Venezuela: Real Wages Collapse amid Continuing Crack-Up Boom

While the crack-up boom in Venezuela continues, real wages in the country have have utterly collapsed. The bolivar is still trading close to 700 to the US dollar on the black market, and the Caracas stock index keeps making new all time highs in nominal terms almost every day. Ironically, Venezuela’s currency is called the “bolivar fuerte” (VEF), i.e. “the strong bolivar” ever since it has been “reverse split” 1 for 1,000 in January 2008.

 

brain-drainImage via designlimbo.com

 

As an aside, the stock market has likewise been subject to a reverse split of 1 for 1,000 about a year ago – pre-split the index would now be trading at a cool 15.5 million points.

 

BolivarThe black market rate of the “strong” bolivar (VEF) – 1 USD now buys nearly 700 VEF – click to enlarge.

 

Meanwhile, Venezuela has the highest sovereign CDS spreads in the world. Below is a chart of Venezuela’s annual default probabilities based on 5 yr. CDS spreads at a 40% recovery assumption:

 

VENZ default probability-AVenezuela: annual sovereign default probability from 5 year CDS spreads at an assumed recovery rate of 40% (which may prove to be a generous assumption) – click to enlarge.

 

Venezuela’s Economy Loses its Best People

The great successes of socialism in Venezuela aren’t confined to increasing shortages of basic goods, a collapsing currency and extremely high sovereign CDS spreads.

Businesses are confronted with a mixture of sharply rising input costs and price controls and as a result are unable to pay their employees wages that can even remotely balance the sharp losses in the bolivar’s purchasing power. As Reuters reports, skilled workers have been hit the worst:

 

“Headhunters across Latin America are tapping Venezuela for low-cost professionals as a deepening economic crisis has left many skilled workers earning less money than taxi drivers and waiters. Highly-trained Venezuelans are seeking to escape a decaying socialist economy in which they often have to work second jobs and spend hours in line to buy basic goods such as milk or diapers.

[…]

Apple software developer Hector Ghinaglia, 24, was earning about $130 a month at the black market exchange rate until he was recruited through LinkedIn. “One day a message appeared offering me work,” said Ghinaglia, who was offered $900 a month plus the cost of his flight and visa to work in Colombia. He is happy with the move despite the higher cost of living there.

The most sought-after professionals include IT experts who face few opportunities in Venezuela’s withering private sector and oil and gas engineers loathe to work for state-run PDVSA, which under late socialist leader Hugo Chavez became focused on social development projects rather than operational efficiency.

“If we’re looking to fill a special position, such as a geologist or a specialization in oil or gas, Venezuela is a strong option for us,” said Claudio Fernaud, the managing director of Stanton Chase’s operation in Argentina.

[…]

Particularly destructive to salaries in Venezuela is the collapse of the bolivar currency, which has left an iPhone costing several months’ worth of an executive’s salary. Currency controls peg the bolivar at 6.3 per dollar but the black market rate governs much of the economy and is now at 687 bolivars per dollar, having weakened from 173 bolivars at the start of 2015.

“Everybody is looking for payment in hard currency: dollars, pounds, euros – anything but bolivars,” said Leonardo Lacruz, the Venezuela director of multinational headhunter Korn/Ferry, adding he has seen “desperation” among executives to leave the country. “People do the math and realize they’re making nothing here.”

The Panama branch of Stanton Chase said it receives 30 to 40 resumes per day from Venezuela compared with just one a day from Colombia. Local businesses are unable to keep salaries in line with rising consumer prices, let alone pay qualified professionals at rates that compete with neighboring countries. These firms constantly worry that their skilled technicians will be poached, said Juan Carlos Dao, president of Bancaribe, one of the country’s top 10 banks. “It’s a tragedy that’s very hard to deal with,” Dao said in an interview earlier this year. “This is happening to everybody, to all the major corporations in the country.”

In turn, foreign companies have little incentive to hire in Venezuela due to price controls that force some to sell at a loss and currency controls that leave them unable to repatriate revenue. Steady devaluations of the bolivar have caused billions of dollars in balance sheet losses for multinationals ranging from General Motors to Energizer.”

 

(emphasis added)

As an aside to this: Economists of the Marxist wing of Syriza reportedly think that the socialist economy created by Hugo Chavez would be a “good model” for Greece. This is the one thing that would probably be even worse than debt-slavery under the “troika” – at least, the latter will result in the implementation of a few economic reforms (and we’re quite sure the EU will find ways to infinitely extend Greece’s debt repayments).

What is especially surprising to us is that the Venezuelan government has left its main source of income, namely state-owned oil company PDVSA, withering on the vine. Venezuela’s rulers are not only socialists, they appear to be really stupid socialists to boot. Revenues from oil sales have always been the only thing that has kept the Chavismo ship afloat. These revenues could be used to buy the votes of Venezuela’s poor, by providing them with plenty of government handouts. However, not only have oil prices now collapsed, but PDVSA has actually been run into the ground well before that already. They have killed the goose that laid the golden eggs.

 

pdvsa_5_de_julio_mediumThe sign above the PDVSA HQ says “socialism or death” (socialismo o muerte). They actually seem to have gotten both.

Photo credit: Petróleos de Venezuela

 

Venezuela’s oil production has declined sharply over the past decade, even while oil prices were still rising. This is really an amazing feat, given the fact that the country’s oil reserves (especially its huge shale oil reserves) are among the largest in the world. Nobody really wants to work in a company run by political commissars – and those who are working in such a company will do as little work as possible.

The brain drain caused by the collapse in real wages will do incalculable additional harm to an economy that is already in dire straits. Even if the socialists were to lose power, it will be very difficult for Venezuela’s economy to get back on its feet. This is by the way a big if, since they have complete control over the state apparatus and are certainly able to cling to power by force – after all, they have already jailed several of their biggest opposition challengers on what appear to be trumped up charges.

Then again, Venezuela’s workers could always follow Janet Yellen’s advice to the likewise income-challenged US middle class: Just buy stocks!

 

Caracas IndexThe IBC General Index in Caracas currently trades at a new all time high of 15,476 points – click to enlarge.

 

Conclusion

Socialism still doesn’t work – contrary to apparently still widespread assumptions, it also won’t work if “implemented correctly”. “Correctly implemented socialism” is of course always the type advocated by whoever does the advocating. The basic problems of this system are however insurmountable – not even angels could do it right. Rational economic calculation is impossible in a socialist system. The resulting economic distortions tend to elicit ever more government interventions, leading to an inexorable downward spiral for the economy.

In Venezuela, money printing on a vast scale, capital controls and many other restrictions on business, price controls and an officially fixed and completely unrealistic currency rate have ended up creating ever more distortions. Now the very people Venezuela would urgently need to rebuild the economy after the inevitably collapse of socialism in the country are leaving in droves to boot.

 

pdvsa-socialistaNope – still not working.

Photo via abcdelasemana.com

 

Charts and data by: BigCharts, acting-man.com, dolartoday.com, Deutsche Bank

 

 
 

 
 

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2 Responses to “Brain-Drained”

  • John Galt III:

    Latin America has been and is such a mess. Founded by Iberians that had been ruled by Muslims for 700 years, all they knew when they got to the America’s was to 1) Murder 2) Steal 3) Enslave the locals and 4) Jam a culture, language and religion down the locals throats just as their Islamic conquerors had done to them.

    Canada and the US were founded by colonists who were escaping the Thrity Years War in Europe and its stifling, stupid governments. The wanted religious and economic freedom.

    Two countries turned out well while Latin America now has Iran opening up 80 “cultural centers” and mosques in Central and South America. That should help things improve immensely.

  • Crysangle:

    Well the ECB et al beat Venezuela to capital controls on deposits , just …

    http://www.libremercado.com/2015-08-06/corralito-en-venezuela-algunos-bancos-limitan-la-retirada-de-dinero-1276554437/

    In case anyone needs reminding before they settle down to the centre left right marxist world central bank menu etc. etc. etc.

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