How Venezuela imploded (update)

0:00This message comes from Bonterra. Your nonprofit's mission is big, but your team is small. With fundraising software from Bonterra's Network for Good, you can focus on changing lives. Big impact, less stress. Learn more at BonterraTech.com slash NFG. This is Planet Money from NPR. Hey, everybody. It's Amanda Aronchik. Today, a kind of undercovered and unexpected update to one of the biggest economic meltdowns in recent history. The Venezuelan Comeback. Back in 2016, Robert Smith and Noel King explained how the Venezuelan economy collapsed. We will start there. And then we will come back with an update.

0:47How the Venezuelan economy stabilized. Here are Noel and Robert from 2016, when the economy in Venezuela was still in free fall. I talked with a doctor in Venezuela the other day, a neurosurgeon. He'd been working in the public hospitals in Caracas for free, I should say, pro bono. And recently, he just had to quit. The conditions in the public hospital were getting too dangerous. I didn't want to jeopardize anybody's life because of being irresponsible. I'm sure you've heard about the situation in Venezuela right now. It's in the midst of this economic crisis. Collapse is probably a better word.

1:26There's almost no food on the shelves of the supermarkets. There are riots. Inflation is estimated at 500 percent. And there are these rolling blackouts across the city, which is a bad thing for neurosurgeons. I know colleagues who actually have ended their operations with a flashlight that comes in the cell phone. They've used that for surgery. Oh, yeah, at least to close the patient. It is inconceivable how they operate hospitals in Venezuela anymore. But they do. They just plan around the blackouts and the water outages, no water for hours at a time. And if you live in Caracas and you have to go to the hospital, you know you should probably bring everything from home.

2:06There is essentially nothing there. There are no gloves. There are no sutures. Patients have to bring their own food, their own gauces. They have to bring their own food to the hospital? Absolutely. In most of the hospitals, there's not even food for them. OK, yeah, it is as dramatic as it sounds. Infant mortality is rising, up 20 percent from last year. Diseases like tuberculosis and malaria are coming back. And the neurosurgeon says he would walk through the corridors of the hospital and see patients just lying on the floor on blankets and on mattresses they brought from home. If you could even imagine a war zone hospital, this is even worse.

2:48Why? Because in a war, you actually either didn't plan it, you know, it was something that exploded, it happened, it was unpredictable, but this is something that could have been avoided a long time ago with the right political and economical measures.

3:09Venezuela designed their own collapse.

3:16Hello and welcome to Planet Money. I'm Robert Smith. And I'm Noelle King. Venezuela used to be a relatively rich country. It had money and prestige. And most importantly, it had oil. Venezuelans used to brag that they had the largest reserves of oil in the world. Today on the show, we have an economic horror story about a country that made all the wrong decisions with that oil money. It's a window into the fundamental way that money works and how, when you try to control it, you can lose everything. This message comes from Vanguard. Capturing value in the bond market is not easy. That's why Vanguard offers a suite of over 80 institutional quality bond funds, actively managed by a 200-person global team of sector specialists, analysts, and traders.

4:04They're designed for financial advisors looking to give their clients consistent results year in and year out. See the record at Vanguard.com slash audio. That's Vanguard.com slash audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor. This message comes from The Economist. Introducing The Economist Insider, a new video offering providing unprecedented access to The Economist journalists. Twice Weekly Shows will feature in-depth debates and discussions with The Economist senior editors as they share expertise and analysis to make sense of an increasingly complex and dangerous world.

4:42More at economist.com slash insider. A decade ago, Venezuela was riding so high, its leader felt that he could take on the United States of America. This was Hugo Chavez, former revolutionary. But he had been elected president of Venezuela. And Robert, do you remember this? In 2006, he came here to New York to talk at the United Nations. And President George Bush had just spoken at the U.N. the day before. Chavez stands there and he says. Yesterday, the devil stood right here. The devil. And then I love this part. Chavez is a total straight man. He crosses himself. He makes prayer hands. And then he waves away and he says, I can still smell the sulfur.

5:29And everybody cracked up, except probably George Bush. But it was kind of funny, right? Back in those days, Hugo Chavez made a sport of straight up trolling the United States whenever he could. He would point out how terribly the U.S. was treating its poor and how sad it made him. We Venezuelan people love you. We want, I want to be your brothers. And then he makes the people of the United States an offer. He says Venezuela has so much money and so much oil that we're going to give discounted heating oil to poor people in the U.S. The Venezuelan state owns an oil company. You may have heard of it, Citgo.

6:07And they put out a bunch of ads in Boston and New York featuring Joe Kennedy. Mommy, I'm cold. These ads were all over TV, basically saying to the United States, look at us. We are Venezuela. We are the champions of the world. I'm Joe Kennedy. Help is on the way. Heating oil at 40 percent off from our friends in Venezuela and Citgo. This is Hugo Chavez's style, right? Right. He uses oil money to buy love and to buy power. The foundation for the collapse started, as it always does, during these boom years. Chavez wasn't big into saving any of his oil money for, you know, the day when it will run out.

6:45He was a socialist. He was a populist. He wanted to spend the money, especially on programs for the poor. Food subsidies, you know, education programs. Pretty much it was a time of economic bonanza. Alejandro Velasco grew up in Caracas. He's a professor at NYU now. And he says all that oil money started to dominate the economy. Oil was by far the biggest export. It paid most of the government's bills. And in the meantime, everything else in the economy wilted. No one wanted to build a factory. No one wanted to grow food because the oil business was lucrative enough. Yeah, when the country needed something, it just bought it from someplace else.

7:24Why make it yourself? When you could just buy the import with very cheap dollars. Why make auto parts when you can buy auto parts from abroad? Why? Make shoes. Make shoes. My own shoes. Milk. Anything. Cheese. Anything. Just buy it. Just buy it. Absolutely. Ready-made. Not have to worry about having to go through all the procedures and investment domestically to have to do that. Just buy it from abroad. And so it makes you hugely dependent on imports. So you have a country that is living and breathing oil money. They would sell the oil, which is priced in US dollars, then convert it to the Venezuelan currency called bolivars, and then every centimo of it is spent to keep the country running, to feed and clothe themselves.

8:04And then all of a sudden, there's a problem. In 2003, the oil workers go on strike. There is no oil. There is no money. Venezuela desperately needed cash, desperately needed dollars to do everything, anything that we've been talking about, buy imports that it required, right? Chavez freaks out. He has bills to pay. He's worried about his own currency, the Bolivar losing value. And so to keep the whole economy stable, he decides to fix the exchange rate between the Bolivar and the dollar. Chavez essentially said, the value of our money is what I say it is. And if you want dollars, you have to come to the government.

8:42You have to come to me. So it makes financial sense. It actually makes economic sense as an emergency measure. What happened is that this measure was kept and maintained throughout even to today. And this, this was the economic time bomb. Right. Even after the oil workers strike was settled, Chavez kept it so that every major transaction in the country still involved the government. If you wanted dollars, you needed permission to have them. The government set the exchange rate. The government could approve or reject any transaction. Here's how it would work. Alex Rosenberg was a clothing importer in Caracas.

9:19He brought in underwear, jeans, dress shirts, casual shirts, sweaters, jackets, blazers. And would these have your name on them? No, they wouldn't. They would have a couple of brands on them. He was no Calvin Klein. He was Alex Rosenberg. Now, in order to import clothing, he needed to pay his suppliers in dollars. And in order to get the dollars, he now had to go to the government and prove that he wanted to bring in something essential. So the government would give him the list. They printed entire official gazette documents where – Like books of papers? Books of code, basically, where you would check whether or not a particular material or a particular article of clothing had been centrally authorized by the government.

10:07What is this, alphabetically? You'd go down and you'd find underwear? You would find men's underwear made out of polyester, cotton, other fabrics. And then you would check in the book if the government deemed this important enough to buy, essentially. Basically. And, you know, the government didn't just believe you when you said, oh, there's a shipment of underwear out there. No, no, no. You had to show them proof that the underwear existed. Here's a picture of the underwear. Here's a picture of the brand. Here's what they're going to look like. Here's what they're made of. And here's what they cost.

10:40And then you say, I need$10 ,000. And you say, I need X amount of, you know, pieces of underwear at X dollars, totaling X amount of dollars. And I should note, Noel, this is all for permission to spend his own money. I mean, Alex was paying for the underwear. All this bureaucracy was just to see if he could exchange his local bolivars for dollars. And this might seem insane. It's a little insane. This might seem very insane. But as long as the price of oil was high, there weren't actually a lot of serious problems. The government would eventually give you your dollars and your underwear came into the country and all was well.

11:21Then two things happened. Number one, Hugo Chavez dies. Mothers weeping, children weeping, adult men weeping. And the unluckiest man in the world takes his place. His name is Nicolás Maduro. He had been the foreign minister for Chavez for eight years. And after all the drama and the excitement and the love of Chavez, Maduro was like... It's like comparing a log of wood to the circus that rolls into town. And then poor president Log of Wood gets hit with an axe. In 2014, the oil price, the oil price, which they depended on, drops. Like the price drops in half over six months. And this causes panic within the Venezuelan government.

12:10Everything they have, everything they do depends on oil money. And now they have half as much oil money. So the new president, Maduro, goes to OPEC and he begs them, we have to do something. We have to do something to keep oil prices up. Please help us. Countries like Norway and Saudi Arabia had been saving their oil money. Not Venezuela, though. Not only are we not ready for this, but there's nothing that we can do to stem the decline of oil. This is the end of any kind of boom years. But there's nothing that we can do now that isn't going to hurt a tremendous amount. So what do they do? They did nothing.

12:45And every trap set by Hugo Chavez gets sprung at the same time. The first thing that happens is that the Venezuelan government all of a sudden has fewer U.S. dollars. That spigot is turned off. So the government starts being stingy with them. There's this huge shortage of dollars. And of course, when there's a shortage of something, the price goes up. People were now willing to pay hundreds of bolivars for a single U.S. dollar. There are black markets everywhere dealing in U.S. dollars. Yeah, but the government insists on selling dollars at the old rate, which was around six bolivars for a dollar.

13:20They don't want the price for basic things like food to go up. They're desperate to keep things stable. But we know what happens when there are different prices in different markets. The Venezuelan people aren't stupid. They looked at this and they said, oh, well, listen, I can buy a dollar for cheap from the Venezuelan government and then sell it on the black market and make a fortune. Of course they started to do that. And Alejandro says there was this amazing scam. Raspar tarjetas. It was called el raspao, the scratch. The scratch. Scratch. The scratch. People would buy an airplane ticket to New York, say.

13:56They would tell the government, oh, we really need dollars for our essential trip to New York. But then they wouldn't travel. And so you had the mystery of the airplanes that had all their seats sold, but no one was riding on them. But there was so much profit to be made, you could just buy a plane ticket and not get on? Absolutely, because you could make so much more from the black market rate of dollars. Now, normally when this sort of thing starts happening, the country will eventually give up. They will admit that their currency is screwed up. It's worthless. People are scamming them. And eventually they'll let the exchange rates go back to normal.

14:30And I'm not saying it's easy. It is super painful to do. If Venezuela had accepted the true exchange rate, everything would have gotten more expensive. The poor people that Chavez had cared so much about would not be able to afford milk and bread. The country would have to rebuild its industry, rebuild its agriculture. But then things would have gotten better. But Venezuela decides to do exactly the opposite. And it doubles down on its mistakes. They even did something which sounds so confusing. They created different exchange rates for different people and different products. Yeah. And since it was confusing, there were more ways to scam the government, more ways to make money off these fake exchange rates.

15:12So the government thinks, OK, we'll print more money. Absolutely wrong move. Inflation soared. OK, so we'll stop reporting our inflation numbers or any numbers, in fact. We will hide how badly the economy is doing. But of course, people figure it out. They can see the prices for items in the stores and the prices are going crazy. OK, so prices are going crazy. We will mandate price controls. We'll say you can only make so much profit. This is even worse because businesses find that they're losing money every month. I mean, why keep selling products if you can't make any money? And even if you do make a little bit of money out of your business, that money is increasingly worthless because of the inflation.

15:53This is really bad for Venezuela. It is incredibly bad. And it becomes impossible to import anything. I mean, that's what happened to Alex, the clothing guy with the underwear, right? But his last big shipment was for something essential. It was for medical supplies. We wanted to import a shipment of non-woven fabric, which is basically that blue fabric that's used for surgical ropes. Oh, so the stuff you'd see in the hospital. Yeah, yeah. Like you wanted to bring in bolts of this so you could make surgical clothing. Yeah. Literally the stuff that the neurosurgeon would have needed for surgery to save people's lives.

16:28And Alex goes to the government for approval to spend dollars on it. And every day he waits for that approval. You go to your computer every morning once you get to the office. You open that system and you're like, okay, let's see if I hit the lottery today and they've authorized my goods. And you're hitting refresh and just seeing like no, no, no, no, no. Or no change in status basically. How long can this go on for? We're still waiting to have those goods cleared and we still owe that money to our suppliers in Asia. So Alex does what he never wanted to do. He freezes his business. He steps away from it and stops importing anything.

17:05And this happens over and over and over again with all of the things that Venezuela is importing, which is basically everything. Clothing and medicine and electronics and food. No one can get any dollars to bring anything into the country. And this is how a crisis gets built out of simple economic decisions. Without a real currency, there are massive shortages. There are these dangerous hospitals. The government is cutting school days and office hours just to save electricity. And all of this in a country that is still exporting oil. It is still bringing in billions of dollars and it is not enough to save them.

17:43And no one seems to know what should happen next. This is a country in the middle of a political stalemate because no politician wants to do the drastic things, and they would be drastic, that are going to be necessary to fix this. The NYU professor Alejandro says that everyone's still just praying that the oil prices will go back up, that more dollars will just solve everything. It's not like we don't know this story. I'm an historian of Venezuela. I wrote about this. I wrote a book about it. But we just really crave those good times. And it seems like every time the bad times come, we just say, well, at least sometime in the future we'll have another good role.

18:27Instead of fixing the problem, which is that the whole economy is based on something volatile. And if you try to maintain control no matter what, you're going to lose it.

18:39That was where we left things back in 2016. And after the break, an update about an economic recovery and the power of the American dollar. This message comes from LinkedIn ads. One of the hardest parts about B2B marketing is reaching the right audience. That's why you need LinkedIn ads. You can target your buyers by job title, company, role, seniority, and skills. All the professionals you need to reach in one place. Get a$250 credit on your next campaign so you can try it yourself. Just go to linkedin.com slash nprpod. That's linkedin.com slash nprpod. Terms and conditions apply. Only on LinkedIn ads.

19:21This message comes from Greenlight. Ready to start talking to your kids about financial literacy? Meet Greenlight, the debit card and money app that teaches kids and teens how to earn, save, spend wisely, and invest. Start your risk-free trial at greenlight.com slash NPR. This message comes from NPR sponsor Charles Schwab. Financial decisions can be tricky. Your biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help. Download the latest episode and subscribe at schwab.com slash financial decoder. This message comes from Schwab. Everyone has moments when they could have done better.

20:00Same goes for where you invest. Level up and invest smarter with Schwab. Get market insights, education, and human help when you need it. Since our episode first aired eight years ago, the Venezuelan economy has stabilized a bit. But not before inflation spiraled even further out of control, like truly wildly out of control. At some points, you would see people walking around with bags full of cash. This is NYU professor Alejandro Velasco last week in 2024. He reminds us that almost right after our episode published back in 2016, Donald Trump was elected president. Trump piled on sanctions and more sanctions, further cutting off Venezuela from the global economy and making it even harder to sell oil on global markets.

20:52When sanctions hit, that became the catalyst for most significant hyperinflation, where we saw going from levels of several hundred percent to several thousand and eventually dozens of thousands of percent. By 2018, it was estimated that inflation peaked at 65 ,000 percent, making even those bags of Venezuelan Bolivaras essentially worthless. Those who are able to begin to sell off their local currency and try to trade it as much as they can into a more stable currency like the dollars. That year, when hyperinflation peaked, Venezuela's population, according to the International Monetary Fund, dropped by 5 percent.

21:37Much of that was because people were fleeing the humanitarian crisis. And many of those folks who left the country, they now send money back home. They send remittances. And those remittances have been key to what happened next. The U.S. dollar started to take over. And this, Alejandro says, is how the turnaround began. You started to see targeted sectors of the economy turn over into dollars. And, you know, the reason why this is significant is because the government controls the flow of currency and at the time tightly controlled the flow of dollars. And so this was really an acknowledgment that it was no longer going to control that flow.

22:20The government eventually relaxed currency controls in 2019. But even before then, people started turning to the stability of the dollar to pay for things like groceries and household supplies. American dollars allowed people to plan for the future again. It is the single greatest factor to the stabilization of Venezuela's economy, without a doubt. The economy for the average Venezuelan also shifted to rely more on those remittances, that cash that was being sent or brought from relatives outside of the country. If you travel and go back to Venezuela to see relatives, which is something that we've been seeing in increasing amounts over certainly the last year and a half to two years, people come with cash.

23:05You know, they pack it in, hide it in various places, sometimes have to use a little bit of it to pay off authorities. But that's how some of that cash is being brought. And then it's stored in, you know, under mattresses and other ways to try to keep safe. After Trump left office, some of the sanctions were walked back by the Biden administration. and oil production stopped cratering. It even picked up like a tiny bit. And throughout this process, the American dollar has stuck around. And this has made a type of inequality in Venezuela worse. If you have, for instance, relatives abroad who can send remittances in dollars, if you have access to state resources that are increasingly paid out in dollars, If you have access to the private sector, especially the large-scale banking and other sectors, then yes, you have access to the dollarized economy.

24:03But if you're shut out of that, which is the case for most of the population, you continue to struggle. More than 7 million people have left Venezuela since all of this started. Inflation is more stable, but it's still high. And oil production is down and GDP is way down from what it used to be. So hopes for a big recovery tend to hinge on hoping for some big government policy changes. And those, they are not likely to happen anytime soon. There was a presidential election on July 28th. The official results put Nicolas Maduro as the winner. But the U.S. and most international observers question that outcome.

24:46The consensus is that the opposition candidate, Edmundo González, got more votes. This kicked off a tighter crackdown on opposition to the government. And then after weeks of standoff, Maduro all but secured his third term in office when his rival González signed a letter accepting defeat and he fled to Spain. He now says he was forced to sign it. And because of all this, our NYU professor, Alejandro Velasco, he is not expecting big changes in economic policy anytime soon. But, he says, at least the economy has stabilized.

25:26This episode was originally produced by Nick Fountain and Sally Helm. The update was produced by Sean Saldonia, fact-checked by Sarah Juarez, and engineered by Neil Rauch. Alex Goldmark is our executive producer. I'm Amanda Aronchik. This is NPR. Thanks for listening.