The struggle to put Venezuela back on the path to economic health: Don Pittis

The struggle to put Venezuela back on the path to economic health: Don
Pittis
Food riots, looting threaten what should be one of the world's richest
countries
By Don Pittis, CBC News Posted: May 22, 2017 5:00 AM ET Last Updated:
May 22, 2017 11:14 AM ET

Don Pittis was a forest firefighter and a ranger in Canada's High Arctic
islands. After moving into journalism, he was principal business
reporter for Radio Television Hong Kong before the handover to China. He
has produced and reported for the CBC in Saskatchewan and Toronto and
the BBC in London. He is currently senior producer at CBC's business unit.

As OPEC meets on Thursday, its most oil-rich member is collapsing into
chaos.

While Saudi Arabia, Russia and even the United States and Canada make
headlines as petroleum giants, it is actually troubled Venezuela that
has the world's largest reserves of crude, something in the order of 300
billion barrels.

Even at reduced current world prices, back-of-the-envelope calculations
show that oil wealth alone should make all Venezuelan families U.S.
dollar millionaires.
Looking like a war zone

And yet last week we saw pictures from the country that looked like a
war zone. Clashes between demonstrators and authorities have led to more
than 40 deaths.

Food riots descend into looting as families go hungry. Surrounding
countries are being overwhelmed by refugees.

Some say the chaos means Venezuela under the military-backed government
of President Nicolas Maduro could be on its way to becoming a failed
state like Somalia.

It seems clear that eventually Venezuelans must reach a political
compromise, but whatever government is in charge, getting the country
back on the road to economic health is crucial to ending the suffering
of its people.

The country is so sharply divided that outsiders, including France and
the Vatican, have called for international mediation. But even
international Venezuela-watchers are sharply divided on what has caused
the country's economic troubles, and the ultimate solutions.
Economic sabotage

"For many years, the opposition has engaged in destructive economic
sabotage, causing shortages through hoarding and speculation in a
deliberate attempt to create economic instability," Sujatha Fernandes,
an Australian specialist in the Venezuelan economy, told me in an email
conversation.

Nonetheless, she says, much of the current mess can be blamed on
economic mismanagement by the Maduro government following the 2014 crash
in oil prices.

Though they differ on many things, that is something Ken Frankel,
president of the Canadian Association of the Americas, can agree on. But
he scoffs at comparisons of Venezuela to Somalia.

"It's nowhere fair to compare it to Somalia. Venezuela does have
infrastructure, a history of democratic rule and a lot of the basic
elements of a modern state and economic structure," says Frankel.

Rather than blaming the country's troubles on the pro-business
opposition, he points to the undermining of the business sector first by
the charismatic socialist leader Hugo Chavez and then by his successor
Maduro.

Oil production actually declined sharply as the government chased
foreign companies away and replaced qualified managers at the state oil
company PDVSA with regime loyalists.
Desperate for cash

When oil prices crashed the government, which had maintained its
popularity by transferring income from resource wealth to its people,
became dangerously short of cash. In desperation it sold off gold
reserves, used oil infrastructure as collateral for loans and made bad
deals to sell future oil production at well below world prices.

Perhaps worse, says Frankel, it debased its currency, leading to
inflation that the International Monetary Fund has estimated at 720 per
cent but others have put at over 2,000 per cent. That destroyed domestic
industries including coffee production while making the imports that
people depended upon prohibitively expensive.

But Frankel insists a full recovery is possible because Venezuela's
enormous resource wealth, including the world's second largest
underground reserves of gold, means the country is simply suffering from
a cash-flow problem.

"It's a liquidity problem as opposed to a solvency problem," he says.

The hardest question, he says, is how to restructure the economy while
minimizing the pain and making things fair for the country's poorest.
'Pink tide'

York University political economist Viviana Patroni, who specializes in
Latin America, says ending the pain was the reason that Chavez was
elected so overwhelmingly in 1998 as part of the socialist "pink tide"
that swept what she describes as "the most unequal region in the world."

The Chavez idea was to transform some of the country's wealth into
better health care, better education and better nutrition for the poor.

"That's not so radical," she says.

But looking at Venezuela now, she can only think it was a failed
experiment partly because Chavez was unable to diversify the economy
away from natural resources and partly because he failed to engage the
private sector to help him transform the economy.

"What's broken is pretty much everything," says Kurt Annen, professor of
economics at the University of Guelph, who studies development aid and
Latin America.

Before it can do anything else, he says, Venezuela must stabilize its
currency and get its hyper-inflation under control. He says it has been
done in the country's neighbour, Bolivia.

There, the government's first step to slash the the budget deficit, in
Bolivia's case by cutting gas subsidies, resulting in a tenfold increase
in pump prices. That is certainly an option for Venezuela where gas
sells for pennies a litre.

The next step, says Annen, is to entice the private sector back to the
country in order to boost oil production to its traditional levels.

"The current government may not be willing to slash the budget deficit
as this will further erode the little political power they still hold,"
says Annen. Besides, he says, businesses are unlikely to trust
assurances from this government. Any economic improvement almost
certainly will require political change as well.

As several of the experts I spoke to suggested, those seeking change
have one advantage. Conditions in Venezuela are so bad that people will
be willing to accept a significant amount of pain to get the economy
back on track.

Follow Don on Twitter @don_pittis

http://www.cbc.ca/news/business/venezuela-economy-recovery-1.4122185