1,000 and move it to an offshore account. Doing this on a large scale has caused a currency flight from the country. The amount estimated for this loss is around 300 billion Bolivars between 2003 and 2016.Western mainstream media claim this money gets stolen by corrupt officials.
However, it is far more plausible that this money has been taken out of the country by the economic elite who remain in Venezuela. How much is $300 billion? It’s greater than the GDP of many countries around the world, including Finland ($272,217), Pakistan ($243,632), Ireland ($238,020), Greece ($235,574), Portugal ($230,117), Iraq ($223,500), New Zealand ($199,970).
Not only are Venezuela’s economic elite cyphering off vast amount of money from the economy, they are also inflating prices well beyond what they should be. The next time this subject this comes up, ask an opponent of the Bolivarian Government to explain why prices are so high whilst supply is so low. Almost always they won’t give you an answer, other than to say it’s the “fault of socialism.”
6. Legitimate Criticisms & Short-Term Responses
It is only possible to carry out this scam because of the multiple exchange rates. The policy is absolutely wrong! In this case, I blame the Bolivarian Government for not nationalizing the import industry and grocery stores. I also blame them for having an ineffective exchange rate policy.
In response, the government opened the boarder, enabling citizens were free to cross into Colombia to purchase the essentials. Unfortunately, they were met with exorbitant prices. Colombia is facing its own price problems which are going relatively unreported in the media. “Goods like flour and sugar are scarce now, so the supply is limited,” said Pedro, a Colombian grocery store owner. Many stores place a limit on how much a single customer could purchase.
It should also be noted that Venezuela was listed as having almost abolished hunger by the UN Food and Agriculture Organization (FAO) in 2015.
Opening the boarder is not the only measure they’ve taken. Since the shortages have started, the government has accelerated existing food programs that supply much needed groceries to the public. Along with this acceleration, they have implemented a few modifications to their programs and approaching problems in new ways.
A new program that creates a synergy between local grass roots organization and the government. The Local Provisioning and Production Committees (CLAP) organizes an alternative food distribution network in all 24 states.
“CLAPs have a twofold purpose. In the immediate term, they are working to combat lines, shortages, and speculation by delivering basic food products directly to people. The government purchases goods directly from both private and state enterprises, which the CLAPs distribute house to house based on community censuses. The project is seen as a temporary stop-gap solution to the current shortages, aimed at the most vulnerable fifth of the population. In the longer term, CLAPs are also intended to engage in local food production and processing. In tandem is a major push for urban agriculture, overseen by a newly formed Ministry of Urban Agriculture. A recent hundred-day planting campaign involving 29,000 urban productive spaces throughout the country aims to increase the amount of fresh produce, eggs, fish, and animal protein available locally. These efforts are complemented by a renewed push for production in the countryside.”
Citizen participation in agriculture has exploded. People are engaging in backyard farming, bartering vegetables, exchanging seeds, and carrying out their own cooperatives. Many are also creating their own small food businesses. As it stands right now, agriculture represents 3% of GDP, 10% of the labour force.
“A reduced supply of industrial agriculture inputs is also driving a transition toward organic practices and agro ecology, in what some are likening to Cuba’s special period. The shortages are also causing a shift from processed foods and a renewed appreciation of local foods and traditional food ways. Many activists see these developments as elements of a new food system, a project they have been trying to advance for many years.”
In July, the Government seized a large Untied States owned producer of goods in Venezuela, Kimberley Clarke. About a month earlier, the company fired 900 workers claiming that they lacked the raw materials necessary to continue production. The factory was seized by the government and handed over to the workers who were previously employed there. Once the factory had been handed over, President Nicholas Maduro authorized 22 million to be loaned to the enterprise to purchase the raw materials they needed to begin operations again. Its products are certainly essential as ‘The factory can produce, every month, 25 million diapers, 18 million sanitary napkins and 33 million rolls of toilet paper – products that have been in short supply throughout Venezuela.’
7. Long-term Responses & What is to be Done?
The big question remains… what do they do now? What measures would be necessary to repair the economy and allow Venezuela to exercise self-determination whilst minimizing interference by the imperialists?
- Immediate economic reform is vital. The multiple exchange rate should be abolished without delay and one moderate exchange rate should be established.
- The price of Venezuela oil should be raised and subsides for domestic oil consumption should be eliminated. This subsidy general benefits to middle to upper classes due to the lower classes not consuming much in the way of oil. The reduced domestic rate mostly serves to help those who can afford the oil anyway. Government revenues would increase significantly, allowing funds to be transferred to much more important social programs.
According to an International Monterey Fund, October 2015 database, revenue from petroleum exports accounts for more 50% of Venezuela’s GDP and roughly 95% of total exports. Raising the price of oil for export would mean a small percentage could alleviate the drop-in revenue from the global oil price decrease.
- Manufacturing in the country should also be increased. Venezuela already produces heavy industry products such as steel, aluminium, cement etc. The actual means of production need to be added to the manufacturing sector, not just the circulating constant capital. More specifically, the government should invest in the production of Department 1 Commodities; a category made up of constant capital, machinery, software etc. Basically, the means of production that other capitalists purchase for carrying out production.
The benefit of producing these in Venezuela, is to insulate itself from the global price system for the oil industry and constant capital. As this industry grow, embargo’s and sanction against the oil and technology industry effectively won’t work on Venezuela. However, it currently remains vulnerable here due to its oil based economy. Plus, the country will benefit from what they export and free up the necessary capital for food imports.
Now, one of the mistakes Venezuela has made is not re-investing enough oil prices back into production, and some of it’s technology is falling behind as a result. A significant re-vestment of capital will increase the efficiency of the industry leading to lower costs of production in the long-run, and by extension, more oil based revenue. With oil as their primary national industry it is nothing short of neglectful to do otherwise.
In Marxism, commodities are divided into two departments:
- Department 1: contains the means of production. Capital invested in producing materials, machinery, and anything else a capitalist would need for carrying out production, including inputs like steel.
- Department 2: contains the means of living. The consumer goods of society for workers and capitalists, also including luxury items.
In traditional Keynesianism, the State spends funds on public projects to simulate demand for goods and services. But since Marxists make a differentiation between these two type of commodities – we build up first which productive forces, which can produce the consumer goods that will enter in to demand because of wage increases. In this way, you build up the productive forces necessary to facilitate the production of new consumer goods that will be in demand. This is the path the Soviets took which proved to be completely correct. The necessary means of production are built to carry out the industrialization process.
8. Mounting Foreign Debt
Since the price of oil and other raw materials have collapsed, Venezuela (and others) has been left with huge budget shortfalls. National income from oil used to account for 96% of the foreign currency earnings. After the collapse, it represents only 75%. This make it difficult to pay foreign debt. Instead of using foreign currencies of a higher value, Venezuela uses its own lower currency to pay those debts. This means they have to use much more of it to pay it down. For example, at the time of this writing the Venezuelan Bolivar is worth 10 cents to 1 U.S. Dollar. Paying back a loan in their own currency, thus means they have pay ten times as much
This situation severely hinders their ability to pay off foreign debts. The Venezuela Government must keep on dipping into their reserves of foreign currency to service the debt. At other moments, they carry out Monetary gold swaps. Many will recall how they called in all their international gold holdings and kept them in the Central Bank in 2014. The foresight of this move was brilliant. Selling off gold reserves in foreign currency to use to pay for foreign debts as necessary and a smart move in this situation.
The debt problem in Venezuela is far worse than it seems. This is due to incorrect ideas about the economy’s ability to pay them. It is viewed as possible to pay the debts because it is compared to the GDP converted into USD. This is being at their current dipro rate of 1 Bolivar to the 10 USD. When you divide the contracted GDP by such an exchange rate, you created an overestimation of the GDP. Thus, you get distorted picture of the foreign debt as a percentage of the GDP. This is an underestimate which make the situation look manageable.
Others have a false idea that the debt can be paid via oil price increases. They’re looking at an artificial increase created by OPEC Countries by restricting the supply of oil. The idea is that if they restrict the supply the market will raise the price, yet these attempts have already failed and are also ineffective at recovering liquefied foreign currency.
The reality of the situation in Venezuela is quite dismal. Their foreign currency reserves have been reduced to a mere $12 billion USD. Something must be done to rectify the situation immediately. This foreign currency is necessary to carrying out import needs and paying down foreign debt. The second nose around the neck is the compensation cases placed upon Venezuela by the International Centre for Settlement of Investment Disputes. Companies that have been refusing to produce have been appropriated and put back to work. Those companies are now demanding compensation of their lost enterprises. In the context of revolution, these companies shouldn’t be given anything considering they were engaged economic sabotage.
9. Eliminating the Debt
Something needs to be done, otherwise there will be total collapse of the Bolivarian Government and the Venezuelan economy. The dangers are very real and require careful planning and strong leadership if they are to be handled. As many see it, there are only two options to take at this point.
- Eliminate the multiple exchange rates and create a single moderate and high rate to beginning paying down the debts in a more valuable currency.
- Create a moratorium on debts whilst payment can be restructured.
The most effective would be the latter. Venezuela should tell its creditors that it will be paying back less than what is called for. Less money should be given to the creditors and instead steered towards industrial production i.e. the creation of commodities for export. The point would be to use the money for investment in expanding the GDP via creating more employment, but production in wages are taxable which would give the State the revenue necessary to pay off the debts more quickly. A reduction in debt paid today, would save an astronomical amount of interest in the future. Or even worse, a possible total economic collapse.
Certainly, there will be a political backlash against the country for taking such a route. Creditors don’t like it when you don’t pay back the money they loaned you. The biggest such threat however, is the possibility of asset and property seizures. Most devastating would be for that to happen to state oil company (PDVSA). Right the PDVSA has 44 oil tankers, 13 refineries and numerous bank accounts around the world. Their freezing would hurt the economy greatly, given that it is depended on oil exports. This would also create an embargo situation.
It wouldn’t be in the interests of creditors to freeze such assets because it would only make it harder for Venezuela to pay back its debts. Essentially, if you cripple a person’s ability to pay back a loan, you won’t get the money. They’d be much better off allowing Venezuela to reduce its debt whilst they continue with value creation, enabling them to pay the money they owe. The problem in this situation, is that some creditors want Venezuela to collapse so they can bring in a right-wing government and bury the country under neo-liberal economic policies. So, it’s a gamble.
It could be argued that if a county defaults on it loans, no-one will loan to them in the future. This is not likely. No-one will exclude Venezuela from the financial markets long term because it has something to pay back its loans with: Oil. So long as oil and minerals exist in Venezuela there will always be an ability to pay and a reason to invest. No one will pass up such investment in the long-term.
Venezuela doesn’t have a long-term solvency crisis, it has an immediate liquidity crisis. The debt held by Venezuela creditors isn’t being sold off to other investors because they know the price of oil will raise again, leading to an ability to pay off those debts eventually. There is low risk of default in the future as oil and raw material costs raise. Some action can be taken to lessen the debt pressure without defaulting on them. The government could purchase some of the debt back from creditors. This will eliminate payments on the capital and interest, creating some breathing room for the government to manoeuvre. An alternation in the deal with Perocarbide to charge a higher rate for energy would boast revenue. Currently, Petrocarbide provide a subsidized oil program to the Caribbean nations. The price comes in at a low rate and then increases over time. If they adjusted the price to its intended full price, it would provide important funds.
Domestic production of commodities currently imported is an absolute necessity. Many who produce domestically are refusing to produce out of protest. Just recently, Kimberley Clarke was seized by the Venezuelan government and handed over to its workers with a loan to begin production again. Within a short period of time, 2 million sanitary pads were back on the market. Freed up money to spent on investment and domestic production of good would solve two problems: First, it would reduce the need of foreign currency for imports, freeing it up to pay foreign debt. Second, it would produce industry and wages which could be taxed as the economy expands. Physical capital creation via commodity production is just plain forgotten about in todays financialized economies.
Venezuela could also restructure payments coming in from other countries into USD. For example, Venezuela is currently paying for infrastructure projects in China, Brazil, Iran, and others whose re-profiling due dates are seclude to take place next this year or sometime even next year. Asking for USD would inflate their foreign currency reserves, and bonds that are about to expire to could be substituted for the new ones that are longer term. Finally, there could be a reduction in military spending, in an effort made in the financial markets to rehabilitee the reputation by correcting mistaken ideas about their reputation.
Defaulting on some debt whilst re-orientating economic policy could be a tremendous benefit to the country. These large creditors can get some, if not most of their money back or none of it at all. What is it going to be? Creditors are being much harder on Venezuela than is necessary and the financial markets are making Venezuela look worse than they are in regards to debt. No doubt, this is part of U.S. foreign policy to attack the Venezuela which is struggling to free themselves of imperialist tyranny.