Manufactured Scarcity: An Examination of the Root Causes of Venezuela’s Food Shortage and Prospects for the Recovery

 

In 2015, as Venezuela experienced acute shortages of food, medical supplies, and basic household goods, the country recorded over 500 major protests.[1] The protests, often outside of grocery stores, hospitals, or government buildings, tell a story of political unrest and widespread dissatisfaction with not only the current social situation, but also with the government and the administration’s economic policies. In order to assess possible policy solutions for the country’s rapidly declining economy, it is first necessary to understand the root causes of the underlying problem. This paper presents an examination of the recent policies that led to Venezuela’s current chaotic situation, as well as historical comparisons, - drawn from the experience of the Soviet Union – and then offers recommendations and prescriptive policies that could provide a meaningful path forward.

In October of 2015, the International Monetary Fund (IMF) issued a report predicting that Venezuela’s economy would shrink more than any other country in the world, largely due to falling oil prices.[2] Over the years, Venezuela has pursued risky policies, despite warnings from international economic institutions. Rather than lessening its dependence on the revenue from oil exports, the country has continued down that path, relying on oil export prices of 90 U.S. dollars or more per barrel in order to sustain the economy.

As is often the case in countries with controlled economies, Venezuela’s civil society is also severely controlled.  Venezuela’s political system is democratic socialism, although the country’s democratic institutions have been severely weakened over the past decade. Freedom of the press is almost non-existent; public discourse related to both economic and government matters is heavily restricted. The result is that the Venezuelan government so severely restricts data that it is now nearly impossible to find reliable basic economic data, including figures on inflation, unemployment, and the food shortage.

The lack of free speech and free press means that there is very little written analysis from within the country opposing the government’s damaging economic policies.  One of the most damaging policies, not only of the current administration, but also of former administrations, is the over-reliance on oil as an export, as well as the country’s over-reliance on imports for basic necessities. Over the years, Venezuela became simultaneously dependent on the revenue from exporting oil at an unsustainable high price, and dependent on imports for a wide range of basic necessities, including butter, oil, bread, baby food supplies, and even chemotherapy drugs and other essential medicines.

The Decline of Global Oil Prices

The chart below, from NASDAQ, shows just how precipitous the decline in global oil prices has been over the past 12 months.[3]

 

According to the latest data available from Bloomberg, the price at which Venezuela is able to sell its oil for export has fallen more than 52 percent over the past year.[4]  What makes that figure all the more problematic for the country is that 95 percent of the country’s revenue comes from oil exports. In other words, solely due to the decline of global oil prices, Venezuela’s total annual revenue has decreased by 49.4 percent.

The Severity of the Shortages

The shortages in Venezuela include almost every consumable product, ranging from eggs to butter to oil to milk. The shortages are severe enough at this point that the government is now directing people to begin growing their own food. President Nicolás Maduro has reported that he and his family are living by example, having purchased their own “egg-laying chicken,” and Maduro is encouraging apartment complexes and individual families to begin growing their own food because the federal government is unable to address the situation.[5]

A Controlled Economy

The paradox of Venezuela’s current economic crisis is that the country is extraordinarily “oil rich,” but the populace is starving and unable to purchase food and cooking supplies. The underlying problem that accounts for this seeming paradox is the state’s expansive role in the economy. Through intentional central planning, the government has seized control over all areas of major enterprise and has established damaging price controls that have dissuaded private industries to enter the market. The devastating result is that the government is over-represented in the market, as both a seller and buyer.

One concrete example of the government’s predominance in the economy is the announcement in 2014 by Polar, the nation’s largest food company, that it would cease operations of one of its biggest factories because the government owed the company $463 million.[6] The predictable result of government interference is that there is now a gap in the market, as a major source of pre-packaged foods has exited, and there are no other companies able (or willing) to enter a government-managed economy, with few prospects for making a profit.

Rationing and the Rise of Smuggling

Maduro’s government announced on May 2, 2015 that the government would nationalize the remaining half of the country’s food distribution.[7] For almost three years, Venezuela’s government has played an increasingly heavy-handed role in food production and distribution. The Venezuelan government’s system of rationing and price controls means products, especially food and baby supplies, are priced significantly below their production cost, which has the inevitable consequence of hampering new entrants into the market. Without the lure of the possibility to make a profit, existing foreign companies as well as would-be domestic entrepreneurs are dissuaded from fronting the start-up costs and labor to fill the void.

Complicating the bleak economic situation is the fact that right next door to socialist Venezuela is Colombia, with a free market and robust black market. Goods received for free or for mere pennies in Venezuela can be - and often are - smuggled across the border and then sold for incredible profits. According to the Wall Street Journal, smuggling has become incredibly commonplace, with everyone from students to professionals becoming involved in the trade. One 26-year old student reports taking a bus across the border with a crate of common household items such as bath sponges, which he then sells for quick and easy money on the streets in Colombia.[8]

Lessons from the Soviet Union

The Soviet Union provides an instructive example to consider. The Soviet Union’s controlled economy suffered similar fates as the Venezuela economy today. In fact, at various points throughout the Soviet Union’s history, the country experienced several unique and distinct food shortages, usually followed by regimented rationing.

The first significant food shortage in the Soviet Union occurred in 1929, immediately following the rolling back of the New Economic Policy (NEP).  The NEP, or “state capitalism,” as Vladimir Lenin referred to it, was a liberalization of the Soviet economic policies that allowed for a truncated version of the free market.

After two natural disasters - severe drought followed by massive frost – the newly-installed Bolshevik government decided in 1921 to introduce some free-market provisions on an extremely limited basis. Under Lenin’s leadership, the government loosened the restrictions on markets and trade. The underlying goal was to motivate the workers in a variety of fields (manufacturing and agriculture, most notably) to increase their output and production.  The successful end result of the NEP was an increase in production.

In 1929, Joseph Stalin, who had assumed power in 1924, ended the NEP. The policy decision was, at least in part, driven by the country’s grain shortages. The solution, as envisaged by Stalin, was to eliminate private ownership, and replace that semblance of free market with a collectivization program aimed at the country’s entire agricultural output.

Implementation of Stalin’s plan involved destroying several million private farms, which of course had the devastating effect of decreasing production capabilities, rather than assuring recovery.

Much later in the Soviet Union’s existence, food shortages again became commonplace in the early 1980’s and up until the ultimate collapse of the USSR in 1991. At the end of 1990, western newspapers noted that the country’s food shortages resembled war-time shortages and that the only way the country could address the humanitarian crisis was through foreign charitable donations and aid.[9]

In both instances, as well as numerous other food shortage crises that surfaced in the Soviet Union, the underlying cause was universally the same: over-involvement of the government into the production of food, which in each instance depressed overall output, thus making it necessary for the government to instate strict rations.

The Path to Recovery

Venezuela’s economic path to recovery will be slow, and politically painful. Below are several recommendations for the government to take to improve living conditions and the economy.

Cut spending

This proposed change is easier said than done, of course, and cutting spending in a country with a vast system of nationalization is even more difficult. The government could begin by first implementing a reliable budgeting process that takes honest stock of each expense on an annual basis.

Increase revenues

Again, this is a longer-term recommendation. In the short-term, the government can increase revenues by improving the business climate to attract foreign countries and companies.

Improve the rule of law

Although the rule of law may seem only tangentially related to the economy, the fact is that the rule of law is so weak and insufficient in Venezuela that it deters companies from entering or remaining in the market.

Work with private enterprise

Instead of demonizing for-profit companies (and spreading propaganda to the populace), Venezuela must work hand-in-hand with international food suppliers. Equally important, the government must work to eliminate an entrenched system of pay-to-play bribery. If Venezuela does not do so, the consequences will be catastrophic and likely irreversible.


References

  1. Social Conflict in Venezuela during the First Semester of 2015,” Observatorio Venezelano de Conflictividad Social
  2. World Outlook” International Monetary Fund.
  3. End of day Commodity Futures Price Quotes for Crude Oil WTI (NYMEX), NASDAQ.
  4. Crooks, Nathan. “Venezuela Worst in World as IMF Forecasts 10% Contraction,” Bloomberg, 6 October 2015.
  5. Según Maduro, él mismo alimenta a las gallinas que les ponen huevos
  6. Venezuela's Biggest Food Company Suspends Pasta Production At One Facility,” The Huffington Post.
  7. Novak, Jake. “Food, Water & Obamacare,” CNBC.
  8. Vyas, Kejal, “Venezuela Pays Price for Smuggling,” The Wall Street Journal, 8 June 2014.
  9. Throughout 1990, there were several U.S.- and U.K.-based newspapers that conducted investigative inquiries into the For one example, see this Los Angeles times piece dated 30 November 1990, available at: http://articles.latimes.com/1990-11-30/news/mn-5767_1_soviet-union