Episode 731: How Venezuela Imploded : Planet Money Venezuela has just about every economic advantage a country could ask for: fertile land, good climate, educated population, and oil, lots and lots of oil. So how did it go so wrong?

Episode 731: How Venezuela Imploded

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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.

UNIDENTIFIED NEUROSURGEON: I didn't want to jeopardize anybody's life because of being irresponsible.

SMITH: 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. There'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.

UNIDENTIFIED NEUROSURGEON: I know colleagues who actually have ended their operations with a flashlight that comes in the cell phone.

SMITH: They've used that for surgery?

UNIDENTIFIED NEUROSURGEON: Oh, yeah - at least to close the patient.

SMITH: 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.

UNIDENTIFIED NEUROSURGEON: There is essentially nothing there. There are no gloves. There are no sutures. Patients have to bring their own food, their own gauzes.

SMITH: They have to bring their own food to the hospital?

UNIDENTIFIED NEUROSURGEON: Absolutely. In most of the hospitals, there is not even food for them. OK? Yeah, it is as dramatic as it sounds.

SMITH: 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.

UNIDENTIFIED NEUROSURGEON: If you could even imagine a war zone hospital, this is even worse.


UNIDENTIFIED NEUROSURGEON: 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 long time ago with the right political and economical measures.

SMITH: Venezuela designed their own collapse.


SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith.


And I'm Noel King. Venezuela used to be a relatively rich countries. 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.

SMITH: 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 could lose everything.


SMITH: A decade ago, Venezuela was riding so high its leader felt that he could take on the United States of America.

KING: This was Hugo Chavez, former revolutionary.

SMITH: But he had been elected president of Venezuela.

KING: 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...


PRESIDENT HUGO CHAVEZ: (Speaking Spanish).

KING: "Yesterday, the devil stood right here."


CHAVEZ: El diablo...

SMITH: "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."


CHAVEZ: (Speaking Spanish).

KING: And everybody cracked up, except probably George Bush. But it was kind of funny, right?

SMITH: 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.


CHAVEZ: We, Venezuelan people, love you. We want - I want to be your brother.

KING: 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.

SMITH: The Venezuelan state owns an oil company. You may have heard of it - Citgo. And they put out a bunch of ads in Boston, in New York featuring Joe Kennedy.


UNIDENTIFIED CHILD ACTOR: (As character) Mommy, I'm cold.

SMITH: These ads were all (laughter) over TV, basically saying the United States, look at us. We are Venezuela. We are the champions of the world.


JOSEPH KENNEDY: I'm Joe Kennedy. Help is on the way - heating oil at 40 percent off from our friends in Venezuela at Citgo. Call me...

KING: This is Hugo Chavez's style - right? He uses oil money to buy love and to buy power.

SMITH: 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. He was a socialist. He was a populist. He wanted to spend the money, especially on programs for the poor.

ALEJANDRO VELASCO: Food subsidies, you know, education programs - pretty much, it was a time of economic bonanza.

SMITH: 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.

KING: 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.

SMITH: Yeah, when the country needed something, it just bought it from someplace else. Why make it yourself...

VELASCO: When you could just buy the import with very cheap dollars.

SMITH: Yeah. Why make auto parts when you can buy auto parts from abroad? Why...

KING: Make shoes.

VELASCO: Make shoes.

SMITH: Why those shoes? Milk.

VELASCO: Anything.

SMITH: Cheese.

VELASCO: Anything.

SMITH: Just buy it. Just buy it.

VELASCO: Absolutely, ready-made and not have to worry about having to go through all the procedures and, you know, investment domestically to have to do that, you just buy from abroad - right? And so it makes you hugely dependent on imports.

SMITH: So you have a country that is living and breathing oil money. They would sell the oil, which is priced in U.S. 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.

KING: And 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.

VELASCO: Venezuela desperately needed cash, desperately needed dollars to do everything, anything that we've been talking about - buy imports that it required - right?

SMITH: 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. You have to come to me.

VELASCO: 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.

SMITH: And this - this was the economic time bomb.

KING: 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.

SMITH: Here's how it would work. Alex Rosemburg was a clothing importer in Caracas. He brought in...

ALEX ROSEMBURG: Underwear, jeans, dress shirts, casual shirts, sweaters, jackets, blazers.

SMITH: And would these have your name on them?

ROSEMBURG: No, they wouldn't. They would have a couple of brands on them.

SMITH: He was no Calvin Klein.

KING: (Laughter) He was Alex Rosemburg.

SMITH: He was Alex Rosemburg (laughter). Now, in order to import clothing, he needed to pay his suppliers in dollars. And in order to get the dollars, he had to go to the government and prove that he wanted to bring in something essential. So the government would give him the list.

ROSEMBURG: They printed entire official gazette documents where...

SMITH: Like books of papers?

ROSEMBURG: Yeah, 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.

SMITH: What is this, alphabetical? You'd go down, and you'd find underwear under this listing?

ROSEMBURG: You would find men's underwear made out of polyester, cotton, other fabrics.

SMITH: And then you would check in the book if the government deemed this important enough to buy, essentially.

ROSEMBURG: Basically.

SMITH: 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.

ROSEMBURG: 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.

SMITH: And then you say, I need $10,000?

ROSEMBURG: And you say, I need X amount of, you know, pieces of underwear at X dollars totaling X amount of dollars.

SMITH: 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.

KING: And this might seem insane.

SMITH: It's a little insane.

KING: (Laughter) 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.

SMITH: Then two things happen. Number one, Hugo Chavez dies.

VELASCO: Mothers weeping, children weeping, adult men weeping.

SMITH: And the unluckiest man in the world takes his place.

VELASCO: His name is Nicolas Maduro. He had been the foreign minister for Chavez for eight years.

SMITH: And after all the drama and the excitement and the love of Chavez, Maduro was like...

VELASCO: It's like comparing a log of wood to the, you know - to the circus that rolls into town.

SMITH: 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.

KING: And this causes panic within the Venezuelan government. Everything 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.

SMITH: Countries like Norway and Saudi Arabia had been saving their oil money - not Venezuela, though.

VELASCO: 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.

SMITH: So what do they do?

VELASCO: They did nothing.

SMITH: And every trap set by Hugo Chavez gets sprung at the same time.

KING: 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.

SMITH: 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.

KING: Yeah. But the government insists on selling dollars at the old rate, which was around 6 bolivars for a dollar. They don't want the price for basic things like food to go up. They're desperate to keep things stable.

SMITH: 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.

VELASCO: (Speaking Spanish) - it was called el raspao - the Scratch.

SMITH: The Scratch.

KING: Scratch.

SMITH: The Scratch. People would buy an airplane ticket to New York, say. They would tell the government, oh, we really need dollars for our essential trip to New York.

VELASCO: 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.

SMITH: But there was so much profit to be made, you could just buy a plane ticket and not get on?

VELASCO: Absolutely - because you could make so much more from the black market rate of dollars.

SMITH: 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. And 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 - but then things would have gotten better.

KING: 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.

SMITH: Yeah, and since it was confusing, there were more ways to scam the government, more ways to make money off these fake exchange rates.

KING: So the government thinks, OK, we'll print more money.

SMITH: Absolutely wrong move. Inflation soared.

KING: OK, so we'll stop reporting our inflation numbers or...

SMITH: (Laughter) That always works.

KING: ...Any numbers, in fact. We will hide how badly the economy's doing.

SMITH: But of course people figure it out. They can see the prices for items in the stores, and the prices are going crazy.

KING: OK, so prices are going crazy. We will mandate price controls. We'll say you can only make so much profit.

SMITH: 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.

KING: This is really bad for Venezuela.

SMITH: 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.

ROSEMBURG: We wanted to import a shipment of non-woven fabric, which is basically that blue fabric that's used for surgical robes.

SMITH: Oh, so the stuff you'd see in a hospital.

ROSEMBURG: Yeah, yeah, basically.

SMITH: Like, you wanted to bring in bolts of this...


SMITH: ...So you could make...


SMITH: ...Surgical clothing.


SMITH: Literally the stuff that the neurosurgeon would have needed for surgery to save people's lives. And Alex goes to the government for approval to spend dollars on it, and every day he waits for that approval.

ROSEMBURG: You go to your computer every morning once you get to the office. You open that system and you're like, OK, let's see if I hit the lottery today and they've authorized my goods.

SMITH: And you're hitting refresh and just seeing, like, no, no, no, no, no?

ROSEMBURG: Or no change in status, basically.

SMITH: How long can this go on for?

ROSEMBURG: We're still waiting to have those goods cleared, and we still owe that money to our suppliers in Asia.

SMITH: So Alex does what he never wanted to do. He freezes his business. He steps away from it and stops importing anything.

KING: And this happens over and over and over again with all of the things that Venezuela is importing, which is basically everything.

SMITH: Everything.

KING: Clothing and medicine, any electronics and food. No one can get any dollars to bring anything into the country.

SMITH: 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.

KING: And 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.

SMITH: 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.

VELASCO: It's not like we don't know this story. I'm an historian of Venezuela. I wrote about this, right? I wrote a whole book about it, right? And so but we just really crave those good times. And it seems like every time the bad times come, we just say, well, at least some time in the future we'll have another good roll.

SMITH: Instead 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.


SMITH: We did this story in part because we got a lot of emails about Venezuela. We do read what you write to us. So if you have a question about something in your world, get in touch - planetmoney@npr.org. In fact, a couple of our Venezuelan listeners really helped us out with this show. Special thanks to Max Arciniegas (ph) and Nelson Cohen (ph), also to Daniel Lansberg-Rodriguez (ph).

KING: Our episode today was produced by Nick Fountain and Sally Helm. Thanks also to Alex Goldmark, Elizabeth Kulas, Jasmine Garsd...

SMITH: Whom we wish the best of luck in her new job. We miss you already, Jasmine.

KING: And our intern Raina Cohen (ph).

SMITH: Also, we're looking for the next PLANET MONEY intern. Is it you? Interns help out with every part of the show. Perhaps you've heard some of their voices on the podcast. For more information about how to apply, go to our website, npr.org/money.

KING: Last up, if you're looking for another show to listen to, check out Fresh Air. It's hosted by the amazing Terry Gross. She recently interviewed the boss, Bruce Springsteen. The two of them talked about his childhood, his very competitive relationship with his dad and how he formed his on-stage persona. That's the Fresh Air podcast. Find it on the NPR One app or wherever you get your podcasts.

SMITH: I'm Robert Smith.

KING: I'm Noel King. Thanks for listening.

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