ADSactly World - Venezuela’s Looting Through the Currency Exchange Control

Introduction

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Every person who keeps him or herself informed, is aware that for the past few years the situation in Venezuela has been getting worse and worse, the large number of people who are leaving the country has become a regional issue, stories about people dying because there aren’t medicines are told over and over again, as if they were the same story being repeated several times, except that they are not, and crazy facts about the average salary that people earn in here can sometimes sound unbelievable.

As with any complex problem, there are several factors that together can cause a historic crisis such as this one, which by the way, is the worst economic and political crisis in Venezuela’s history. However, one particular factor might be a little bit harder to understand for people who have never lived through a currency exchange control.

As a personal anecdote, I remember speaking with a Spanish couple a few years ago, and we were talking about Venezuela, eventually the topic was about Venezuela’s economy and people’s money, when I told them how much the minimum salary in Venezuela was, they were impressed because it sounded like a lot of money, and when I told them that the real value of those Bolivares (Venezuela’s currency) was much lower, it was difficult for them to comprehend how could this be. Eventually I managed to explain to them why the official numbers don’t work when it comes to calculating the money people can earn in the country, in short words, when converting the local currency we need to use the black market rate, not the official rate.

However, more than explaining the economic impact a currency exchange control has for the people, I want to explain how a system such as this one can be used to enrich those in power through the loot of the country.

Briefly explaining the currency exchange control

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In Venezuela, the mechanism for the allocation of external currencies has changed over the years, what hasn’t changed is the fact there is not a free market where people can freely exchange currencies like in other normal countries, therefore, for the past 15 or so years, there has always been a system of control.

This system is, of course, controlled by the government, and what it basically allows is for some bureaucrats to choose which companies or individuals are going to have access to the external currencies at the official price, meaning the extremely cheap price.

Something like this might sound crazy, and indeed it is, but it was an economic measure supported by the people because, according to the government, this would stop the “evil” businessmen, from taking their money out of the country, and inexplicably, apparently the voters thought this was a good idea. So the currency exchange control came into place.

In the beginning, it wasn’t all that strict, the people had access to thousands of dollars on a yearly basis for their personal consumption, and companies were receiving the funds they needed to keep their operations alive. But little by little, and year after year, having access to external currencies with the official prices was getting tougher, the people’s personal allocation was now in the hundreds instead of thousands, and companies were unable to exchange the amount of money they needed for their imports. Eventually, it got to a point where only people with contacts inside the government were the ones having access to external currencies with the official price.

How did the corrupted government and its cronies got rich?

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As we know, just because something is illegal it doesn’t mean the demand will disappear, common examples are the alcohol prohibition, that ended up creating mafias and a black market for it, and in today’s era, the drug prohibition does the same, drugs might be illegal but that doesn’t mean people are going to stop buying them, and if there is a demand, it is just a matter of time for there to be a supply.

Therefore, the same happened in Venezuela with external currencies, freely exchanging them is illegal, but since the mechanism of control doesn’t satisfy the demand, people go to the black market and exchange their currencies at that rate, which is obviously much higher than the official rate.

Here is where the “trick” comes in, what sane people would willingly exchange their stable dollars for a currency with the highest inflation on the planet? No one in their right mind would do a trade like this. No one except one type of person, those who control the currency exchange control allocation.

What they do is assign a certain part of the available external currencies to themselves at the official prices, and then they have 2 options:

1. Import any product and sell it in the country pricing said products using the black market rate.
2. Directly selling their dollars at the black market rate through the use of “proxy people” to anyone interested in buying them, and in Venezuela pretty much everyone is always looking to buy stable currencies.

And then repeat the cycle: assign “cheap” currency to themselves – importing or directly selling the currency at the black market rate – assign themselves the “cheap” currency again, and again, and again...

Those are basically the 2 methods they used, selling the value assigned at the black market rate, and then using the money they received with said sale, to assign themselves “cheap” currencies again, only this time, they have something like 10 times more money than before, although this will depend on the difference between the black market rate and the official rate, which is why the allocation to people outside of the government started to dry off with time, eventually the people in control had enough money to acquire it all.

This is how we sometimes find news about Venezuela’s politicians having hundreds of millions of dollars in places like Andorra, and rumors about Chavez’s oldest daughter having billions of dollars. They used the currency exchange control mechanism to illegally enrich themselves with amounts of money that are so high, that it can even be considered as one of the majors looting in the history of the world. In fact, there is a Venezuela economist that roughly estimates this looting in 467 billions of dollars, you can find his report (in Spanish) here.

There are of course, other mafias unrelated to the currency exchange control that were used by the current politicians to enrich themselves, but again, I have the feeling the one that might be more difficult to understand is this one, given the fact almost no country on Earth has a currency exchange control, so its implications can be mostly unknown.

Conclusion

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In this post, I wanted to explain in the most simple possible way, how a currency exchange control works and how it can be used to enrich the people in power, and I hope at least one person was able to learn something while reading this article.

I also find this issue an important example of what happens when a government takes complete control of the economy, history has proved that it is freedom the circumstance that allows prosperity to exist, so supporting economic freedom instead of government control over the economy comes down to simple common sense.