Money on the Edge: Finding Confidence in a Collapsing Economy
When you cannot rely on institutions, where do you turn?
This is a key question Venezuelans face daily in their fight to keep going.
Local government institutions are not only unreliable, but can feel like the adversary. Rule of law is capriciously enforced or non-existent. In this environment, people turn to each other for support.
Instead of companies and institutions, people rely on dynamic, informal networks of people for access to goods and services. Banding together and trusting each other, many find the means to survive (and sometimes thrive!).
Reliance on informal networks, however, comes with heightened risk and little recourse. Couple this with extreme product scarcity and the fact that everyone is feeling the pressure, and this can lead people to scamming and deceiving each other in a desperate bid to survive.
In an adverse environment where traditional institutions have faded, people need confidence in their new ways of transacting. Confidence to trade with an unfamiliar counterparty. Confidence to use new products and tools. Confidence in their extended networks of people.
In this blog post, we share a few of our insights on this topic. Think of these insights as statements that can help us see the on-the-ground human experience. These insights do not aim to represent all experiences. Rather, they highlight an unexpected or misunderstood aspect of what life looks like for some. With an improved understanding, we can start to imagine products and services that fit into people’s needs, expectations, and lives.
Insight #1: Networks of people have replaced the roles of companies and institutions.
As the economy crumbles, the availability of basic resources and services through traditional commercial or governmental channels has drastically diminished. To fill the gap, digital and offline networks have emerged as the primary means of accessing product and services.
Small tasks, like buying flour or exchanging odd lots of US dollars for bolivars, can be done through people found in online groups on WhatsApp or Facebook. Riskier trades are generally done with a smaller, highly trusted network, like extended family.
We heard from Juan, a 29-year old Venezuelan emigrant, that back in Caracas he would often buy his groceries not from a store clerk or a wholesaler, but from a friend of his who had the connections to get otherwise-scarce products. Juan would meet him at night in an underground parking garage. “They lock the door and open the back of the truck, and there’s all the goods.” Juan expressed that he didn’t feel any danger doing this. “I knew the guy,” he shrugged.
Underground markets aren’t always found in the shadows beneath the streets, though. More often than not, underground markets are found on WhatsApp stories, in Instagram posts, and in Facebook groups.
Wilmer, a 46-year old professional driver based in Carora told us that he sells scarce products as his side gig. He considered advertising this in his car, but realized that this was too risky as he never knew who would be getting in his back seat. Instead, he advertises on WhatsApp and Instagram, where he has more control over who sees his offerings.
This is common, with digital groups acting as a sort of whisper network for exchanging information and goods alike.
From these observations, we can ask ourselves: how might we…
— empower digital networks of people to serve and support each other’s basic needs?
— increase access by enabling closed groups to connect with sellers and buyers outside their trusted networks?
— empower highly trusted individuals to evangelize alternative financial tools and currencies with their friends and family?
Insight #2: Necessary transactions often feel as uncomfortable as drug deals.
Venezuelan laws make it difficult for businesses to sell goods above cost (price fixing) and for people to safeguard their savings (capital controls). Surviving is not only difficult in Venezuela, it can also be illegal. In order to live, people must break the law.
Sometimes this takes the form of purchasing food staples on the black market. Sometimes this means keeping savings in outlawed US dollars. Other times this means covertly importing restricted goods.
Juan, who bought groceries in an underground garage, told us that people do get in trouble for selling on the black market. “Some have even gone to jail. But the government sets the prices and those prices don’t even cover the cost of business.” What else are you supposed to do?, he implies.
Raúl, a 53-year old entrepreneur in Caracas, told us of his business importing powdered milk. Venezuelan law states that any entity holding a good like milk for more than a certain number of days could be fined and charged with hoarding. Raúl, however, knew he would be losing money on the milk powder if he had to sell it in accordance with the government mandated timelines and prices. In order to evade enforcement of this policy, he set up multiple entities and continually rotated (or laundered) his supply amongst them, constantly moving them off the books of one entity and onto the books of another.
We frequently saw business owners relying on convoluted structures like these just to keep their operations running.
These types of activities have become an accepted part of life in Venezuela and are often openly discussed or carried out. But their illicit nature means that people are unable to rely on normal measures of recourse if transactions go awry. All transaction participants are constantly at risk of punishment for breaking the law.
This dynamic creates circumstances for scammers to thrive. Óscar, a 50-year old business owner in Caracas, told of how he was exit-scammed by a contact who worked at his local bank. Off the books, Óscar would wire this contact money in US dollars, and his contact would credit his local account in bolivars. “One time I wired him $30,000,” Óscar told us, “and he disappeared. I never heard from him again. I couldn’t tell the police what happened because exchanges are illegal.”
These stories and those like them beg the questions, how might we…
— empower people to transact with people in their extended networks more securely?
— increase the safety of underground market participants?
— open up networks to larger groups of people while increasing confidence in counterparties?
Insight #3: Despite scarcity and economic collapse, some are thriving.
Venezuela is not just a place of scarcity and struggle.
Juan told us that, counterintuitively, “in Caracas, the restaurants are full. There are people with money. It’s like two countries. There are those who are afloat and there are those who are underwater.”
The upper class who have bank accounts abroad are largely the ones who have managed to stay afloat. They can still gain access within their own country to service their needs.
Elites pay for memberships in exclusive country clubs that afford them a safe haven for their families and an expanded social circle to make profitable connections. These clubs create communities of trust. They are a place to meet customers and commercial partners and to discover contacts who can help them source otherwise-scarce items.
But it’s not just about staying afloat. There are also those who have managed to thrive amidst the crisis. Guillermo, a 60-year old entrepreneur, told us: “high inflation has made a lot of millionaires.”
Those who have a trifecta of access to credit, hard assets (like real estate or US dollars), and bank accounts abroad have stood to profit from hyperinflation. “Banks are still mandated to lend money,” Guillermo explained. As long as you know the right person at the bank, you can take out a loan in bolivars. “I took out a loan in bolivars and I bought an apartment in New York using the loan. But the value of the loan is going to zero due to inflation.” That apartment he bought? It’s effectively free.
Taking out a loan in a currency is the financial equivalent of going short that currency (or betting against it). Taking out loans in bolivars and putting that money into more resilient assets has been a highly profitable trade over the last 5 years.
Hearing Guillermo’s story leads us to ask: how might we…
— enable people with access to foreign financial systems to extend it to trusted friends and family?
—create more safe havens for commercial and social exchange?
—connect Venezuelans with people that can share access to foreign financial systems?
Conclusion
Access makes all the difference in a place like Venezuela. Access to food and medicine. Access to banking services, to offshore accounts, to loans. Access to social capital.
Often this access can only be found indirectly, by way of a trusted network. People must make several hops, trusting a family member who trusts a friend who in turn trusts an old colleague, to access even basic goods and services. Technology plays a role here by serving as a means of discovering and evaluating new networks. WhatsApp, Instagram, and Facebook through their groups, stories, and messaging functions extend existing trust graphs. But trust is always accompanied by risk. Where there is little remaining rule of law and strong incentives to optimize for the short-term, scams and frauds occur frequently and with devastating consequences.
Stay tuned for future posts as we discuss some of the ways we can render these risks more salient and understandable, in an effort to make people safer.
