A Visual Guide to Venezuela’s Failed Economy

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Venezuela’s economy is in shambles, with runaway inflation and a massive budget deficit leading to food shortages and frequent violence.

Venezuela is perhaps the world’s most unique economy. The country has the luxury of tremendous natural resource wealth; Venezuela has more proven oil reserves than any other country in the world and represents more than a quarter of OPEC’s total.

Venezuela has also been home to a prolonged experiment in socialism. Starting with the election of Hugo Chávez in 1999, Venezuela began an aggressive campaign to eliminate income disparity and enact social reforms. This movement was funded primarily through the nationalization of oil companies and other industries.

By many key metrics, Venezuela has made huge strides since Chávez took over. Life expectancy and school enrollment have increased, while teenage births and infant deaths have declined significantly.

 

Data Source: World Bank.

Now in its second decade, however, the socialist economy is faltering. Venezuela is experiencing massive budget shortfalls, shortages of basic resources, and a skyrocketing violent crime rate. The charts below illustrate how the country’s dependence on oil has put the economy in danger of a complete collapse.

Oil Dependency

Venezuela’s pursuit of a socialist economy has been possible in large part because of the massive oil reserves held by the country. While the economy was hardly robust during oil markets, it has been devastated by the recent decline in crude prices.

It starts with a significant reliance on oil to fund the government’s annual budget. Oil represents 95 percent of Venezuela’s exports, 40 percent of government income, and as much as 17 percent of total GDP.

Data Source: MIT.edu

Like many other oil-rich countries, Venezuela produces very few “high technology” products for export. It ranks far behind its neighbours as well as larger emerging economies such as India and China.

Data Source: World Bank

The fact that Venezuela’s exports consist primarily of oil products is not at all surprising; it would be foolish not to take advantage of the natural resources wealth the country inherited. But Venezuela has failed to develop private industries that would diversify its dependence on oil, which means that export revenue depends almost entirely on crude.

Yahoo! > Caracas Stock Exchange

The status of Venezuela’s stock market illustrates the extreme scarcity of public, non-oil companies. Acquiring meaningful information about the Caracas Stock Exchange is challenging for a number of reasons, including the runaway inflation and low trading volume in the fewer than 20 companies listed (most of which are national banks).

But the data that is available paints a grim picture. The CIA World Factbook estimated the total value of Venezuela’s publicly traded shares at approximately $25.3 billion in 2012. To put that number in perspective, Venezuela’s stock market was worth slightly more than Chipotle.

Reflects 2012 estimate for Venezuela from CIA.gov, July 9, 2015 estimates from FinViz for others.

The 2012 estimates value the public stock market of Peru — which has a population roughly equal to Venezuela — at about $153 billion. Chile, which is roughly half the size of Venezuela, was valued at $313 billion.

When Oil Falls…

Through a prolonged period of high oil prices, Venezuela was generating significant cash through its state-run drilling companies and refineries. But when crude prices dropped, Venezuela’s oil revenue was reduced significantly.

Data Sources: OPEC Bulletins for 2012, 2013, 2014, and 2015

The significant drop-off in oil revenue, combined with a high level of inflation and contraction elsewhere in the economy, has resulted in a huge budget gap. Venezuela spent approximately $60 billion more than it took in during 2014, which translates to a deficit of almost 30 percent of GDP.

Data Source: CIA World Factbook

To be clear, the figure above represents Venezuela’s shortfall in 2014 alone. The deficits run by Spain and Greece, among others, are creating serious economic consequences in those countries, but they are dwarfed by the deficit Venezuela is facing.

Runaway Inflation

Venezuela’s attempts to control prices of goods and of its currency has consistently resulted in some of the highest inflation levels in the world. It is relatively common for emerging markets to experience inflation rates in the high single digits. But Venezuela has been battling price increases far above the normal range for decades; since 2005, inflation has averaged 27 percent annually, compared to 7 percent for Brazil.

Data Source: World Bank

A decade of massive inflation has wreaked havoc on Venezuela’s economy. If the U.S. had experienced a similar decade of inflation, an item that sold for $1 in 2004 (for example, a fast-food hamburger) would now cost nearly $11.

Starting a Business

The United Socialist Party’s high level of control over all aspects of life in Venezuela has restricted the development of a private sector. Starting a business in Venezuela, for example, is a significant undertaking. According to the World Bank, completing the required paperwork takes nearly six months, by far the longest of any country for which data is available.

Data Source: World Bank

Buying Milk

Beyond the relatively ambitious goal of starting a business, more common tasks have also become increasingly difficult. Venezuela has regularly faced shortages of basic goods, which has led to finger scanners at grocery stores and other government mandates. Many basic goods are considerably more expensive in Venezuela than they are elsewhere in South America.

Data Source: Numbeo.com as of July 2015

Staying Alive

Among South American countries, Mexico and Colombia seem to have developed reputations for frequent violence — typically related to the drug trade. Venezuela is much more dangerous than either of those locations, as the economic struggles have translated into a climbing number of murders. Venezuela is one of the most violent countries in the most violent region of the world; in 2014, there were almost 25,000 violent deaths.

Data Sources: Insight Crime, Quandl

In addition to homicides, police killings are relatively common. In 2014, nearly 3,500 people were killed by the police — about triple the number of police killings in the U.S.

Reflects 2014 figures for Venezuela from Insight Crime. Reflects annualized (through June) 2015 figures for the U.S. from The Guardian

The chart above reflects the absolute number of killings. The U.S. population is just over 10 times larger than Venezuela’s, so the gap in police killing rates is even more significant. For every 100,000 citizens, there were 11 police killings in Venezuela last year. In the U.S., there were approximately 0.3 per 100,000.

Put another way, the police killing rate in Venezuela is more than twice the homicide rate in the U.S.

Income Inequality

Venezuela has achieved a greater degree of income equality than many of its neighbours. But the country scores below many advanced capitalist economies on the Gini coefficient, indicating that Venezuela has a greater degree of income inequality than the U.S.

Data Source: World Bank Aggregation. Note: the year of calculation varies by country.

Freedom Scores

In addition to relatively high-income inequality, Venezuela also scores low in terms of individual freedoms. Freedom House compiles an annual ranking of the level of political and civil freedoms in countries around the world, ranking them from 1.0 (most free) to 7.0 (least free). These scores take into account a number of factors, including fair elections and freedom of religion and speech. Venezuela ranks a half-point ahead of Zimbabwe, where it is illegal for members of the same sex to hold hands or hug.

Data Source: Freedom House

Finally, it is worth revisiting the first table in this article illustrating progress in Venezuela to provide some perspective. Around the same time that Venezuelans elected Hugo Chávez in 1999, Colombia was embracing a series of economic reforms in partnership with the International Monetary Fund.

Today, Colombia has perhaps South America’s strongest economy despite limited natural resources. And it experienced comparable improvements in many key development metrics between 2000 and 2013:

Reflects change between 2000 and 2013. Source: World Bank.

At a time when many emerging markets are experiencing rapid growth and becoming a more important component of the global economy, Venezuela has taken a significant step backwards. The country’s ability to avoid a complete collapse depends almost entirely on the price of oil.

About the Author: Michael Johnston

Michael Johnston is senior analyst for All Emerging Markets, and also serves as COO of parent company Poseidon Financial. His investment expertise has been featured in The Wall Street Journal, Barron’s, and USA Today, among other publications. He resides in Chicago.


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