Venezuela's Economic Problems
I have just started a new job this week and so have had a lot less time to write as I adjust. As a result, last week and likely for the next few weeks I'll be posting some old essays.
I have a few new writings coming up in the pipeline though, including a review of the excellent Caliphs podcast, a collection of my notes from rereading Robert Fisk's The Great War for Civilization, and an essay on inefficiencies of a privatized healthcare system, so expect these in the next few weeks/months.
I wrote this short essay back in 2016 and am reposting it here. At the time, a drop in oil prices severely impacted Venezuela’s economy and led to runaway inflation, which has not recovered since. This essay was an attempt by me to help explain why this occurred. Perhaps not the most technical or economically sound explanation, as I’ve learned a lot in the last 10 years, but not, I think, completely wrong either, though you'll note at the time I thought Maduro would not stay in power much longer and he made it another 10 years.
Venezuela's Economic Problems
I have always admired the government of Hugo Chavez in large part because they were able to institute socialism in Venezuela to reduce income inequality and act as a force which other Latin American economies could rally behind to resist American economic and political imperialism. Chavez died in 2013, and was succeeded by Nicolas Maduro, another member of his party, who has been in power since. Not too long after Maduro took over, the Venezuelan economy began to decline. Inflation began to rise very rapidly, and the availability of consumer goods have also decreased to the point where some necessary goods have become very difficult to find, and require hours of waiting in line in the hopes of finding them. Predictably, popular support for Maduro has fallen, and the political opposition currently has a lot of support. Maduro’s party lost their majority in the National Assembly last year, and there is currently an ongoing attempt at holding a referendum to remove Maduro from power before his term is up. Even if the referendum fails, it now seems inevitable that Maduro and his party will lose the next round of elections, and Venezuela will be governed by a party whose policies are much more conservative.
So how did all of this come to pass? The lazy answer, and one I often hear, is that this is just another example of why socialism doesn’t work. This of course, is a lazy answer for people who don’t really understand why exactly the economy began to worsen. After all, socialism did work marvelously well for Venezuela for over a decade, there had to have been a concrete reason(s) why things have gotten worse. If you ask one of my fellow socialists why this came to pass, many may tell you that what Venezuela had was not true socialism, and therefore the events that are occurring there should not be used as evidence to be held against socialism. While that may be in some respects true, that is also a very lazy answer because the government in Venezuela was at the least very left-leaning, and instituted a lot of policies one would expect a socialist government to utilize, like land reform, nationalizing a lot of major industries, setting price controls for consumer goods, and intervening in currency valuation (ie. all in all, something of a command economy). So even if it was not a textbook socialist country, it certainly had a lot of aspects that many would consider to be socialist, insofar as socialism as it has been implemented in the 20th century is often associated with centralized, command economies. .
To start off with, it’s important to understand that as is very normal for a socialist country, government spending was very high, as it has to support a wide variety of very expensive social programs meant to decrease income inequality and provide all of its citizens with basic necessities. Venezuela’s greatest source of wealth is its oil: it is one of the biggest exporters of oil in the world. As these are nationalized industries, the government could claim the revenue of the oil industry, use what it needed to maintain oil production, and use the remainder of the revenue to fund social programs. So Venezuela’s wealth is very closely tied to the amount of money its oil industry can generate. Some might then say that the government was very irresponsible for not using the oil revenue to invest in other sectors of the economy so that the country’s GDP would be generated by a more diverse set of industries rather than just oil, and that’s true. One must understand however, that Venezuela’s government was not the oligarchic socialist government you saw in China or the USSR, it was a very open and democratic government. Chavez need to keep the populace happy to stay in power, and he ran on a platform that was based on reducing income inequality and land reform. The social programs were a political necessity to stay in power, and they drained a lot of the oil revenues. Perhaps in time, after the populace had been placated for a while, that money could have been diverted to produce a more diverse economy. Unfortunately, shortly after Maduro took office, the price of oil began to decline. This was due primarily to the increased production by the United States of oil obtained from shale and fracking sources, which in turn led Saudi Arabia to flood the market with cheap oil in an attempt to put those new shale and fracking businesses into bankruptcy (and it is also believed that it was done to hurt Russia’s economy for their involvement in Syria), which lead to a very prolonged and dramatic collapse in the price of oil worldwide, to such an extent that the prices have only recently begun to increase and are still not anywhere near the prices where they were before.
This obviously devastated Venezuela’s economy. They were unable to import a lot of the consumer goods as their coffers ran dry. As goods became scarcer, this increased the rate of inflation, and contributed in large part to the situation we see today. It’s a very unfortunate story, and an instructive one for any developing country that seeks to institute socialism. Socialism is expensive, it requires a large government (and therefore a government that spends a lot of money) in order to institute policies that reduce income inequality and increase the quality of life for its people. That money has to come from somewhere. If a developing country has a good natural resource, like Venezuela, that can be utilized to fund these social programs, but it will be incredibly important to diversify your economy to not rely on that one resource lest you be totally at the mercy of fluctuations of its market price. If you lack a good natural resource like that, then you will have to rely on heavy taxation of whatever sources of GDP you can generate in your country, whether that’s manufacturing or agriculture, and use that to invest in the economy to strengthen it. That likely means that your people will have to suffer for a time until the economy can be sufficiently bolstered to generate the kinds of revenues needed for simultaneous social programs and further economic development.
All that having been said, there were other issues facing Venezuela. A problem that faces any socialist country is that companies are (understandably) often unwilling to invest in a country where their assets could be seized and nationalized by the government, which means you have decreased capital flowing into the country. As the Chavez government gradually revealed itself to be progressively more socialist, it also frightened the very wealthy and the businesses currently in the country, and many took their riches with them and left. That wealth flowing out of Venezuela is what’s known as capital flight, and is obviously damaging to the economy. In an attempt to decrease the capital flight affecting the country, the government set limits on the conversion of currency from bolivars to dollars. In addition to this, to combat inflation, the government set price limits on how much stores could charge (which to some extent exacerbated capital flight), and set an unrealistic exchange rate on bolivars to dollars (where about 6 bolivars equals a dollar). There was also an existence of a black market trade of bolivars to dollars (where about 190 bolivars equals a dollar). So people with special permissions (like some importers) can exchange bolivars for dollars from the state, and then take those dollars and exchange them for many more bolivars on the black market, perpetuating inflation. Additionally, because cost of living is based on this black market rate, those individuals who get paid in dollars are becoming wealthier, whereas those who get paid in bolivars are becoming poorer.
So it’s easy to say now that having a fixed exchange rate for the bolivar was a mistake and has fueled inflation, but it was initially put in place to combat the very real problem of capital flight, and it’s unclear what state the economy would have been in without those exchange controls. The fact that inflation was fueled by importation difficulties (in part because of issues with fixed exchange rates, as companies getting paid in bolivars instead of dollars to import food are losing profit) makes it incredibly difficult to combat, and setting price controls to prevent price-gouging by business owners is not unreasonable, even if it didn’t work.
The fact that Venezuela’s economy was plagued with capital flight, along with the fact that its response to capital flight caused importation difficulties, along with the fact that the country had not yet had time to diversify its economy before oil sales plummeted, all meant that the economic situation there was likely inevitable, and despite some mismanagement by the government, it’s likely that the same situation would have occurred regardless.
The key problems that I see with this is the fact that better solutions were required for capital flight, as the fixed exchange rate led to many difficulties down the road, including problems with importation (largely responsible for inflation) and the appearance of a bolivar/dollar black market. I currently do not know what would have worked better. Perhaps a much more coordinated and sudden seizure of properties and assets of the wealthy, as well as imprisoning the wealthy until all of their assets can be accounted for so that they can’t leave the country with them. How realistic that is will depend on a case-by-case basis. The other problem was that Venezuela, despite its substantial oil wealth, was unable to diversify its economy in large part because it needed to maintain social programs to keep the people happy because the government is at risk of being voted out. Obviously, having social programs to improve the life of the population is a huge facet of socialism, but the security of the revolution must always be established first, and it would have been much better to diversify the economy so that they would not have been so vulnerable to a collapse in oil prices the way they were. Once the security of the economy is established, then those revenues could be diverted to making the populace happy, and down the line this is much better for the country and its people as well.