Venezuela: How could such a rich country become so poor (Part I)

Thursday March 14 2019

By LUIS FRANCESCHI
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Air France Flight AF 0368 left Paris’ Charles de Gaulle Airport for La Guaira, Caracas, on January 12 at 9:05am. I was on board. As the plane took off, I checked the local currency exchange rate in Venezuela. It was at 900 bolivars to the dollar.

Nine hours later, we landed at the Caracas’ La Guaira Airport. A majestic run down and lonely international airport that speaks of better days; it has the scent of long-gone but extremely wealthy days. I checked again the exchange rate; the dollar was now at 2,200 bolivars.

By the time my passport was stamped, crossed customs and came out of the airport, the dollar was at 2,500. I then realised that I had become a millionaire in just 10 hours.

I had unbelievable purchasing power. I had amassed a fortune and it would grow by the hour, provided I did not change my few dollars into thousands of bolivars.

BEAUTIFUL COUNTRY

La Guaira Airport is squeezed between a deep blue Caribbean Sea and the imposing Avila Mountain, a 3,000 meters-high beautiful mountain range that separates the city from the airport.

I was driven to the city through an impressive superhighway built in the 1950s. We passed Boquerón I and II, two never-ending tunnels that pierce right through the massive green mountain. Behind is the sea, on top is the mountain, and suddenly, the light at the end of the tunnel is a no less impressive sight - Caracas city. It is a unique, breath taking experience that Venezuelans take for granted.

Caracas sits on a green valley. The city is made of a cobweb of impressive elevated superhighways built in the 1960s, surrounded by remarkable skyscrapers built in the 1970s, 1980s and 1990s, and some remarkable unfinished and abandoned buildings that were supposed to have been finished in the first decade of the millennium, the 2000s.

Thirty years ago, Venezuela was the richest country in South America, and one of the most important economies in the South. Ironically, there were also huge and unjustifiable disparities between the rich and the poor. The social gap, corruption and a tsunami of illegal immigrants triggered a time bomb. It brought the charismatic Hugo Chavez to power.

Venezuela is seated on magical landscapes. Its name was coined in 1499 by Italian navigator Amerigo Vespucci of Venice. After observing stilt houses built on water that reminded him of Venice, he named it Veneziola, or "Little Venice". It is twice the size of Kenya, with less than half of its population. It is literally floating on oil; it has the biggest oil reserves in the world, vast and rich deposits of gold, iron, bauxite…every possible mineral, and it is watered by large rivers that make its lands highly suitable for agriculture.

HYPERINFLATION

I had not been to Venezuela since 2015, when the exchange rate of the bolivar to the dollar was at 2,500. How could this be? 25 years ago, the bolivar and the Kenyan shilling were almost at par, at around 60 per dollar. Today our shilling stands at 100, while that original bolivar vanished. Today that bolivar would be exchanged at the rate of 350,000,000,000 per US dollar.

By 2008, the original bolivar had lost so much value that Chavez tried to stop inflation by removing three zeroes and creating a new currency, the strong bolivar (bolívar fuerte). This trick did not work and the strong bolivar continued to decline so much that ten years later, in August 2018, Maduro tried the same trick by removing five zeroes, so that 1,000,000 bolivars became 10.

Maduro called this third currency the sovereign bolivar (bolívar soberano). So, if you had one million in the bank, you could afford to buy three chapatis, at 300,000 strong bolivars each. The day after the reconversion, you could buy the same 3 chapatis for 10 sovereign bolivars. So, it seemed a logical step forward and an improvement.

POOR LEADERSHIP

The problem with dull and ludicrous leaders is that they tend to resolve problems by passing new decrees, laws, changing names, holding referendums, conferences, inventing new controls and blaming outsiders. They create their own animal farm, where they resurrect the dead by painting the coffin, and cure sicknesses by changing their name or the colour of the bulb in the sick person’s room. They never ask themselves, where the sickness is coming from and what is causing it.

As predicted, the slippery slope accelerated so that today’s exchange is at 3,600 (sovereign) bolivars to the dollar. This means that in 5 months the bolivar has devaluated from 10 to 3,600 per dollar. It wiped out any savings, pension, investment or retirement benefits.

The whole middle class has joined the poor, and the poor slumped to being miserable. Today, the minimum salary is just below four dollars per month, which is also the price of two loaves of bread. People no longer ask ''How much is the dollar today?'' Instead, they ask ''How much is the dollar now?''

FROM CHAVEZ TO MADURO

What had happened? Chavez died in 2013 and in came Maduro. Soon after, oil prices started plummeting. Chavez’ philosophy had been to do away with the private sector. He could do it because the country was extremely wealthy. He did not need to collect taxes, and he could afford to pay fat bonuses to anyone in need.

The oil crash that followed made Chavez’ model unsustainable. The country could not afford the high social bill. Corruption hit a high never seen before. Economists say that almost $1 trillion has been stolen in the last three years.

Meanwhile, Maduro behaved like a host throwing an exuberant party. He kept it going so that no one would notice; after all there was still food in the kitchen…but it was bound to end in disaster. Maduro should have known better, but you cannot expect oranges from a mango tree. Maduro kept the party going.

What caused such hyperinflation? Why was the currency so badly devalued? Chavez had nationalised the oil business; he had full control of PDVSA, one of the biggest and most successful oil companies in the world. He nationalised the biggest mineral corporations, banks, food factories. He expropriated land, buildings, farms… He also had full control of the Supreme Court, the electoral commission, the Office of the Public Prosecutor, Parliament…everything! What went wrong and why?

This will be continued.

Dr Luis Franceschi, Dean – Strathmore Law School, [email protected]