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Can Venezuela stand the heat of its own economy?

Dan Grech Mar 1, 2007

Can Venezuela stand the heat of its own economy?

Dan Grech Mar 1, 2007

BOB MOON: It’s hard to find a more dramatic example of what happens when an economy starts to overheat than what’s going on right now in Venezuela. Its economic growth was up almost 10 percent last year, thanks to a gush of oil revenue. And Venezuelans are on a shopping spree, snapping up cars, apartments and designer clothes.

But there’s a dark side: inflation. Despite efforts to control prices, Venezuela is headed for an inflation rate this year of 27 percent. So how are people reacting to skyrocketing prices? We sent Americas Desk reporter Dan Grech to Caracas to find out.

DAN GRECH: Perhaps the clearest sign that Venezuela’s economy is overheated is sales of Scotch Whiskey. They jumped 55 percent in 2005, cementing Venezuela’s place among the world’s top 10 whiskey-drinking nations.

That may seem strange in a country known for its rum. But here at Whiskey Bar in Caracas’s club district of San Ignacio, accountant Giovanna Ka explains why Whiskey is the drink of choice.

GIOVANNA KA (voice of translator): For me it’s status. It’s cultural, psychological. To drink a Whiskey aged 12 years means you have a certain status. You’re part of an elite. It’s not because we like the flavor.

Like almost all sectors of Venezuela’s economy, night life is hopping. But bubbling beneath the economic bonanza is a growing sense of unease.

Cristian Rinaldi, a manager at a casino, pays his bar tab: 150 bucks.He says the country can’t sustain this torrid growth.

CRISTIAN RINALDI (voice of translator): This is fiction. There’s a lot of money in the street, but not because the economy is doing well. Prices went up 2 percent in January alone.

Economists say Venezuela’s rampant inflation, the highest in Latin America, is a signal that this party’s coming to an end.

But rising prices have vastly different impacts on the various social classes.Inflation hits poor Venezuelans hardest, since they spend almost half their income on food. President Hugo Chavez has tried to shield this important political base by subsidizing food and offering free education and health care.

Robert Bottome is publisher of Veneconomia, a Caracas business journal.He says Chavez can stave off the impact of inflation for only so long.

ROBERT BOTTOME: People are becoming more conscious of prices. And this discontent is brewing. You know, there’s a potential for some kind of an explosion, because people are getting fed up.

This discontent is growing. The lines at a recent government market selling subsidized food were up to eight hours long.

This gives Venezuelans flashbacks to 1989. An oil boom was followed by a massive devaluation, economic collapse and riots in the streets. The upper class has responded to inflation by parking their money abroad, particularly in the U.S.

For the middle class, inflation’s impact is completely different. The prospect of ever-higher prices actually increases the pace of big-ticket purchases.

Robert Bottome.

BOTTOME: If the car is old, why don’t you take advantage of today’s prices, which any sensible person will say are low compared to what they’re going to be two or three years from now.

Take Saul Perez, a 32-year-old engineer. He’s at a Chevy dealership in the upscale Altamira neighborhood. He wants to replace his 2003 Ford with a brand-new SUV.

SAUL PEREZ (voice of translator): Each day I wait, a new car gets more expensive, and my ability to afford it less. Right now I have the money, so right now I’m gonna buy it. If I wait, I spend more.

Perez isn’t alone. Car sales are up 70 percent in the last year. There’s now a three-month wait for a new car.

Oscar Gonzalez is president of the Chevy dealership. He says heavy sales have brought the city a new problem: the midday traffic jam.

OSCAR GONZALEZ: More cars were sold than ever before. But also, people had more money, they could take out their cars for more reasons. Now we have this mess.

Although President Chavez rails against U.S. consumerism, his policies have actually led the U.S. and Venezuela to become more economically entwined. Last year, trade between the two countries rose 36 percent as middle-class Venezuelans bought U.S. goods in a race against inflation.

In Caracas, I’m Dan Grech for Marketplace.

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