Since 2014, Venezuela has been suffering from an economic crisis of disastrous proportions. Reuters reported inflation of 488,865% for the year ending in September 2018. In 2017, Gross Domestic Product (adjusted for inflation) decreased by 14% and inflation reached 26.4%. These economic woes have led to severe social problems. Venezuelans are starving because of food shortages. Medicine and personal hygiene products are in short supply. Water and electricity are inconsistent at best and nonexistent at worst. Where did these problems come from, and why are they so severe?
After Hugo Chavez assumed the presidency in 1999, Venezuela’s government started exercising much more control over the economy. They nationalized businesses, controlled the value of the currency, and fixed prices for basic necessities. Though these policies were popular among Venezuelan citizens at the time, they discouraged investment by multinational companies and production by domestic companies. Between 1999 and 2013, high oil prices encouraged Venezuela’s dependence on oil extraction and export. In 2014, however, the price of oil began to fall, severely cutting Venezuela’s G.D.P. To compensate for these shortfalls in revenue the government began printing more money, causing inflation to spike.
In an attempt to maintain consistent price levels, the Venezuelan government has also tightened price controls for certain products. Because of these price controls, companies no longer have the ability to adjust the price of their goods to reflect the ever increasing inflation. When the cost of inflation is greater than the profit obtained by selling the good, producers no longer have an economic incentive to produce. This is why we see such severe shortages in Venezuela; firms won’t produce something they can’t make a profit on.
Venezuela’s woes highlight the strengths of a free market system. If the price of a product is dictated by the supply of and demand for that product, companies will always have an incentive to produce just the right amount. The competitive, free market system maximizes the wellbeing of the people. In an attempt to create equality, the socialist system implemented by Hugo Chavez and perpetuated by Nicholas Maduro has ruined those that it was designed to help.
The C.I.A. estimates that four million Venezuelans have migrated—mostly illegally—in the past four years. Common destinations include Colombia, Brazil, Mexico, Panama, Chile and the Dominican Republic. Despite increased immigration restrictions and deportation efforts in these countries, Venezuelans continue to flee the economic disaster in their homeland. Of course, not all Venezuelans have the resources to move to another country. Those who are leaving are the wealthy and the educated, mostly from the middle and upper class. This process, colloquially known as “brain drain”, doesn’t bode well for Venezuela’s future. To pull themselves out of the current economic disaster they need domestic production and innovation, neither of which can be achieved without people who have the resources and the know-how to start and maintain successful businesses.
Venezuela can begin to rehabilitate its socioeconomic situation by eliminating the price and currency controls that are at the root of these problems. As profitable business opportunities once again become available, individuals will look to move to Venezuela, not move out of it. President Maduro has been highly critical of the capitalist system in the past, even going so far as to blame it for Venezuela’s economic crisis. In recent months, however, it would appear that Maduro has ever so slightly changed his tone, acknowledging that “the production models we’ve tried so far have failed.” Hopefully this indicates a more comprehensive paradigm shift.
For Venezuela, deregulation and liberalization mark the path to prosperity. For the health, happiness, and even survival of their citizens, they must adopt more open economic policies.
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