Tuesday, August 18, 2015

Economic War In Venezuela (and Colombia).


Things are hard in Venezuela. There's no serious doubt about this. Inflation is at record levels- in fact it's been months since the National Bank has published statistics. Venezuela's government is a self proclaimed socialist one and opponents of the government and its ideology of Chavismo say that Venezuela is a case study of the impossibility of improving the lives of the majority through a collectivist system.
Shortages of staples and medicines, as well as personal hygiene products such as toilet paper and toothpaste force people to wait on long lines, at the end of which they might or might not find what they're looking for.

What seldom gets mentioned is that neighboring Colombia, which does not claim to be a socialist country in any way, (quite the contrary) is also mired in economic malaise. In truth many of the same causes are at play and the two countries fates are tied together like Siamese twins.

Venezuela is a major global petroleum producing and exporting nation. Columbia is not a petroleum power on the scale of Venezuela, but petroleum production and the production and export of commodities are important to Colombia.

Commodity prices in general and petroleum prices perhaps most of all have been falling rapidly lately. Venezuela in particular experienced a petroleum boom that allowed the Chavista government to expand socialist type programs like subsidized food and housing, even while capital was draining out of the country and food self sufficiency as well as industrialization remained as slogans and goals towards which little if any progress was made.

Living standards of Venezuelans have deteriorated over recent months. But as Venezuela has sneezed, Colombia has caught a cold, or maybe pneumonia. You won't find lines for food and other necessities in Colombia, as the market rations food and the government doesn't subsidize food prices like the Venezuelan government does (or more recently, as the Venezuelan government tries to do.)

According to the Venezuelan government around thirty percent of the staples, personal hygiene products and medicines it subsidized is smuggled into Colombia, where it is sold for more than the subsidized price but less than the market price. Poor Colombians have come to depend on the smuggled goods coming from Venezuela. Thousands of Venezuelans and Colombians, (4 - 5 million of whom live in Venezuela) make their livings from the trade in smuggled goods. An end to this trade would be catastrophic for thousands, maybe millions of people on both sides of the border. Yet along with the lucrative trade in smuggled gasoline (Venezuelans get gasoline for their cars virtually for free,) the contraband trade is bleeding Venezuela and also disrupting legitimate business in Colombia.

Aggravating the contraband goods trade is the black market in dollars. Venezuela's government makes available dollars for importation of staples and medicines at the price of 6.3 Bolivares fuerte per dollar. Other importers are supposed to get dollars for 12 Bolivares fuerte. On top of this there exists a supposed market driven legal exchange called SIMADI that theoretically makes dollars available to Venezuelans for a moving price that's currently around 190 Bolivares fuerte per dollar.

Historically it's been large businesses, many of them foreign owned multinational corporations, that get the cheap dollars. People who are called "plugged" also get these cheap dollars and use them fraudulently on the black market, which presently pays out over 600 Bolivares fuerte per one dollar. According to the Venezuelan government then, someone who earns 6,300 Bolivares fuerte has earned $1,000 while those Bolivares fuerte are fetching around ten dollars on the black market. The opportunity to steal is flagrant. Around $300,000,000,000 (yep, three hundred billions of dollars) have found new homes outside Venezuela over the course of the past ten years while workers are keeping their children alive with Arepas (a Venezuelan corn flour bread) and sugar water instead of milk.

Smugglers convert the Colombian pesos they get for dollars as well. This makes the sale of millions
of dirt cheap litres of Venezuelan gasoline incredibly profitable. There are virtually no legitimate gas stations in the Colombian border region.

So here is a puzzle for a genius to solve.

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