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Venezuela's 5th minimum wage hike in a year shows its economy is collapsing

Its economy is in a tailspin of epic proportions.

Venezuelans hold up 100-Bolivar notes during a protest over lack of cash in December.  
Getty Images

On Sunday, Venezuelan President Nicolás Maduro raised the country’s minimum wage by a whopping 50 percent. But it wasn’t much of a surprise — the country has already raised the minimum wage four times in the past year alone, in an attempt to adapt to a crippling inflation crisis that has caused the price of basic necessities like food to skyrocket to astronomical levels.

Maduro announced that he was hiking the monthly minimum wage to 40,000 bolivars, which amounts to just US$12 on the black market, where most people buy dollars because they don’t have access to official exchange rate dollars. The minimum wage has now risen by a cumulative 322 percent since last February.

Venezuela’s economy has been in a tailspin since a drop in global oil prices in 2014, and its explosive inflation — the highest in the world — is showing no signs of letting up. The International Monetary Fund estimates that the country’s inflation is expected to rise 1,660 percent this year and 2,880 percent next year. Just to get a sense of how much that defies the region’s trends, if you exclude Venezuela, inflation in Latin America is expected to increase by less than 7 percent in 2017.

Proponents of free market capitalism have been eager to point to Venezuela’s disaster as the latest proof that socialism is a guarantor of economic ruin. But the reality is considerably more complex.

Setting aside the fact that some leftist policymaking experiments in South America like Bolivia are faring quite well, Venezuela’s woes are due to a confluence of factors, ranging from the country’s destructive addiction to oil to shortsighted monetary policy — factors that can’t simply be dismissed as vices of socialism.

What’s happening in Venezuela at the moment

The country is suffering from huge shortages in food, medicine, and electricity, which has triggered upheavals ranging from widespread looting of stores to disruptions in the school year for millions of children. If someone wants to try to find alternatives to publicly subsidized stores that are running low on goods, buying an item like flour on the black market can cost an entire month’s pay for minimum wage workers.

Analysts say the latest increase in minimum wage doesn’t come close to keeping up with the rate of inflation, meaning that it won’t raise the minimum wage to a rate that’s easy to actually live on.

And as Alejandro Velasco, a scholar of Latin American history at New York University, points out, it won’t provide a boost to the millions of workers who are employed in the informal economy — businesses that are off the books and unburdened by government regulation.

The inflation crisis has made the everyday use of cash incredibly difficult. When Velasco visited Caracas, the capital of Venezuela, last fall, it took about 10 100-bolivar bills — the country’s largest-denomination bill — to simply buy a cup of coffee in a shop.

He saw long ATM lines as people constantly sought out more cash to buy the most basic products needed to get by. But in order to deal with the cash crunch, ATMs had a daily allowance, which wasn’t very high: He says it came out to around the price of about six cups of coffee.

In December, Venezuela announced that it expects to print six new bank notes, worth between 500 and 20,000 bolivars, to ease the cash crisis. It also announced a plan to pull 100-bolivar notes from circulation — both because the currency has basically become worthless and in order to try to crack down on the untaxed shadow economy. However, the deadline for them to be decommissioned has been delayed until later in January, and it’s unclear exactly what status they have at the moment.

Suffice it to say, using money in Venezuela at the moment is not easy.

Venezuela’s crisis has many roots

There are several reasons Venezuela is where it is today. The first one is tied to the plummeting of global oil prices since 2014, which wreaked havoc on the country’s economy.

Venezuela has the largest proven oil reserves in the world, and that feature has long been at the core of its economic well-being. Since the early 20th century, its economy has experienced booms and busts based on how much oil could be sold for on the global market.

Between about 2004 and 2014, global oil prices skyrocketed, and gave Venezuela the biggest sustained oil revenue windfall it has ever received. Under the socialist firebrand Hugo Chavez, the government used the surge in revenue for ambitious social spending that invested heavily in education, health, and anti-poverty programs.

But oil is as much a curse as it is a gift for many countries, and Venezuela is a prime example of it. It relied entirely on oil exports to drive growth and did little to invest in domestic production. Instead, it relied on imports for many of its most basic goods and services. So when oil prices plunged, so did Venezuela’s economy, which had put all its eggs in one, well, barrel.

Velasco believes Chavez’s model of socialism that he implemented during that era of the oil boom exacerbated the country’s oil dependency. “His system of nationalizations and regulations really strangled the already meager productive apparatus of Venezuela,” he explains. He says the problem isn’t socialism per se, but rather “petro-socialism”: The real gains that marginalized Venezuelans saw through increased social spending were ultimately undermined by a refusal to generate sources of growth other than oil.

Chavez’s spending regime also left the country acutely vulnerable to emergency. Ricardo Hausmann, director of the Center for International Development at Harvard's Kennedy School, notes at the New York Times that Chavez’s government failed “to put money aside for a rainy day but instead, over-spent and quintupled the public foreign debt.” When the price of oil fell, it left the government “with no savings and no access to financial markets because of over-indebtedness.”

Chavez’s bid to make Venezuelan democracy more participatory has caused the state to pour huge sums of resources into election campaign seasons since the turn of the millennium. Every year and a half or so, some kind of referendum or election on a regional or national level takes place, and the government tends to spend fortune on the campaigns surrounding it. This wasn’t in and of itself a cause of the crisis, but rather was symptomatic of the lack of government discipline that helped set the stage for it.

The response of the government to the decline in oil prices has made the situation worse. As the country was rocked by lower oil prices, imports dropped, and people used their money to chase after fewer and fewer products with increasingly marked-up prices. So the government printed out more money to ensure people had enough money in their pockets. But ultimately the combination of the huge increase in the money supply and the sluggish rate of imports has fueled inflation further.

Velasco’s perspective on the current Venezuelan crisis is that it’s the latest manifestation of the country’s old addiction to oil — one that’s surfaced before under other governments, not just socialist ones. “The problem isn’t ideology — it’s dependence,” he says.

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