During the weekend of July 16, 2016, more than 100,000 Venezuelans ventured into Colombia in search of medicine and food that are in short supply back home. Vice president of Venezuela’s Chamber of Commerce, Ricardo Cusanno, says that there has been a “shortage of everything at some level," as 85% of corporations in Venezuela halt production, including The Coca-Cola Company (NYSE: KO). Low oil prices, triple-digit inflation and currency controls are listed as the main factors to blame for the rampant stagflation plaguing Venezuela.

Dependency on Oil

The International Monetary Fund (IMF) estimates that the country’s economy should contract by 8%, with inflation surging to 720% by the end of 2016. To gain a deeper understanding of the current crisis, investors and economists must first examine Venezuela’s historical dependence on oil. In general, export-dependent economies, such as Venezuela’s, have always been at the mercy of the global economy and the commodities market, in particular. Due to the ebb and flow of commodity prices, governments of export-dependent countries must be vigilant about saving money during booms in commodity prices so they can stay afloat when the inevitable bust occurs.

Wasteful Spending

However, the Venezuelan government, under both the rule of former, deceased president Hugo Chávez and current president Nicolás Maduro, has been notorious for wasteful spending. During periods of oil booms, the government overspends on projects that do little to promote productive domestic industrial sectors, leaving the country dependent on imports. When the money from oil is flowing, there are few worries from the citizenry and government, as imports are readily available and affordable. Yet, very little of that money is spent investing in domestic industry, leaving the country dependent on revenues to buy imported goods instead of taking steps to become a more self-sustaining economy.

Extension of the Petrostate

Additionally, the socialist governments of Chávez and Maduro have expropriated large portions of the productive economy in a mission to strengthen the petrostate. They believe that an efficient domestic economy emerges from worker-operated and state-owned companies. Nonetheless, reality proves that the inefficiencies of these state-run enterprises are too great to allow these companies to contend with more organized and profit-oriented competitors. In fact, expropriation of farmland and agro-industrial companies, in addition to strict price controls, resulted in a collapse of domestic food production, as it was cheaper to import food than produce it locally.

Political Unrest

However, the government and its supporters blame the food shortage on a supposed destabilization plan, which they argue is backed by right-wing opposition and foreign powers that wish to see Maduro removed from office. To counter this “economic war," Maduro urges citizens to grow their own produce and raise chickens at home, although 80% of Venezuelans live in cities. Additionally, Maduro declared a 60-day state of emergency in May to prevent his removal from office, as nearly 70% of Venezuelans want him gone. Yet, despite acquiring triple the amount of signatures needed to begin a recall, citizens’ demand for political change has fallen on deaf ears as Maduro remains uncooperative, vowing to see out the end of his term in 2019.

Abuse of Currency Controls

Furthermore, the extended use of currency controls over the past 13 years has fostered a corrupt political environment and deepened the current economic crisis. Central-bank data shows that in 2015, Venezuela increased monetary liquidity, a measure of all the money in the economy, by more than 100%, resulting in more bolivars being in circulation than dollars or euros. This has resulted in severe currency devaluation while contributing to rampant inflation that has lowered the value of a bolivar to 1,000 per dollar for the first time on Venezuela’s black market.

Shortage’s Effect on the Population

A June 2016 academic study shows that 12% of citizens are eating less than three meals a day. The elderly and children have been disproportionately affected by the food shortage. According to the Bengoa Foundation, out of a sampling of 4,000 school children, 30% were found to be malnourished, while absences have been on the rise. Local Paula Arciniegas, 19, worries about the nutrition of her 2-year-old daughter, whom she has often been forced to feed a mixture of water and cornstarch due to the scarcity of milk.

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