Published On: Mon, Sep 3rd, 2018

The Venezuela crisis and Nigeria’s woes

By TESLIM SHITTA-BEY

Food is escorted under the ominous presence of heavily armed escorts of military trucks, as children with threadbare clothes and scabby bodies wave weakly at drivers as parents with sunken eye sockets gaze with lust at transported grains. No, this is not Eritrea, Sudan or anywhere else in Africa where stories of such nature were once common fare. This is an economy gone awry reflecting the running story of a Latin American country gone belly-up; this is the ongoing debacle of a once illustrious country called Venezuela.

Venezuela’s President Nicolas Maduro gestures as he talks to the media during a news conference in Caracas, Venezuela February 15, 2018. REUTERS/Marco Bello

One thing that is clear from the red-eyed mobs and sweaty muscle men on Venezuela’s dusty streets is that even for a country with the largest oil reserves in the world things could go terribly wrong. Poor economics and even poorer politics could bring a country to its knees.

But what is the problem with Venezuela? The country’s economic travails appear to be the consequence of a number of complex happenings that range from disastrous fiscal and monetary policy to unbounded political grandstanding. The country went after a populist social and economic agenda like a city drug junky on crack. The expected relief proved worse than the initial depression. The oil-induced perception of success led the country to an orgy of spending on projects of dubious usefulness and programmes of doubtful sustainability. So when the bottom fell from under the international oil market in 2014, Venezuela could no longer support its high level of social transfer payments (perhaps a warning to Nigeria on its messy patchwork of hurriedly knitted anti-poverty schemes), expansive socialist ideology and its staggering external debt.

Venezuela’s imports have presently dropped over 50% from a year ago, according to Ecoanalitica, a national research firm. Venezuela’s minimum wage is currently the equivalent of $1 a month, making food and everyday purchases unaffordable for many. With a shortage of import goods, the country’s blossoming black market has gotten a free hand to make life even more miserable for citizens. Indeed prices of commodities double every 26 days on average, says a report by the British Broadcasting Corporation (BBC). According to Al Jazeera, a United Arab Emirate (UAE) media organisation, several Venezuelans spend their day rummaging through bags of garbage in search of food.

A survey in February 2018 found that about 90% of Venezuelans were below the poverty line and more than 60% surveyed have said that they wake up hungry because they do not have sufficient money to buy food, according to Reuters. Apart from food, the country is facing a shortage of medicine. The economic crisis has dealt a deadly blow on the public health system, making medicine and health equipment unavailable. According to local economist Tayo Ogidan, an analyst with research company Econometrica, ‘’ Venezuela is that lovely lady you swooned over in freshness of her youth but avoid in old age; she now looks worn, weary and ugly. Nigeria could learn a lesson or two from her story of grace to grass’’.

According to Ogidan, ‘’the Venezuelan horror show demonstrates what happens when politics takes the high stage in preference to economics. In the short term politicians gain the love and adoration of an ignorant people and then they go on to win the next election, but reality soon sets in, and disaster quickly follows. The Hugo Chavez and Mauricio Maduro (Presidents of Venezuela from 1999) brand of economic management have been like that of a drunken sailor; one step forward followed by three steps backwards’’.

To understand the extent of the tragedy of bad thinking, a journey into Venezuela’s recent economic history is important. Venezuela discovered oil as far back as 1914 and this brought the country vast wealth and supported a relatively free market economy. By 1950 the country could boast of having the fourth highest income per person in the world, being behind only the United States of America, Switzerland and New Zealand. As recently as 1980 Venezuela was actually the fastest growing economy on the planet in the 20th century. Even by 2001 the country was still ranked as Latin America’s wealthiest nation. So what went wrong?

Well before the turn of the millennium, indeed as far back as 1958, Venezuela had sowed the seeds of its own ill fate. By the late 1950’s government’s meddlesome involvement in the economy which involved price and exchange rate controls, tax increases and restrictions on the rights of citizens to own property lead to ten years of subsequent stagnation with real Gross Domestic Product (GDP) per capita dropping 0.13 per cent between1960 and 1997. As bad as things seemed to be at the time the impact was relatively mild.

Today Venezuela is a basket case. The country with the world’s largest oil reserves suffers from a contracting economy, hyperinflation inflation (in other words inflation rate above 50 per cent per month), mass emigration (23 million people have either crossed the country’s borders or are presently embarking on that uncertain journey), despotism, rising crime , disease, hunger and starvation, with the situation deteriorating by the day. Economists note that Venezuela’s economy tanked by 16% in 2016, 14% in 2017 and a likely 15% in 2018. Inflation rate rose to 112% in 2015 and 2,800% in 2017. One estimate puts the country’s annualized rate of inflation at around 65,000% for 2018, making it one of the most staggering hyperinflations known to economic history, indeed perhaps worse than the debacle of the German Weimar Republic at the end of the First World War. The absence of food has resulted in massive average weight loss of the country’s people with weight falling by an average of 18 pounds per person in 2016 to 24 pounds per person in 2017.

Despite socialisms long slog through disaster President Chavez has required his compatriots taste the poisoned challis. On becoming President in 1999 Chavez did all the things third world dictators do; steal, oppress, polarize and jail. Benefitting from a staggering $1 trillion raked in over a fourteen year presidency Chavez was able to embark on an incredibly expensive social spending agenda to guarantee his reelection. He even borrowed a leaf from some African dictators by replacing competent officials with clearly less gifted stooges; plunging the economy into a crisis of not only finance but also of management.

This was a tradition continued by his preferred successor Mauricio Maduro. The new man at the helm in Venezuela since 2013 has sustained Chavez’s political and economic legacy but with oil prices tumbling in 2014, Maduro got handed the gift of having to clean up the Chavez mess. Venezuela’s President has bungled the assignment royally. He decision to keep the clearly unsustainable socialist policies in the face of changing global economic realities has been his greatest undoing. Between 2014 and 2017 budget deficit as proportion of GDP has risen from -16.48 per cent in 2014 to an incredible -31.85 per cent in 2017. According to Suraj Akinyemi an economist and local Nigerian industrialist, ‘’you have to either have an incredible stretch of faith or an unbelievable depth of naivety to believe that Venezuela can wriggle out of this problem without  massive economic reform. Its recent currency change is like pissing in your pants, everybody sees it but only you feel it’’.

As far as Akinyemi is concerned if Venezuela is to pull back from the brink it needs policy credibility that will stabilize its currency, improve domestic food supply stocks and rebuild external currency reserves. Rising oil prices should be accompanied by falling public debt rather than rising fiscal borrowings as a proportion of GDP (see chart). The best cure for inflation is to cut back money supply but this would lead to rising interest rates, slower growth, and high unemployment. Says Akinyemi, ‘’Venezuela will have to take the bitter pill and wait for results later. Economists do not have wonder solutions in their tool boxes, Maduro and compatriots will have to wait for delayed gratification’’.

Nigeria may not be anywhere near the contemporary Venezuelan economic sand storm, but a few lessons are clear. The first lesson is that a government cannot sustain a socialist agenda for too long. Nigeria cannot afford populist agenda’s unhinged from domestic productivity. Rising welfare must be the product of increased output per head and not exploding social transfer payments. Secondly debt is not a virtue. The only time when debt makes good economic sense is when the government’s return on investment exceeds its cost of debt, going on a borrowing binge to fix short term recurrent obligations is bad fiscal conduct. Thirdly, inflation does count. Allowing money supply to go on a joy ride to buy votes or bribe citizens is a disastrous road to penury. With inflation at about 11 per cent the value of the naira would split down the middle in seven years, meaning that if the rate stays constant in the next seven years a naira today would be worth 50 kobo by 2025. By Venezuelan standards this is paradise. So far the Central Bank of Nigeria (CBN) has done a decent job of keeping inflation in check but this has come at the expense of the jobless rate. Nigeria’s unemployment rate is a worrisome 18.8 per cent and underemployment is even worse at a soaring 21 per cent. Fourthly, market resource allocation is not perfect but easily trumps allocation by government fiat.

The riots, robbery and chaos on Venezuelan streets are testimony to how bad things can get if the market mechanism is suppressed and the economy is sandbagged by excessive government intervention. Lastly, elevating lower talent to spite people with greater ability is self-defeating. Nigeria’s flagrant disregard for merit and competence for tribe and political party-connections denies the country of its most productive resources. The loser is not the individuals so alienated but the country deprived of the use of its most effective human capital. Lackeys, stooges and flunkeys have their uses, but certainly not at the command wheels of an economy navigating its way from recession to growth.

Venezuela’s economic decline is wretched and pitiable, but it portrays the consequences of poor political and economic choices. As historian Paul Johnson once noted, ‘’ the worst of all despotisms is the heartless tyranny of ideas’’, this is where Nigeria really needs to take a few notes from the dreadful playbook of Latin America’s sick lady of oil.

 

 

 

 

 

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