Five ways to ruin an economy

16/11/2013

Some startling images caught our eye this week. A shopping free-for-all at a major electronics chain, the equivalent of America's Best Buy. People making off with flat-screen TVs…refrigerators…and more…all at bargain basement prices. No, it’s not the holidays yet. This is what happened when the government of Venezuela decided to play Robin Hood: the army took over the privately owned chain and slashed prices.

The incident got us thinking. We often talk about best practices for economies. Perhaps there should also be a list of things to avoid – a checklist titled ‘How to ruin your economy.’ Well, it so happens this isn't just a theoretical list, because Venezuela is actually ticking each of those boxes in practice.

So let's go to rule #1. Attack big business. That's exactly what we saw Venezuela do this week with "Daka" – the electronics chain. President Nicolas Maduro says that his opposition is in cahoots with Washington to bring down his economy. Apparently that's why TVs were so expensive. As we saw this week, there's an easy fix: Have the army take over. Sounds like a lasting solution.

That brings me to rule #2. Create hyperinflation. It turns out those TV salesmen in Venezuela aren't the only robbers. The truth is the overall price of goods has risen 54 percent in Venezuela this year. So, if your household groceries cost $100 a week in January, they'll now cost you $154. The ripple effect is clear. Prices go up, so salaries have to go up, and so anything you produce costs more. Mission accomplished, your economy is now less competitive.

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Rule #3. Induce a currency crisis. The easiest way to curb inflation is to increase the value of your currency. Basically, print less money. But it turns out Caracas actually has a cash crunch, so it actually needs to do the opposite. Meanwhile, the black market for American dollars is thriving. The official exchange rate is 6.3 Bolivars for every greenback. In reality, the black market rate is 7 to 10 times that amount. For a country which imports 70 percent of its basic goods, this is a big problem. You may remember recently that Venezuela ran out of toilet paper. Why? Well, it's running out of a different kind of paper – the money to pay for it.

Which brings me to rule #4. Subsidize, subsidize, subsidize. If Caracas is running out of money, thegovernment doesn't seem to know. Just last month, President Maduro raised public sector salaries by 10 percent across the board. This comes after two recent elections, where the government lavished subsidies to win votes. Gas is essentially free in Venezuela. In fact it's also nearly free in neighboring Cuba, which Venezuela has been subsidizing for years.

I could go on and on, but I'll point out just one more rule. Number #5, which is…Become a dictatorship. President Nicholas Maduro won a vote this week to get what is known as “decree powers” – the ability to pass laws without consulting Congress. He says he needs these powers to fix the economy and tackle corruption. After all, Venezuela is ranked 181st of 189 countries for doing business. It is ranked 9th for corruption. It took years for Hugo Chavez to take Venezuela to this point…and now Maduro wants to double down on the very same policies.

So, on points 1 through 5, Venezuela is on a fast-track to total ruin. The world saw this coming under Chavez. We hoped for change, but in his dying days Chavez handpicked a “mini-me” to stay the course. The sad truth is that Venezuela is wasting the world's largest oil reserves. It could have been as wealthy as Saudi Arabia or Qatar. It could have outstripped Mexico or Brazil. Instead, it is beginning to resemble North Korea, simply by following the most ruinous set of policies in the world.

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