35% GDP collapse: Venezuela’s unprecedented economic slide in numbers

LONDON — The South American state of Venezuela is in deep trouble.

The country, which was once hailed by many on the Western left as a shining example of socialism in action, is crumbling, both economically and politically.

In recent days fresh trouble has been sparked by an election decried by critics as illegitimate and designed to give the unpopular government of President Nicolas Maduro powers to rewrite the constitution and sideline the opposition-led congress.

Earlier this week, the USA labelled Maduro as a dictator for “seizing absolute power,” and imposed sanctions on the country, compounding the state’s economic woes.

Economically speaking, Venezuela’s main problem is that it relies far too heavily on exporting oil as a means of generating economic prosperity.

When times were good in the oil markets and oil was worth in excess of $US100 per barrel the country was able to grow rapidly and offer its citizens a great quality of life.

However, three years on from the crash in oil prices, the country simply cannot do that anymore, and its citizens are suffering. Problems in Venezuela certainly weren’t initially caused by the oil price crash, but it accelerated and exacerbated those issues.

Associated Press correspondent Hannah Dreier recalled on Wednesday how food shortages are so bad that one bakery near where she lived in Venezuela’s capital, Caracas, allowed people to queue outside, not to buy bread, but to rummage through its bins for scraps.

“People waited for their turn to hunt through black bags of bakery garbage. A young woman found a box of muffin crumbs. A teenage boy focused on finding juice containers and drinking whatever remained,” Dreier writes.

Beyond the harrowing tales of human suffering and crisis, lies cold, hard data, some of which is truly shocking.

In 2017, Venezuela’s economy is 35% smaller, in GDP terms, than it was in 2013, and 40% lower in per capita terms, as noted by Harvard economist Ricardo Hausmann, who was the country’s minister of planning in the early 1990s, in a piece for Project Syndicate

Hausmann reflects on the scale of the contraction in a recent article for Project Syndicate, writing that the shrinking is “a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%.”

“It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993), and Albania (1989-1993).”

Beyond the headline numbers, things are even more stark. Here is Hausmann once again:

“Clearly, a 40% decline in per capita GDP is a very rare event. But several factors make the situation in Venezuela even bleaker. For starters, while Venezuela’s GDP contraction (in constant prices) from 2013 to 2017 includes a 17% decline in oil production, it excludes the 55% plunge in oil prices during that period. Oil exports fell by $US2,200 per capita from 2012 to 2016, of which $US1,500 was due to the decline in oil prices.”

You can read Ricardo Hausmann’s full analysis here.

On a different macroeconomic level, inflation in the country is still growing uncontrollably, while the country’s currency, the bolivar, devalues at an almost unbelievable rate.

While the official rate of exchange between the US dollar and the bolivar is roughly 10 bolivars to the dollar, in reality it is more like 10,000.

A recent analysis by CNN Money showed that at the end of July, a dollar was worth 10,389 bolivars, up from about 3,000 at the start of the year, and 8,000 just a week beforehand.

Inflation could exceed 1,600% by the end of 2017, according to some estimates, and many restaurants have now stopped publishing prices because costs are rocketing so fast.

Restaurants, however, are but a dream for the vast majority of Venezuelans, and one statistic shows this in a stark, harrowing light.

As The Economist — which ran a special report on the country last week — writes: “Over the past year around three-quarters of Venezuelans have lost weight, averaging 8.7kg per person, because of a scarcity of food.”