An approach to Venezuela's economic crisis - EXCHANGE OF CONTROL

Let’s make a short review of the Venezuelan economic crisis. As many of you should already know the government in Venezuela is ruled by the socialist. As every socialist they have control over the whole economy, they created more regulations and more controls. Those regulations and controls are undoubtedly the epicenters of the whole crisis. Let’s take a look at it.

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Let’s start by defining what’s the exchange of control:

The main feature of exchange control is that currency becomes "inconvertible", i.e. that individuals in a society do not enjoy full freedom to exchange the national currency for other currencies in international markets. Exchange controls are not good or bad perse since sometimes this measure can be used to solve the loss of reserves of a given currency for a given period of time. An example of successful exchange control is the exchange control carried out by the government of Romulo Betancourt (Venezuelan President between 1959 y 1964). However, the negative effects that the implementation of exchange control has had on Venezuela's history outweigh the positive effects of this mechanism.

President Chávez implemented exchange control in order to prevent capital flight and to maintain the price of the bolivar against the dollar at a fixed rate, which would lead to price stability on imported goods, including goods and services of national production used as raw material for imported inputs. Fifteen years after the implementation of exchange control, it can be seen that the objectives pursued with its application failed, since it did not prevent currency flight, and it leads to the creation of a black market for foreign exchange, driven by a website that has managed to capture the confidence of economic agents and, in addition, has distorted the exchange rate with the US dollar and the euro, also affecting the prices of goods and services in the domestic market.

The government of current President Nicolás Maduro, President Chávez's successor, has chosen to maintain exchange control and refuses to eliminate it. The president assures that this is not the problem of the crisis and attributes all the problems to external factors such as currency speculation by a website and the massive purchase of our currency cone on the border with Colombia, specifically in Cúcuta. The truth is that the elimination of the exchange control is necessary to solve the current crisis in Venezuela since the maintenance of this exchange control causes the Venezuelan economy to deteriorate more and more as time goes by.

Luis Vicente León, economist and president of Datanálisis (He might be regarded as the best economist in Venezuela), said that "the country is moving towards the consolidation of a dual economy: the majority dependent on the State, in bolivars, and the minority living on dollars". The dichotomy in the exchange rate of the US dollar is a source of corruption, as it works as the best business to obtain dollars at the lowest official rate and sell them at the highest official rate, or even sell them at the illegal market rate. This is the cause of currency flight, shortages and rising prices of essential goods. The economist also states that "without confidence, currency stability is completely lost and exchange control increases distrust". The limit and the scarcity of foreign exchange in the country have led to the creation of a parallel or black market, in which speculation is made with the national currency, given the confidence that Venezuelans have in these markets and not in those controlled by the government. This market has caused people to lose confidence in their currency and to choose other currencies, which are used as safe-haven currencies.

Therefore, the elimination of exchange control is necessary, to begin with, the development of the Venezuelan economy once and for all, as economist León states: "all the world experiences of control and interventionism have translated into inflation and severe devaluation". Thus, inflation must be seen as a problem that leads to a rise in the price of international currencies. That is why the imposition of exchange control to solve inflation only brings even more serious problems for the economy.

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As previously stated, the elimination of exchange control in Venezuela is of the utmost importance, since this is the main cause of the current economic crisis and inflation. Liberalization of exchange control would free up the market and would bring new international companies to invest in the country and thus generate jobs and eliminate scarcity altogether.

It should be noted that, at present, there are various types of exchange controls in Venezuela, as well as a parallel currency market in which transactions circulate freely. The price of the currencies of this market is controlled by the website called DolarToday. Likewise, the multiple controls can be observed through the different organizations created by the Venezuelan government, among which SIMADI I and II stand out, which are in charge of offering the purchase of foreign currency by the companies in charge of supplying the different markets or items in Venezuela.

To wrap up, it can be said that the shortage has been largely due to this exchange control established by the administration of former President Chávez and that it is currently in force in the administration of President Nicolás Maduro, since it does not have foreign currency available to guarantee the products needed to support the Venezuelan's livelihood, such as food from the basic basket and certain medicines. Furthermore, the government has chosen to regulate the prices of certain basic products, such as milk, flour, bread, coffee, sugar, among others. These regulated prices have led to the creation of mafias, known as 'Bachaqueros', who buy the products at lower prices and resell them at higher prices.

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This has caused great despair in the Venezuelan population since it has suffered to a great extent the effects caused by these economic measures, among them: malnutrition and deaths due to lack of medical supplies. Due to these conditions, a large number of citizens have been forced to make abrupt decisions in order to ensure a better quality of life and/or future; among these decisions, the most common is that of emigration, which can be observed in the massive exodus of Venezuelans in the last 3 years.