Chavez is Gone but his economics are not

Hugo Chavez

“Let them eat dollars!”

Venezuelans are protesting in violent opposition to president Nicolas Maduro who incorrectly thought carrying his predecessor’s economic policies forward would bring him the same charisma as Hugo Chavez.

These policies began when Chavez nationalized most businesses 13 years ago reducing production leading to Venezuela being ranked as having the lowest property rights in the world.

This nationalization resulted in a compete absence of foreign and local investment because investors did not know if or when their business would be seized by the government.  With no new investment and decreased production, the demand for imports went up.  Chavez then enacted a policy whereby the Bolivar could only be exchanged for USD through the Venezuelan National Bank making the greenback scarce.  He further artificially manipulated the official exchange rate which resulted in soaring inflation.

Finally, he created legislation that allowed government owned oil and gas companies to hold USD in off-shore accounts making it easy for them to pay employees but extremely difficult for Venezuelan businesses.

Venezuela’s inflation rate, now above 56 percent, is the highest inflation rate of any OPEC nation.  The rate hit its high when Maduro decreed limits on corporate profit margins of 30 percent in an effort to combat what he calls an ‘economic war.’

The Venezuelan National Bank’s scarcity index, which is a measure of a shortage of basic consumer products, jumped to a record 28 percent.  Reminiscent of Soviet era shortages, shoppers wait in line for hours to buy essentials such as flour, cooking oil and toilet paper.  The shortages are the result of currency controls that prevent importing raw materials and machine parts.

A primary driver behind the inflation is an expansion of the money supply which significantly exceeds economic growth.  In 2013, the money supply increased by 70 percent.  To compare it to stock, as a company issues more shares, the price drops because the value of the company is constant while the number of shares outstanding increases.  To dilute a currency in such a manner is unimaginable for Americans.

The original intent of Chavez economic policies was to help the poor majority in Venezuela while simultaneously ensuring a consistent voter turnout.  In the latter, he succeeded.  The former, however, turned out to be egregious economic mistakes which have only hurt the poor more than help them.