The Crisis in Venezuela

Venezuela is one of the world’s few big countries to adhere to communism. Hugo Chavez came to power in 2002, and the government has adhered to hard core communist ideology. Because of the country’s oil reserves, it was pointless for the country’s politicians to promote some other form of business enterprise. Oil money has enabled the communist regime to remain in power while not being held responsible for any of society’s ills. Hugo Chavez’s government deliberately suppressed all opposition forces in order to remain in power indefinitely. Independent media outlets too were crushed making it impossible to dissent against the policies of the government. Some TV channels which were critical of the policies of the government were forced to close down.

Over the past few years, has been embroiled in a major crisis which resulted in untold hardship to its citizens. After the death of Hugo Chavez, his trusted lieutenant Nicolas Maduro has become the president of Venezuela. The continuation of the socialist policies resulted in the bankruptcy of the state. One of the main reason for the strain on country’s finances is the fall of oil prices since 2014. Since most of the economy was dependent on oil wealth, the decline in the prices of oil made it difficult for the government to balance its finances. It could not continue the subsidies which were continuously doled out to its citizens since Hugo Chavez came to power.

Most of the basic requirements of the country like food were imported from outside. Oil money was used to pay for the food imports. Fall in oil prices made it difficult for the government to fund the imports. As a result many of the country’s citizens has started going hungry.

Crisis in Venezuela

By the second half of 2016, the food crisis in the country has started going out of control. Many people could not feed themselves and their children due to the acute shortage of food in the country. In order to bring normalcy to the country, the Venezuelan government has resorted to rationing. All the food items were distributed to citizens in a limited manner. People had to stand in long queues to get their daily rations. Despite standing in queues for hours together, citizens had no guarantee of getting the required food. Many mothers were worried of leaving their children go hungry (Hernandez et al., 2017). Doctors and health experts too have opined that skipping of meals by children can lead to weight loss and malnutrition in the long-term. The country’s military generals started profiting from the crisis by taking bribes for preferential allotment of food items to some citizens. Some citizens had to resort to desperate attempts like picking the food items falling off from the delivery trucks on the streets (Pratt, 2017).

In view of the many reasons that are being ascribed to the food crisis that was engulfing Venezuela, some economists have opined that the real reason for the food crisis is the failure to maximize both the consumers’ surplus and producers surplus. This has made it almost impossible to achieve equilibrium. The value of the country’s currency too is at an all-time low.

Consumers Surplus

Consumers surplus is one of the most important concepts in Economics. It depicts the difference between the value placed on a product and the price that a consumer is willing to pay for it (Hicks, 1941). It is one of the most important measure of the welfare that consumers gain from consuming the goods and services. Consumers surplus can be formally defined as the difference between the price that the consumers are willing to pay for a good or service and the actual amount they pay for it. The actual amount that the consumers are willing and able to pay for a product or service is shown by the demand curve. The amount that is actually paid by the consumers is depicted by the market price of the product or service.

Consumers surplus can be easily understood with the help of the Figure I given below:

Figure I

Consumers Surplus

In the above figure price is depicted on the y axis and demand is depicted on the x axis. Demand curve is depicted by the line slanting from left to right. A is the price that is the consumer is willing to pay for Quantity Q1 of the product. The consumer will be willing to pay more price than A but he does not need to pay since the consumer is willing to sell it at just A. Hence, the area between the points ‘ABC’ depicts Consumers Surplus. The area ABC depicts the welfare derived by the consumers derived by purchasing that product.

Producer Surplus

Producer surplus is another important concept in economics. While the concept of consumers surplus deals with the welfare derived by the consumers by consuming the product, producer surplus depicts is a measure of producer welfare (Yao and Wu, 1999). It depicts the difference between the minimum amount at which a producer is willing to sell the product and the actual amount he receives by selling the product.

Formally, the concept of producer surplus can be defined as the surplus amount received by the seller over and above the price at which he is willing to sell the product in the market.

The concept of producer surplus can be depicted with the help of the Figure II below:

Figure II

Producer Surplus

In the figure given below the x-axis depicts quantity and the y-axis depicts the price at which the product is sold. A is the minimum price at which the producer is willing to sell the product. B is the actual selling price of the product. Hence, the area between ABC depicts the producer welfare or the producer surplus. Every producer wants to maximize his surplus as it will also result in the maximization of his welfare.

Maximization of Consumers and Producer Surplus

In order to maximize the economic welfare of a nation, care should be taken to maximize the both the producers and consumers welfare. Economic welfare is also known as the community surplus. It is calculated by adding both the consumers’ surplus and producer surplus.

The maximization of consumers’ surplus and producer surplus and the resulting economic welfare is depicted in Figure III below:

Figure III

Economic Welfare

In the figure depicted above, the area which adds both the consumers’ surplus and producer surplus, viz. ‘ABE’ will depicts economic welfare.

Welfare economics considers whether the economic policies of the governments will result in an increase or decrease in the economic welfare of a nation. Governments should make sure that their policies do not have an adverse impact on the welfare of the citizens.

Crisis in Venezuela and Maximization of Consumers and Producer Surplus

As the crisis in Venezuela started to spiral out of control, the rate of inflation started to increase very fast. The main reason for growing inflation was that the scarcity of food items in the open market. Producers and importers could not cater to the demand for products in the market. As a result, the government resorted to price control measures. The value of the country’s currency has also fallen rapidly making imports expensive (Boyd, 2016). For the year 2016, the imports of bread and meat have fallen by 94 percent and 63 percent respectively (Gillespie, 2016). The end result was the reduction in producer surplus as the producers could not get the price they wanted to get over and above the minimum price at which they wanted to sell the products. As they were not contended with price they were getting for their products, many of the products were redirected to the black market.

The prices of goods started to spiral out of control very soon as the rate of inflation in the economy started to rise. Military generals who were delegated the task of ensuring that all the consumers receive the rations in a timely manner too have participated in diverting the goods to the black market.

The rations supplied by the government through its stores were not sufficient to meet the needs of the consumers. Lengthy queues near the government owned ration shops forced the citizens to buy goods in the black market. As the prices of products in the black market were higher than the prices at which the consumers were willing and able to pay in the market, the consumers’ surplus too has fallen dramatically.

The failure to maximize both the consumers’ surplus and producer surplus resulted in the overall reduction of the economic welfare of the citizens of Venezuela. The only people who have profited from the crisis are the corrupt government officials and military generals who were entrusted with the task ensuring the fair distribution of the scare food rations in the country. Some citizens were even reported to have died due to the scarcity of food and medicines.

Conclusion

As the dictatorship under Maduro is showing no signs of relinquishing power anytime soon, the crisis in Venezuela too may not end in the near future. The crisis shows the troubles that can result due to a short-sighted economic policy of the government which failed to understand the problem at hand and resorted to unnecessary price controls. Failure to maximize the consumers’ surplus and producer surplus reduced the overall economic welfare of the nation.

The immediate solution to the problem is to radically overhauling the economic policy of the country. Rather than trying to control prices, the government should try to import more products from other countries and ensure their proper distribution to the citizens. This can solve the crisis and improve the citizen’s welfare.

References

Boyd, S. (2016, November 1). Venezuela’s Currency Is Collapsing on the Black Market Again. Bloomberg Markets. Retrieved from https://www.bloomberg.com/news/articles/2016-11-01/venezuela-s-currency-is-collapsing-on-the-black-market-again.

Gillespie, P. (2016, August 11). Venezuela food crisis deepens as shipments plummet. Cnn Money. Retrieved from http://money.cnn.com/2016/08/11/news/economy/venezuela-food-shortages/index.html.

Hernandez, O., Castillo, M., & Bloom, D. (2017, February 21). Venezuelan food crisis reflected in skipped meals and weight loss. Cnn. Retrieved from http://edition.cnn.com/2017/02/21/americas/venezuelan-food-crisis-weight-loss/.

Hicks, J.R. (1941). The rehabilitation of consumers’ surplus. The Review of Economic Studies, 8(2), 108-116.

Pratt, A. (2017, January 6). Venezuela’s military has turned its food crisis into a ’racket.’ And it’s profiting from people going hungry. PRI. Retrieved from https://www.pri.org/stories/2017-01-06/venezuelas-military-has-turned-its-food-crisis-racket-and-its-profiting-people.

Yao, J., & Wu, K. (1999). Consumer surplus and producer surplus for fuzzy demand and fuzzy supply. Fuzzy Sets and Systems, 3(1), 421-426.