Basic economy in Venezuela 101.

This is just an informative piece from the perspective of a person who is completely ignorant in economic issues(Myself), be it theories, or anything that has to do with it. Perhaps it´s an article of what not to do in economics, as i can say that the venezuelan econonomy has shattered any hope of us prospering or growing.

Most people outside of Venezuela blame socialism as the cause of our problems and, in part, they´re correct. In some ways, the economy cannot be controlled which is the exact essence of pure socialism: to control everything.

Living in Venezuela, i would argue that the cause of our problems are deeper than just an economic or social way of life, if you take into account that “socialism” has been around in our country for the past 18 years, not much (seeing the big picture). Notice the quotation marks on socialism…Our government is not really a socialist one, it is a populist one but i´m digressing...

So, let´s talk about basic economics. The first thing that comes to our minds (to venezuelans) when we talk about the economy is inflation; to us , it is the main thing to move on from, economically. How to understand inflation? …An explanation that stuck with me is that: Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. I read it in investopedia.

This led me to make an experiment. I found several inflation calculators online and, just for fun, i started to see the inflation rate historically in the United States. I´d just read some book about Dalton Trumbo, one of the best paid scriptwriters in hollywood (he could make as much as 80.000 dollars a year in the 1930´s and 40´s before he was blacklisted). 80 grand in 1940 would be around 1.400.000,00 dollars today. The cumulative rate of inflation between 1940 and 2017 in the U.S.A. is 1641.4%.

Now then, imagine that rate but in a couple of years. That´s inflation in Venezuela. President Nicolas Maduro has raised the minimum wage 15 times in four years. I honestly don´t know how do people in this country make it in a monthly basis. Inflation in our country was partly caused by the excessive printing of bills. Ineffective policies followed (Price freezes, etc) and of course, no national production (Zero industries, except oil) at all, no competition of prices, services…and so on. If you add to that the dependence of every individual or private company (to the government) to access hard currency , you have a nice broth.

The minimun wage today in Venezuela is at around 200.000,00 bolivars a month. It´s difficult to say how much this is in dollars but to explain how the economy is destroying us, i´ll try. We have two official rates:

• The Dipro official rate stands at 10 bolivars per dollar. This rate is used for dollars that are “auctioned” to activities that have to do with importing food and medicines.
• The Dicom official rate stands at 722,60 bolivars per dollar, talk about disparity. This rate is used for just about anything else.

Simple math reveals us why this system is so corrupted and why is still in use. 20.000 dollars can be “auctioned” today with one minimum wage at the Dipro rate; try to live in Venezuela with a minimum wage salary alone where 1 Kg of milk powder can cost up to 20.000 bolivars… Does milk powder in the U.S.A. takes 10% of a minimum wage budget? This brings another question, how many venezuelans have access to these rates? Only the ones with very important, very high placed government contacts…

The Dicom rate is also virtually inexistent, despite the disparity. Even if the government had the intention of making it available to everyone, they don´t have the resources to do so, the big drop in the price of oil has made their “socialism” a nightmare. Things change a bit with this rate however, as more or less 72 minimum wages are needed to “auction” 20.000 dollars.

Things don´t stop there. Since we can only get dollars from the government (and there aren´t any) there´s a black market rate that everyone uses. The black market exists because the other rates are in place, simple as that (Eliminate Dipro and Dicom, free up the access to dollars and the black martet will vanish). Not an easy step but it has to be done

But (there´s always a but) most people that can access Dipro or Dicom sell a large portion of their dollars at a black market rate, which is the primary reason that the system is not going to cease operations anytime soon. The rate? 5.118,09 bolivars per dollar and rising. For 20.000 dollars at this rate, you would need a little more than 500 minimun wages. See what´s going on here?

This system, in place since 2003, (albeit with some minor variations made in recent years) is the greatest tool for stealing public money ever invented. Hugo Chavez decided to eliminate the free convertibility of the bolivar to the dollar and banned the use of dollars or any other hard currency in the country. That means there are only two ways to get dollars here…auctioning them from the government or going to the black market. However, when the system started, oil was at 100 dollars the barrel…the government could do as it pleased and still had plenty of space to maneuver; 4,30 bolivars per dollar was the first rate when it all started; it was named CADIVI.

14 years later, oil is at 45 dollars the barrel and the system is relatively the same. Some things we had to import back in 2003 but in 2017 we import everything(i mean EVERYTHING) . You can guess how we are now…

Good day.