Venezuela – What happened?

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Once a wealthy country in the 1970s, Venezuela is now experiencing political turmoil and its citizens are living in poverty. With over 298 barrels of proven oil reserves, why is Venezuela, the country with the largest oil reserve in the world, the poorest performer in terms of GDP growth per capita? What happened to one of the richest countries in Latin America?

  1. It’s ongoing economic crisis

Venezuela is now in its fourth year of recession. With the economy shrinking, the price of goods keep increasing. The price for a dozen eggs is equivalent to US$150. So, this means devaluation of their currency, the Bolivar. To put it into perspective, one U.S. dollar was 100 bolivars in 2014. In 2016, one dollar got you 1,262 bolivars. On top of this, years of the excessive government spending and poorly managed government programs led Venezuela to experience its worst economic crisis in history.

  1. The currency split

Venezuela established three different exchange rate systems for the bolivar; one rate for “essential goods”, the other for “nonessential goods and another one for its citizens. The two primary rates overvalue the bolivar, and the black market values bolivar near worthless. The government has tried increasing the number of bolivars to tackle this problem, but the money in circulation isn’t enough.

  1. Venezuela is running out of cash and gold

Venezuela is struggling to pay its bills. It owes approximately US$15 billion while its central bank only has US$11.8 billion in reserves. The oil company, PDVSA (Petroleum of Venezuela), is pumping less oil and is at risk of defaulting. China used to come to Venezuela’s aid and loan it billions of dollars at a time. But even China has stopped giving out cash. Interestingly, most of Venezuela’s reserves are in the form of gold and has being making debt repayments in the form of gold bars.

  1. Its hottest commodity, oil, isn’t “hot” anymore

Venezuela has the world’s largest oil reserves, but the problem is that oil is the only commodity it has to offer. Ninety-five per cent of Venezuela’s revenue comes from exports, so if it doesn’t sell oil, the country hasn’t got much money to spend. Venezuela’s situation went downhill pretty quickly when oil prices plunged in 2014. It’s been struggling to recover ever since.

  1. Government control

The Venezuelan government enforced strict price controls on golds sold in supermarkets. It also stopped food importers to cease importing basically everything because they would have to sell their products for a major loss. In 2016, the government stopped enforcing price control. However, prices are still so high that Venezuelans can’t afford even the most basics supplies.

There are many factors that have contributed to Venezuela’s economic and political turmoil. The challenge for the country will be to escape the cycle it is stuck in, and that’s only if they can sort out the state of their government first. There won’t be a quick fix solution, it will be long and arduous journey for the country.

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The U.S. household income increased, but there is still much to do.

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The data released by the Census Bureau in the income, poverty, and health insurance report on September 12 seem to portray a healthier U.S. economy.

In fact, the annual report shows that the median household income rose by 3.2% from $57,200 in 2015 to $59,039 in 2016, and that the percentage of people living in poverty decreased in 2016 by 0.8% from the rate registered in 2015. Additionally, the data reveal a drop in the percentage of people without health insurance coverage: the value registered in 2016 was 8.8%, 0.3% less than the value registered in 2015 (Reuters).

Overall the quality of life in the United States seems to be improving and this means that the growth that the country has seen since the recession in things like the stock market, is at least to a certain extent also starting to show in households (Marketplace). Yet, skepticism lingers over the data shown in the report.

Considering other measures could help to better understand why the U.S. still has much to do to repair its economy.

The report by the Census Bureau reveals that the income inequality rate is not decreasing: there are still huge divisions in incomes because of people’s gender, race and age. Moreover, inequality between Americans is growing (The New York Times).

In addition to income inequality, there is another measure that we should take into account: supplementary poverty. As pointed out by Forbes, unlike the poverty rate, supplementary poverty considers many of the government programs designed to assist low income families and individuals that are not included in the official poverty measure. Therefore, it shows that there are many families above the official poverty level that are actually receiving government aids.

This is one of the aspects that shows there are still many open questions about how economists should measure the poverty level and what values to take into account. Despite a rise in median household income, there are a lot of people who still feel «economic frustration», because there are different factors that influence people’s wages and economic opportunities, like for example the place where they live (Marketplace).

Beside these measures, also the number of health insurance coverages raises skepticism among the experts.

Even though the percentage of householders having insurance coverage increased, a breakdown of these data could reveal a different story.

If we look at people with income at or below the poverty level, we can see that 16.3% of them lack insurance coverage: «these are people who can least afford to take on medical debt» (Forbes). This percentage is quite remarkable when compared with the 4.6% of householders above the poverty level living without insurance coverage.

Despite these issues, it seems that the U.S. economy is improving overall. This element matters a lot, since President Donald Trump has announced that he wants to reform the current tax system and cut government spending. Democrats, considering the economic improvements shown in the Census Bureau’s report, «now have more ammunition to argue that the changes Mr. Trump seeks would mess with the success » (The New York Times).

The Federal Reserve is also paying close attention to the data released by the Census Bureau and to the current status of the U.S. economy. In fact, Janet L. Yellen, the Federal Reserve chairwoman, is expected to end the Fed’s lenient monetary policy in a meeting scheduled this week; the changes that will be following could affect the current improving U.S. economy.

Yet, whatever effect the new monetary policy will have on the economy, the increase in household income and the drop in the poverty rate is a reflection of the higher number of people back in the work force and of the 2.2 million of jobs added over the past year. The growth in the number of working people is «a vivid illustration of the old maxim that a job is the best antipoverty program » (The New York Times).