Caracas Chronicles

Photo: Kennyjo.

Get ready for the harsh economic truth.

One of my Macroeconomics professors used to say: “The economy is like a dry piece of leather. You step on one side and the other side will pop up.” This reflects the simple principle of opportunity cost, the one incurred by not enjoying the benefit associated with the best alternative choice.

Flattening the spread curve of the current pandemic will slow the virus’ contagion rate so that fewer people need to seek treatment at the same time, thus reducing mortality. We all agree on that, and the most effective measures have been those taken by South Korea: widespread rigorous quarantine measures and mass testing (including asymptomatic citizens). But this comes at a cost.

Mass testing can be expensive. Testing one patient in Spain costs 46 euros, for example. If the Maduro regime were to test 0,6% of Venezuela’s population (156,000 of roughly 26 million people, assuming a mass exodus of 5 million), which is close to the percentage covered by South Korea up until March 20th, this would be a little over 7 million euros, a lot of money for Venezuela, especially since Venezuelan oil dropped to $28 per barrel and the global semi-parallelization of production will most likely translate into a decrease in oil demand in the following months.

Although the regime extended work immobility, most Venezuelans rely on their informal incomes, which are not protected by law.

A rigorous quarantine will also have economic repercussions. 

Production-wise, by the third trimester of 2019, local industries were operating at 20.6% of their installed capacities. If all of the employees are sent home, production will drop even further, and if the ban on queuing for fuel continues (allegedly as a measure to contain the spread of coronavirus) and an arbitrary assignment is maintained over time, producers of basic goods might have a hard time supplying the nation.

Although the regime extended work immobility, most Venezuelans rely on their informal incomes, which are not protected by law, meaning the measure might asphyxiate some companies. Even if we assume that formal and informal workers can (and will) work from home, water, electricity, and internet services are, at best, unreliable. This is why productivity will inevitably drop.

And what if the government mimics Oprah and gives money to every single Venezuelan? In the words of Ricardo Hausmann, “if firms aren’t producing because their workers are locked down, boosting demand won’t magically make goods appear.” Keep in mind that a little over 78% of Venezuela’s GDP is compounded by non-transferable services, and a good chunk of production inputs and consumer goods are imported: Venezuela’s acquisition and distribution of imports will be affected. 

Productivity and production levels will drop and shortages will rise. Since household income will also drop, price levels will keep on rising. As Venezuelans are well aware of, shortages and hyperinflation will most likely deepen food insecurity, a trend that will stay even after the pandemic is over, because the economic reactivation will take a while.

If this scenario isn’t complicated enough, the Maduro regime faces 20 years of hard-earned domestic distrust and lacks international legitimacy, affecting its policy and communication effectiveness to face the pandemic both at home and abroad. 

According to Hausmann, “flattening the COVID-19 curve will require concerted economic action at the international level.” Given the current sanctions Venezuela faces and Maduro’s poor negotiation skills, Venezuela will have a hard time having access to international lines of credit and negotiating the purchase of test kits, medical equipment and food to distribute via CLAP bags.

If firms aren’t producing because their workers are locked down, boosting demand won’t magically make goods appear.

This is why Maduro’s government will have to start flattening a different curve: the confrontational and illegitimate decision-making curve. 

Maduro and his team will have to truly negotiate with Guaidó’s team to regain legitimacy, produce a transparent budget of the needed resources to tend to the pandemic and be open to external audits of spent resources. They’ll also have to work hard to regain public trust, especially in times when knowing the real contagion rate is key to raising awareness about the importance of social isolation, testing and hygiene standards.   

I’m convinced that flattening the 2019-nCov spread curve is the right way to go and knowing its costs might be a good incentive for the Maduro government to do things right for the first time. 

But who can believe this might actually happen?