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Repercussions of Venezuela’s Collapse To Latin America

Venezuela’s record inflation (latest figure – 1,000,000%) and the collapse of its economy, has had an effect on its population. Consequently, how will the state of Venezuela’s economy and its population will affect Latin America?

The repercussions of Venezuela’s possible collapse would bring complex effects to its neighbour countries of Colombia, Brazil, and Guyana. Venezuela’s downward economic state would bring largely negative effects to its neighbours.

Venezuela’s imports from its closest geographic neighbours take up the majority of the share of imports from South America (65.3%). Losing the majority share of a geographically close export market, or even a portion of that share, is a consequence no country wants. More so, when the country had up to 28.97% higher gross national income PPP compared to Latin American & Caribbean countries, at the period from 2000 to 2014.

The statistics point to an unfavourable conclusion to Venezuela’s closest neighbours. Decreased incomes from exports will be the most visible impact of this country’s collapse. The import figures in Venezuela already have decreased four times since 2014.

Venezuela, along with Colombia, Brazil and Guyana used to undertake joint projects in the past, such as ACTO Amazon programme and IIRSA (Initiative for the Integration of the Regional Infrastructure of South America).

These projects have delivered benefits like better environmental protection, monitoring, and infrastructure building in Venezuela and its neighbour countries.

The benefits to the economies of Venezuela and its neighbours, have, and will be limited by Venezuela having to solve its internal problems. More so, when the neighbours of the Bolivarian Republic will have to find the monetary means to support the inflows of Venezuelans into their territories.

The populace of Venezuela could bring some positive benefits to Colombia, Brazil, and Guyana.

Colombia, Venezuela’s neighbour to the west, will feel the brunt of both positive and negative impacts. Due to its cultural and linguistic proximity to the Venezuelan population, the two-sided impacts are inevitable.

On one side, the refugees travelling to Colombia from Venezuela because of economic and humanitarian needs, will bring positive long-term outcomes to the job market and the economy of Venezuela.

The population aged 0 to 14 years, as a percentage of total population, is 4.589 percentage points higher in Venezuela than in Colombia. Both countries have been experiencing a decrease in the share of a cohort of the youngest members of society. Nonetheless, even since 2000, Venezuela had had a higher share of them.

If the same shares of age groups will travel from Venezuela to Colombia, Colombia can expect to see an increase in the youngest cohort (0 to 14 years) of its population. A younger population comes with many challenges, but its benefits are big.

Brazil and Guyana, and their northern and western provinces, should see smaller repercussions from the fleeing population of Venezuela, and their changing lifestyles.

South America, as a geographic region, will feel the brunt of impact from Venezuela’s economic state.

A member of a continent, especially one geographically isolated but from one other continent, has the ability to create a disproportionately large impact to the economies of other continent members. Decreasing investor confidence and willingness to invest are the most straightforward impacts from the collapse of Venezuelan economy.

From another perspective, the negative investor moods related to South America, due to the state of one of its member countries, could be used as an opportunity by contrarian or value investors. Since emerging markets present a good value proposal to some less risk-averse investors, negative moods of others could be push for contrarian investors to invest in this region.

Although Venezuela has been suspended as a member of Mercosur since 2016, its trade and economic ties with the region’s most powerful economic block are still strong. Out of all Venezuela’s exports to the continent of South America, exports to members of Mercosur take up 55.07% of the total. Imports from Mercosur member states take up a significant share of Venezuela’s total imports – 8.147%.

A collapse of the Venezuelan economy will create negative economic and trade consequences to its South American trade partners. Mercosur members (Brazil, Argentina, Paraguay, Uruguay) will have to cope with losing a part (or the whole) of almost 10% of Venezuela’s imports market.

As a population, Venezuelans, will disperse their impact along South America and other regions.

The most noticeable outcome of the Venezuelan economic and infrastructure collapse will be the refugees that have migrated, or will migrate to other South American countries.

Increasing populations of other South American countries due to migration could mean increases in the labour force and tax payers. Overall, a net benefit.

However, if the refugees will experience difficulties with getting a legal status (it has happened in Colombia), a larger underground economy is bound to develop. With it, tax losses and a separation of the labour force.

Countries which have encountered the same challenges as Venezuela (drop in commodities (more accurately oil) income, currency controls, high level of corruption) and have entered into periods of hyperinflation in the 21st century are: Argentina, Iran, Turkey.

Most notably, these three countries, along with Venezuela, are tied to a high dependency on incomes from commodities. Argentina is more of an exception out of this group of countries – its commodities dependency is based on agricultural exports.

A high level of corruption (Venezuela’s 2018 CPI score – 168 out of 180 countries), is not itself a death sentence to a country’s economy. Nevertheless, corruption coupled with a high level of dependence on volatile goods, and currency controls, all have the power to send a country on a downward spiral.

Currency controls can be the push that causes a bad situation to become worse. Without currency controls, Turkey’s and Argentina’s economies wouldn’t be moving (or wouldn’t have arrived) to a situation, where only external financial help can solve the economy’s problems.

The state of Venezuela’s economy will bring mostly negative economic and demographic impacts to its closest neighbours, and other Latin American countries in the short term. In a decade or more, the demographic and labour migration into other countries should boost their economies. Also, it should minimize the impacts of lost incomes from the Venezuelan market.