The world is changing fast and to keep up you need local knowledge with global context.
By Danielle DiMartino Booth*
Sometimes art imitates life. “I know it was you, Fredo. You broke my heart. You broke my heart!” So said Michael Corleone to his older brother just after gripping his face and delivering a kiss of death. The infamous scene was based on the real life events of January 1, 1959. The occasion? A New Year’s celebration in downtown Havana and the moment in history when Fidel Castro overthrew the dictatorship of Fulgencio Bautista. The chillingly memorable scene from the 1974 classic Godfather II foretells the retribution for Fredo Corleone’s ultimate deceit.
At other points in time, life imitates art. So it was with an inaugural speech on February 2, 1999, some 40 years after Bautista fled Castro and Cuba, when Venezuelan President Huge Chavez betrayed his predecessor, Rafael Caldera. Caldera had granted Chavez amnesty and released him from prison in March 1994 following Chavez’s incarceration stemming from a failed 1992 coup attempt sanctioned by none other than Fidel Castro himself. Now it was the traitor doing the kissing.
It is fitting that Caldera, who died in December 2009, did not live to see the Venezuela of today, a sad failed state reflective of the very man he helped bring to power. After all, Caldera had publicly defended the unsuccessful coup attempt. In his words, “We cannot ask people with hunger to immolate themselves for a democracy that has not been able to give them enough to eat.” Those words, spoken February 4, 1992, would help to elect Caldera to a second term as Venezuela’s president in 1994. It had been 20 since the end of his first presidential term.
Today Venezuelan children are dying of hunger. Premature babies perish as electrical outages snuff the incubators critical to their survival. Those wracked with disease cannot receive the treatment they must have to battle their ailments; diabetics and cancer patients die unnecessarily every day. In the worst cases, as has been documented by numerous media outlets, hospitals have become menaces in and of themselves with operating theatres unfit for use. Patients die in pools of their own blood.
Such is the inconceivable reality of the politically-divided, drought-ridden country that rests upon the world’s largest oil and iron ore reserves. How has Venezuela spiraled so far out of control in the wake of the commodities supercycle that built modern-day China, one that filled the coffers of resource-rich exporters worldwide?
A bit of history helps explain how events have tragically aligned. As is the case with many regime changes, Caldera entered office just as financial crisis was descending. Banco Latino had failed before his term had even begun and was followed by the failure of 10 more banks. Deposits were lost and the government had to step in to provide aid to the financial sector.
The economic devastation that followed was severe. An exchange rate policy imposed by the government caused prices to skyrocket, rendering the necessary supplies to conduct business prohibitively expensive. More than seventy thousand small and medium-sized companies went into bankruptcy.
To staunch the deepening crisis, Caldera reneged on a campaign vow to never accept monies from the International Fund (IMF). Of course, no aid is granted without demands. Satisfying those demands planted the seeds for the rise of the Chavez socialist experiment and the inevitable crisis ignited.
The IMF’s requirements resulted in a 70 percent devaluation of the bolivar, the liberalization of interest rates and the continued privatization of the nation’s industries. On the flipside, fuel prices also rose by 800 percent, devastating much of the populace already reeling from inflation that had put the basic necessities of food and clothing out of their reach.
No doubt, the imposition of economic strictures in Venezuela laid the groundwork for the rise of socialism. The income divide was readily apparent to this Caracas resident in the summer of 1995. The occasion for said residency was an internship at Sivensa, a steel giant that happened to be on the receiving end of the push to privatize firms.
INFLATION INSANITY: Eggs Now $150 a Dozen in Venezuela as Prices for Basic Food Continue to Skyrocket https://t.co/sW67WnCReM
— The Daily Sheeple (@TheDailySheeple) June 1, 2016
The drive into Caracas from the airport on Venezuela’s coast was unforgettable, and yet, as we neared the capital, unspeakable. Such was the unmistakable depth of wretchedness and poverty being endured by those many thousands who existed amid the squalor of makeshift slums barely clinging to the hillsides outside the city. Anyone seeing the stark contrast between the luxurious and carefree lifestyle enjoyed by the elegantly-dressed but impervious Caracanyan haves, who danced their nights away while living in the shadow of those Godforsaken slums, would have to question what was to come. The words, “This cannot end well,” came to mind.
Over 20 years later, things are not ending well, and they do indeed appear to be ending. One company after another has shuttered as the government has cut off lines to the basic foodstuffs needed to produce the goods that stock supermarket shelves. And airlines have been forced to pull up wheels and abandon their routes in and out of the country given the $5.3 billion in un-patriated airline revenues the government has effectively frozen via currency controls. Isolation is descending and fast.
The hope is that the rising opposition can prevail and effect a peaceful transition. In spite of that opposition’s multitude of imprisoned leaders, about half of the four million signatures required to oust President Nicolas Maduro are already in hand.
Amid all of this is the fear is that the government’s latest decision to satisfy the country’s debt obligations, at the expense of providing the needed funding to address the overwhelming humanitarian crisis, will throw the country into civil war. Foreign reserves are quickly dwindling to the $10 billion mark, one-quarter of what they were as recently as 2009. Meanwhile, PDVSA, the state’s oil behemoth, is said to be pursuing debt exchanges with its oil servicers, desperate measures designed to buy time that’s fast running out.
And yet, if Maduro’s government can stall the referendum vote to January 10th, current law dictates that the vice president can waltz in and replace him, no fresh elections triggered. So more of the same as opposed to a true change in leadership.
Some have speculated that a neighboring country could ride to Venezuela’s rescue. The chances of that benign outcome, however, are slim as noted by numerous Latin American economists. They cite the weakened economies of the region’s leaders, Argentina and Brazil, as impediments to a white knight scenario unfolding.
It must also be noted that Mother Nature has piled onto the devastation. Venezuela is a country that has traditionally relied on hydropower. That makes the historic drought ravaging the country all the more destabilizing as over two-thirds of the nation’s electricity is rationed.
Venezuela has not been completely abandoned. On May 29th, a shipment of emergency medical supplies to fight the Zika virus arrived courtesy of China, a country whose ties with Venezuela have strengthened since their status was raised to that of ‘strategic partnership’ in 2014.
China’s efforts notwithstanding, the severity of the unfolding catastrophe suggests nothing short of a full blown, coordinated international relief effort is needed. Both the United States and the IMF come to mind, both abominations in the eyes of the current leadership.
The time for politicking, though, has long come and gone rendering the intensity of Maduro’s resolve to remain alienated from the western world nothing short of traitorous. The president literally has the blood of his fellow countrymen and women on his hands.
Such is the result of corruption followed by the imposition of broken economic models followed by yet more corruption. At some point, as Margaret Thatcher famously predicted of all socialist regimes, Venezuela would simply run out of other people’s money to spend, which appears to be the case today.
And so it goes as the rest of the world looks on with the hopes that Venezuela follows in the footsteps of its neighbors to the south who have begun to reject similarly broken economic and political models rather than stand by and watch their countries burn.
As for Venezuela’s forsworn enemy to the north, judiciaries here should take note of rising U.S. crime rates and the potential for more trouble in our own streets. Idleness, whether forced or chosen, combined with entitlement, can lead to nothing good. You can only placate the masses with an ever-expanding welfare state and misguided monetary policy that fails to grow the workforce while enriching the haves for so long before things turn.
For us, there may not be an overtly dramatic crescendo of unrest, with Michael delivering to Fredo the symbolic kiss of death. But be that as it may, we’ve still been betrayed by those in power. Yes, perhaps a betrayal of the subtlest sort, but a betrayal just the same with an inevitable, still unknown, price to pay.
- Danielle DiMartino Booth has years of experience in central banking and on Wall Street. Known for sounding an early warning about the housing bubble in the 2000s, Danielle offers a unique perspective to audiences seeking expertise in the financial markets, the economy, and the intersection of central banking and politics. Access more of her work at http://dimartinobooth.com/