Belmont Club

Reinforcing Failure

Pop quiz.  Suppose a whole country decides to live off an imaginary inexhaustible stash promised by its president. One day it runs out of other people’s money and begins to starve. Hospitals start to close. Even the beer runs out. What do you do? What do you do?

According to the International Crisis Group that is the problem the world faces in Venezuela. “Some economists predict a sudden collapse in food consumption and widespread hunger, and public health specialists already say that some surveys are showing chronic malnutrition.”  If the Colossus of the North doesn’t save it, then all hell with break loose.  Can’t let that happen can you?

Aside from purely humanitarian concerns, Venezuela’s neighbours and the wider international community have pragmatic reasons for acting. If a solid institutional and social welfare framework can be restored through a negotiated settlement, and economic measures taken to deal with inflation and scarcity, a humanitarian crisis can be averted. If not, the collapse of the health and welfare infrastructure is likely to make political conflict harder to manage and could lead to a further erosion of democracy and an increasing likelihood of violence.

This in turn would have an impact beyond Venezuela’s borders. Potential risks include large-scale migration, the spread of disease and a wider foothold for organised crime. Without a change of economic policy, the country is heading for a chaotic foreign debt default, probably in 2016. An unstable Venezuela unable to meet its international commitments could destabilise other countries in the region, particularly Caribbean nations that have come to rely on subsidised energy from Caracas. It would also have a direct impact in Colombia, along a border already under multiple threats.

Venezuela should have been rich what with being the “12th largest oil producer in the world … and a beneficiary of the most sustained oil price boom in history”.  Instead it is flat broke. It’s currency, the Bolivar is worth 1% of its official rate on the black market and 1/1000th of what it was before Hugo Chavez assumed power.

The country may be on the verge of hyperinflation. Most economists reckon that the inflation rate is already 120% a year (the central bank stopped publishing price data, so no one is sure). Some expect it to reach 200% by the end of 2015.

The Bolivar has essentially stopped working as legal tender and now everything is doled out by the state in an effort to make things “affordable”. “The government uses a labyrinthine system of price and exchange controls to shield Venezuelans from soaring prices. But these make matters worse. Price ceilings have devastated local production; factories are operating at half-capacity and more than two-thirds of food is imported. Affordable goods are in short supply.”

The result has been food riots. Desperate gangs of looters are roaming the streets, forcing the remaining businesses to shut down. “One person was killed and dozens were detained following looting of supermarkets in Venezuela’s southeastern city of Ciudad Guayana on Friday morning, according to Venezuelan authorities. Shoppers seeking scarce consumer staples including milk, rice and flour broke into a supermarket warehouse on Friday morning, leading businesses in the area to shut their doors.”

This has prompted the government to seize the remaining food stocks in the country and parcel out the contents to the population. What else is it going to do?  It has already printed all the money it can crank out so it is essentially looting whatever is left. CNBC says “Venezuelan troops occupied a Caracas warehouse complex used by local food giant Empresas Polar and Nestle to distribute food and beverages …. Workers said dozens of national guard and police took over the building on Wednesday evening. National Guard troops remained within the complex.”

Asked to explain the situation, the Venzuelan government has pointed the finger at the United States. “President Nicolas Maduro said the violence was premeditated and blamed the United States as being behind it.”  Conspicuously absent from the list of those responsible are Hugo Chavez and his socialist “Bolivarian” policies.

The International Crisis Group foresees an eventual collapse. “To forestall the severe consequences of a humanitarian crisis in Venezuela” it urges the regime to  admit its errors and begs the opposition not to exploit the situation  for political advantage. It calls upon “the broader international community”.

  • [to] abandon their reluctance to act, and explicitly press for restoration of the rule of law and of institutional checks and balances, beginning with close oversight of the December parliamentary elections.
  • They should also help alleviate the social costs of the current crisis by offering food and medical aid and helping Venezuela cope with and control existing epidemics and prevent future ones.

The advice amounts to forgiving the guilty, restraining the innocent and billing whoever has any money.  This is the universal solution to all political ills. But as to causes of the plague, there is still some controversy over why things went so wrong in the Caribbean country.   The British public TV Channel 4 reports that things started off well but suddenly things took a turn for the worse.

Under the government of the late President Hugo Chavez, the authorities did invest enormous sums of money in a pioneering health project called Barrio Adentro.

They built thousands of small clinics in low income areas, bringing free basic healthcare to large numbers of impoverished people who had never had any. It was a pioneering project, with limited impact.

Meanwhile, Venezuela’s public hospitals remain forgotten, under-resourced and now on the brink of collapse. …

Few were able to talk to me openly, or felt comfortable giving me their names, for fear of losing their jobs for talking without official permission. But the situation they described was shocking.

In some hospitals, they had less than a third of the medical supplies they require. Almost every patient told me they had to buy at least some of their drugs on the street.

Oncologists said that people who were diagnosed with breast cancer sometimes had to wait more than 18 months for treatment, while surgeons said that other patients often die while waiting for operations.

It’s not just a lack of medicines that is making life difficult. Spiralling inflation, which topped 600 percent in July 2015, has meant that doctors’ salaries are now worth less than £10 per month.

The NGO Venezuelan Medical Societies Network estimates that in the last few years approximately 10,000 medical graduates have left the country.

It was a program of consumption with no thought given to creating replacement wealth on the assumption that “someone” could always foot the bill. Printing money should have worked, and the mystery of why raising the number of Bolivars by ten to the third power did not correspondingly increase the wealth is still a puzzle to Marxist economists. There is the vague sense that if only the pueblo had more money they would have succeeded in providing free everything and doubtless they would have won through if the capitalists had not been so stingy.

For now Venezuela is not only out of food and medicine but out of beer. It is not even possible to solve the problems of the world over a bottle of cervezaThe Guardian reports that troops have been ordered to seize the breweries after President Nicolas Maduro accused them of economic ‘sabotage’.

Things are looking grim what with the world price of oil has been collapsing. The Latin American Tribune notes that the price per barrel is scarcely half of what it was in 2014.  All the indicators spell doom, doom, doom.

Venezuela’s average oil price for 2014 was $88.42, down from 2013’s $98.08, 2012’s $103.42 and 2011’s $101.06, but higher than 2010’s $72.43, and much higher than 2009’s average price of $57.01, which the current average is now below.

In 2014, WTI averaged $93.06 while Brent averaged $99.61.

So far this year, Venezuela’s oil basket hit its highest price of $57.00 during the week ending May 15.

Venezuela is a problem similar but more severe than the challenge Greece poses to the European Union. In both cases you have countries with large voter blocs of socialist believers.  They are charming, sympathetic and economically hopeless. Nobody even pretends to believe that another bailout will help Greece.  Realistically no amount of charity will sustainably help Venezuela either, if the 12th largest oil reserves on the planet could not.

About all a handout will do is simultaneously reinforce failure and obscure its causes. Once the bailout money runs out the crisis will return with each side determined to blame the other for it. Of course that doesn’t mean the president won’t try. Bloomberg’s Nicole Gaouette reports, “the Obama administration’s charm offensive with unfriendly states has rolled through Myanmar, Iran and Cuba. Next stop: Venezuela.”

State Department officers have been meeting quietly with officials in the leftist government of President Nicolas Maduro since April to develop what Secretary of State John Kerry has called “a normal relationship.”

The outreach is another test of President Barack Obama’s 2009 inaugural pledge to “extend a hand” to repressive and corrupt regimes if they are “willing to unclench” their fists.

Unclench your fist so that we may grease their palms and thereby get these regimes out of a jam. One can make the case for rescuing Iran, Cuba and Venezuela in the name of preventing “black holes”. You can’t have them feeling like losers or they’ll make trouble.  In the past American presidents were criticized for supporting dictators against Marxist insurgents on the theory they were preventing chaos. Today the new theory holds that we must prop up dictators to prevent chaos. The more things change the more they stay the same.

Perhaps the best thing to do would be to let Venezuela fix its own problems, however messy that might be. But Western politics makes that unlikely. Once Maduro’s men finish handing out what’s left in the warehouses then starvation — real starvation — will start to stalk Venezuela and the Western politicians will find the visuals impossible to resist. They’ll do something whether it helps or not.

Harry Temple: All right, pop quiz. Airport, gunman with one hostage. He’s using her for cover; he’s almost to a plane. You’re a hundred feet away… Jack?

Jack: Shoot the hostage.

Nah. Pay the ransom.  Forgive the guilty, restrain the innocent and bill the taxpayer. You just know that’s the only way it ends.

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