Venezuela’s Modest Economic Liberalization Has Created a ‘Hellscape of Inequality’

Photo: Federico Parra

 

As high-end stores open in Caracas, the poor are getting poorer.

By Foreign Policy –  

Jan 19, 2023

In mid-November, a glassy Saks Fifth Avenue-like department store opened in Caracas’s wealthy commercial district of Las Mercedes. The store, Avanti, is owned by a Palestinian-Venezuelan businessman and sells high-end fashion brands—Balenciaga, Gucci, Versace, Valentino—and luxury goods such as a $110,000 Samsung television that quickly racked up a waiting list.

Although Avanti was built in the capital of Venezuela, a country where most of the population lives in poverty, the store is hardly an aberration. Throughout Caracas, hundreds of new restaurants, fashion stores, and nightclubs have popped up in the past year—including a restaurant hanging from a crane, with diners overlooking the Caracas skyline.

This “Bubble,” as it’s sometimes called on social media, has arisen from a change in President Nicolás Maduro’s economic policies. After experiencing one of the world’s largest economic collapses outside of war, followed by a series of sanctions, Venezuela’s authoritarian government has drifted away from the orthodox socialist policies of Maduro’s predecessor, Hugo Chávez, and toward a mild economic liberalization. This new approach in recent years has included the elimination of tariffs on many imports, the lifting of price and currency exchange controls, and a nationwide de facto dollarization, in which U.S. dollars have been widely used in place of bolívars.

After eight years of contraction, the oil-rich nation’s economy began to clearly grow again in 2022. Poverty is decreasing, and even though inflation is still high, hyperinflation and food shortages have largely ended. Yet not everyone is benefiting from Venezuela’s economic shift. Instead, the economic reform’s limitations have turned the country into a “hellscape of inequality,” said Omar Zambrano, an economist who leads the Caracas-based think tank Anova Policy Research.

These economic trends were reflected in the latest National Poll of Living Conditions (ENCOVI), released by the Andrés Bello Catholic University in November. The survey has become Venezuela’s de facto census since 2014, after the national statistical system collapsed. According to the poll, the share of households whose income is below the poverty line fell from 90.9 percent in 2021 to 81.5 percent in 2022.

Anitza Freitez, the director of Andrés Bello Catholic University’s Institute of Economic and Social Research and one of ENCOVI’s two coordinators, attributed this reduction in part to more people working in the formal sector of the economy and to an overall rise in private-sector wages. Rising incomes have also led to a reduction of multidimensional poverty—a measurement based on income, employment, education, living conditions, and public services—which went from affecting 65.2 percent of all households in 2021 to 50.5 percent in 2022, the study found.

But ENCOVI also revealed a darker reality: that Venezuela is among the most unequal countries in the world. The country, which was Latin América’s least unequal nation as recently as the early 2010s, now has the highest rate of inequality in the Americas. The richest 10 percent of Venezuela’s population earns 70 times more than its poorest 10 percent.

Even the professional class is struggling. Elvia Jurado, a law professor, has taught at the University of Carabobo for 32 years. Her wages—around $35 every two weeks—are still paid in rapidly devaluing bolívars. Raises are “not consonant with the economic reality,” she said. “It’s a depressing and shameful situation.” Her colleagues, Jurado added, wear torn shoes, cannot afford birthday cakes for their children, and have to choose between buying beef and filling up their cars’ gas tanks. “We are academic paupers,” she said.

Venezuela’s inequality is also geographical. According to ENCOVI, 37.8 percent of Venezuela’s richest households are in Caracas, which represents only 16 percent of the country’s households. And according to the Caracas-based firm Ecoanalítica, the city now represents around 35 percent of the national GDP, despite having few industries.

“The main industries that stirred the rest of the country—oil, manufacturing, industrial agriculture, and mines—fell apart, while Caracas is a commercial city with a lot of consumption,” said Jesús Palacios Chacín, a senior economist at Ecoanalítica. By coincidence, when the country’s largest refinery broke down and halted gasoline production in early December, causing long queues for gasoline in regions outside of Caracas, the government sponsored a transportation fair with luxury racing cars and hot air balloons at a military airbase in Caracas that now has a sushi restaurant.

And even as it has fallen, poverty is still abysmal. It’s on par with the humanitarian crisis’s worst years, when food shortages were widespread, hyperinflation ravaged salaries, and Venezuelans were losing an average of 24 pounds a year. Although food insecurity has decreased slightly, according to ENCOVI, Venezuela has the second-highest malnutrition rate in the Americas.

In fact, what ENCOVI calls “poverty caused by social reasons”—a measure based only on education, housing, and health—rose from 31 percent of households in 2019 to 42 percent in 2022. These households suffer the most from Venezuela’s regular water shortages, electric blackouts, underfunded education system, and transportation problems. Public funding would be needed to fix these issues, but there are currently no public policies designed to address them.

The collapse of Venezuela’s educational system—plagued by a deficit of teachers, poor transportation, a lack of school meals, and dilapidated schools—is the main reason for this rise in social poverty, said Luis Pedro España, ENCOVI’s other coordinator. Andrés Bello Catholic University’s school of education recently published a report based on 16,000 exams handed out at schools in Caracas and 17 other states: 67.7 percent failed math and 60.98 percent failed language skills.

According to ENCOVI, around 740,000 students dropped out of school—usually due to food insecurity or migration—between 2019 and 2022. “We have 1.5 million children and teenagers outside of the educational system,” Freitez said.

Inequality is also rising because the new economic policies aren’t benefiting most of Venezuela’s industries. According to Zambrano, the Maduro regime sought to ease the effects of sanctions and Venezuela’s contraction by having a “customs-to-your-table” policy, in which imported goods go straight to consumers. But while this policy has benefited places such as supermarkets, restaurants, and shopping malls, “the sectors that are recovering are generating relatively little employment,” Zambrano said, which leaves much of the population outside of any economic recovery.

Meanwhile, many of Venezuela’s industries, from the manufacturing sector to agribusiness, continue to suffer from the effects of the economy’s collapse. Its oil industry remains sanctioned, with the national oil company mismanaged by low-skilled loyalists and battered by corruption that has led to the country’s oil infrastructure falling apart; last year saw an average of seven oil spills per month, according to the Venezuelan Observatory of Political Ecology. And some of Venezuela’s dilapidated factories and oil pipelines are being dismantled to be exported as scrap, while assets and lands expropriated by the Chavista governments are being handed to cronies instead of undergoing lawful re-privatizations.

According to Zambrano, the Venezuelan economy would need to grow uninterrupted for 20 or 30 years to reach its pre-crisis size. The problem is that Venezuela’s institutions do not inspire trust in foreign investors. “A legal framework as weak as Venezuela’s will not attract investors,” Palacios Chacín said.

Even if the mild economic recovery continues, España said, poverty reduction will be very slow. But even that is not a given, as many economists expect Venezuela’s rebounding growth rate to slow down this year. “If you want to bet on the right horse,” España added, “I think it’s that poverty is going to rise again in a year or two.” Meanwhile, the wealthiest diners will float over Caracas’s shiny new towers and old hillside slums.

Read More: Foreign Policy – Venezuela’s Modest Economic Liberalization Has Created a ‘Hellscape of Inequality’

La Patilla in English