Venezuelan Economy: 4 factors that led to a failed state
Venezuela was once the richest country in all of South America. From the 1950s to the early 1980s the Venezuelan economy was flourishing making it the most prosperous country in the region. So how exactly did the richest country in South America become one of the poorest? How did a country that once attracted many immigrants come to find itself in one of the worst refugee crises in modern times?
While some people blame socialism in Venezuela others point to the over-dependency on oil calling it the ‘oil curse’. The truth however as we shall see is that both these factors have a role to play in the crisis of Venezuela. As some have rightly pointed out Venezuela is most certainly one of the worst man-made disasters in recent times.
1. The Venezuelan economy and Oil
Venezuela has the largest proven oil reserves in the world. The 2019 edition of the BP Statistical Review of World Energy estimated that the country had a whopping 303 million barrels of oil. So how did a country rich in oil become so poor? The problem was that the country focused too much on oil production while ignoring all other industries. In economics, this is known as Dutch disease.
The problem with having an oil-dependent economy is that the country does very well when the prices of oil are high but when the price of oil goes down the country begins to suffer. This was the case in the 1980s and this is what has happened since 2014. When oil prices plummeted from $115 a barrel in 2014 to nearly half that, Venezuela’s GDP shrank by 10%. By 2019 that figure was down by 25%.
2. The rise of Hugo Chavez
In the early 1990s, there was growing public discontent against then-President Carlos Andres Perez. Low oil prices, a contraction in the Venezuelan economy, high rates of inflation accompanied by charges of rampant corruption were among the main reasons. During that time Hugo Chavez (an officer in the military) made a coup attempt to overthrow the President. However, the coup was a failure and Chavez was imprisoned.
After his release in 1994, Hugo Chavez traveled extensively not only across the country but also around Latin America. He looked for support to his Bolivarian cause of social revolution or what he called “the Bolivarian Revolution”. The promises he made of widespread social and economic reforms gained him the support of the poor and the middle class. This ultimately led to his win in the 1999 Presidential elections.
While socialism represented by the social-democratic parties was already strong in Venezuela, the form of socialism associated with Hugo Chavez (Chavismo) was more radical in nature and with militaristic leanings.
Chavez launched the “Bolivarian Missions”, a series of social programs aimed at tackling a wide range of issues. There were different missions for food and nutrition, poverty, education, and social justice to name a few. Taxes were reduced and government spending increased. All these social programs were funded by the money earned from the country’s oil trade. These programs benefited lots of poor and middle-class Venezuelans making Chavez an extremely popular leader.
3. Problems of Venezuelan Socialism
As oil exports boomed the value of the Venezuelan Bolivar shot up which in turn made it cheaper for the country to import foreign goods. The rise in foreign products began to affect the domestic market. To add to this the government went on a spree nationalizing the production of various goods and services. This further impacted a lot of businesses forcing them to close down. By 2008 all export industries apart from oil had collapsed. To add to it there was rampant corruption and these government organizations were so poorly run that they never made a profit. In fact, they were going into losses!
There came a time when the government had to borrow money in order to fund its expenditure. The Venezuelan government did not care about the fact that the oil prices would not always be high. By this time it was so deeply in debt that any drop in oil revenues would cause serious financial hardships and bring the Venezuelan economy crashing down.
Hugo Chavez may have aimlessly thrown money at the people but there was also a dark underbelly. Chavez was an autocratic leader. During his tenure, he gradually neutralized all opposition against him and crushed all forms of dissent. This combination of authoritarianism and left-wing populism that kept him in power for more than a decade would soon prove to be the undoing of an entire nation.
In 2010, a global fall in oil prices led Chavez to announce that he was decreasing the value of the Bolivar. Devaluing the currency caused a rise in inflation that plunged the country into a downward spiral from which it has been unable to climb out ever since.
4. Maduro: The final nail in the coffin
In 2013 Chavez died of cancer. Nicolas Maduro was elected as the next President. As the oil prices continued to fall the country faced a shortage of funds. There was no money to import the daily utilities needed or to continue funding the social programs. Maduro then did what a poorly run government would do. He tried to print more money to get out of the trouble. Inflation spiraled out of control reaching a state of hyperinflation. Even the most basic utilities had become so expensive that Venezuelans could not afford them.
As time passed the situation only worsened. Food and water became scarce and expensive, malnutrition, and poverty levels increased, medicines were in short supply. Maduro was unable to stop the slide in the economy and focused rather on clamping down on those protesting against him. Venezuelans struggling to survive began to flee in their thousands to nearby countries some even seeking asylum in the US and Europe.
Venezuela is a sad story given the extent of human misery. Once a rich and prosperous country, it has been destroyed by ignorant and callous dictators whose greed for power has plunged an entire nation to near collapse.