What caused the Venezuela economic crisis?

Things were undeniable bad when bread lines formed in a “nice neighborhood” around the local bakery. People were actually waiting in line to buy whatever bread was available. Reporters noticed and took pictures. Before long, real hunger became an everyday sight. People began digging through the bakery’s black garbage bags in search of sustenance. The situation continued to decline and finally, people no longer lined up for bread, instead, the bakery organized people to lined up to go through the bread store’s garbage, where they were relieved to find muffin crumbs or the remains of emptied juice boxes. How could this happen?

Venezuela has the most proven reserves of oil in the world and relies on it for 95% of its exports. A large percentage of this oil revenue is used to pay off loans from China and Russia as well as import needed food and medicine. Yet, the oil production of Venezuela has been dropping by 10% a quarter since mid-2017, according to Forbes. Oil production this year will likely drop to a third of it 2011 high of 3 million barrels of oil. Even worse, the state oil company, PDVSA, has fallen behind on fulfilling its contracts. People want to buy Venezuela’s oil but the country’s production system is failing. PDVSA is now trying to force its oil buyers to accept more expensive terms for unreliable output in order to patch the massive hole in its oil export-dependent economy. This will likely further reduce Venezuela’s oil sales as well as increasing oil prices around the world. How could this happen?

In the space of a few short years, Venezuela, once the richest country in South America, has become one of the worst of nations in which to live, with an inflation rate of 24,000% in only one year, forcing buyers and sellers to weigh the money rather than count it. Naturally, its once admirable health care system is in a shambles with babies, the old and the weak dying in horrific numbers; and even that dreaded scourge polio has returned. Crime is so rampant, that Venezuela has now surpassed Afghanistan as the least safe place in the world. Protesting these issues or even reporting on them has become incredibly dangerous as government-sponsored paramilitary death squads operate in uniform with impunity. No wonder at least 2 million people have fled the country as economic and political refugees. How could this happen?

The Roots of the Current Crisis

American_fleet_at_La_Guaira_Venezuela-1900-1905

At the time Venezuela began drilling its first oil wells in 1914, it was one of the poorest countries in South America, with its people having an average life expectancy in the 30’s and over 70% of the population was illiterate. Then, the British, Dutch and American oil corporations made deals with the Venezuelan Dictator Juan Vicente Gomez to export Venezuelan oil to the world market. The dictator and his military supporters became rich, but little wealth was spread around the country.

Over time, the major landowners sold off their lands, forcing the poor laborers to move to the cities to look for work. Over time, there became two Venezuelas, those who lived and worked in the oil camps had the fruit of modernity, such as electricity, running water, sewage systems, health care and education, while the rest of the nation suffered in continual poverty and illiteracy.

Gomez died in 1935, but he set the pattern to come of Venezuelan leaders getting rich on oil deals while suppressing dissent. Though infrastructure projects offered hope of improvement to the people, it was largely a false hope as in order for leaders to maintain their power, they had to help their corrupt military cronies to reap the majority of the benefits.

Venezuelan_Family_1961

In the 1950’s, Venezuela democratized and for the next 20 years, there were great growth and hope for the common people as oil money began to finally be spent on their concerns. Yet, the economy was still dominated by state control and oil exportation. The leaders also leveraged their oil in order to borrow money for even more public debt spending.

But in the 80’s the price of oil declined and Venezuela had to make a deal with the IMF to restructure its loans and rapidly shift from a state-owned economy to a market economy and remove price controls. This caused the government to rein in its overspending on social programs leading to great unrest in the country. Of course, the Venezuelan government ordered a crackdown and hundreds of people were killed, leading the nation to believe that the dream of democracy had died.

The Socialist Revolution of Hugo Chavez

After the crackdown, the military began to conspire against the unpopular democratic government of Venezuela, and in 1992 lieutenant colonel Hugo Chavez led 10% of the armed forces in a coup. Success was limited and his forces failed to take the capital, so Chavez surrendered and was imprisoned for two years. Despite losing, Chavez became the face of dissent in Venezuela and the poor considered him their champion. This set the stage for Chavez’s successful election as president of the nation in 1998, the first nonwhite, not-elite leader in its modern history.

Hugo Chavez and Fidel Castro

Chavez was elected based on his promises to end corruption, imperialism, and inequality. His method was socialism. Despite a rocky start that included a coup attempt and an oil company strike, Chavez gained popularity and power through the people. With this power, he was able to rewrite the constitution and nationalize vast sectors of the economy. Soon, he controlled the oil industry, the banking industry the agricultural sector, the transportation industry, the power generation sector, telecommunications and the steel industry. All of this was in accordance with the principles of socialism where the means of production are controlled by the people through the government, which was controlled by Chavez.

Russian stamp honoring socialist hero Hugo Chavez

During the time the price of oil continued to rise as did Venezuela’s borrowing power. Socialist friendly governments in Russia and China loaned Venezuela vast amounts of money, which were to be paid back through future oil revenue. Eventually, the debt rose 600% during Chavez’s reign. With all that money gushing in, Chavez, with guidance from Cuba, began pouring money back into programs for the poor; programs such as health care, citizenship rights identity cards, access to food and job training, scholarships, breakfast clubs, university systems. Regrettably, these basic social systems of the first world were created at the expense of making the nation more dependent on the cyclical price of the commodity of oil.

Unfortunately, the more entrenched Chavez’s power the more he reverted back to the traditional model of corrupt leadership. Every sector of the economy that was controlled by the government became corrupt and inefficient. Many government-appropriated farms were abandoned because they were unprofitable due to price controls. Thus, the nation needed to import more and more of its basic food. This was also true in other sectors as well.

The price of oil.

Foolishly, every petrodollar that came in was spent and the government failed to create a sovereign wealth fund which would smooth things out when the price of oil inevitably declined. Slowly and imperceptibly the nation became hollowed out through lack of productive investment and professional expertise, as Chavez eliminated the industrial and agricultural capacity of the nation. But these harbingers of doom were hidden by the high price of oil, which continued to rise 600% during the oil boom from 2004 to 2014.

The Maduro Diet

Shortly after winning his fourth term in office, Chavez died of cancer on March 2013. Chavez was replaced by his vice president, Nicolas Maduro, who lacked Chavez’s charisma, but at least oil prices were strong. Unluckily, starting in June 2014, oil prices fell by 50%, and other nations stop lending new money to Venezuela. Suddenly, Venezuela could no longer afford both its foreign debt payments and its social programs, or even to import food and medicine.

Protests against the Maduro government arose and state forces clashed with them leaving dozens dead. Maduro was firmly backed by the military, the police, and paramilitary which allowed him to strong arm the supreme court which then rubber-stamped his ability to reverse the democratic process – becoming a de facto dictator as was common in Venezuela’s pre-democratic past. From 2016 to now, the people have risen in monumental protests and the government has responded with monumental repression.

The nation’s economy collapsed in 2014 and worsened in 2015. Then, it reached crises mode from 2016 on – resulting in the greatest depression in the Western hemisphere, approximately double the effects of the American Great Depression in the 1930s. And the economy is still shrinking, leading to unprecedented inflation, crime, hunger, poverty, and political repression. It was estimated that nearly 75% of the people have lost an average of 19 pounds between 2016 and 2017, which the Venezuelan’s themselves call, “The Maduro Diet”. According to a university study, in 2018, 90% of the country lives in poverty, while it has also become one of the most violent countries in the world, even though its citizens are prohibited from owning firearms.

Essentially Maduro is following the Chavez model but without the love of the people and without high oil prices. For example, Chavez imposed price controls which led to shortages, Maduro imposed more price controls and food simply disappeared. Chevez’s policies encouraged a housing shortage leading to squatters and shanty towns, Maduro’s policies made housing completely unaffordable- and those who had houses often lacked utilities and food. To balance his budget, Chavez borrowed without a thought for the future, Madero, unable to borrow, devalued the money through hyperinflation to make his budget work. This pattern is similar in every area of comparison. Except for the great suffering of the people of Venezuela, one is tempted to say, “Poor Madero”.

The Final Word

In hindsight, while Chavez was a political marvel, his socialist economic model was eventually doomed to fail. Confiscation of private property combined with massive corruption was an unsustainable framework. Depending on oil exportation to fund 95% of the national budget was an extreme gamble. Yet, even had oil prices remained high, the internal rot was deadly. Eventually, they ran out of other people’s money. And yet, at the precise time a new direction is called for, the Maduro government has doubled down on the failed policies of Chavez. And that is why the economic crisis of Venezuela continues to grow.

Please add your own thoughts in the comments below.

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10 Responses

  1. Wow! Very informative! A nice piece of information to “enlighten” people about this significant occurrence. ANd not so long that people such as I won’t read it. Thanks for sharing.

    • Peter Barban says:

      Thanks, I have found that most of the news focuses on how terrible Venezuela is now. And it is terrible. But we need to know how this happened so that the rest of the world can avoid these mistakes. And Venezuela itself can’t right its ship unless they understand how they got into this position.

  2. ZEGU says:

    Thank you for this informative post that has given me a clear picture of the economic situation in Venezuela.
    It’s sad to hear the situation has continued to go down.
    This post will enlighten Venezuelans and the world at large on what exactly went wrong.
    I have a feeling if the leadership changes coupled with Venezuela’s rich oil reserves, one day the economy will bounce back and become even better.

    • Peter Barban says:

      Chavez made his changes with the consent of the poor. Now with 90% of the people in poverty, any solution needs the consent of the poor. Unfortunately poor people aren’t encouraged to engage in long term strategic thinking. Like you, I hope Venezuela can climb out of the pit they have fallen into.

  3. Melanie Peacock says:

    Wow – I knew the situation in Venezuela was dire but I had no idea just how bad it really was – or how that came to be. Thank you for sharing!

    • Peter Barban says:

      Yeah, this situation is a real heartbreaker with no easy solution. Maybe a capitalist Chavez is an answer- a youngish charismatic military officer who leads a coup, then reforms military corruption, restores the rule of law and the ownership of private property. Finally, he prepares the nation for a return to democracy. That’s my dream.

  4. MelanieP72 says:

    Hi Peter,
    What a very well researched and well written article! I was captivated the whole way through. Much like reading a good book that I couldn’t put down until the end.
    I love how thorough you were at giving the not so known history of Venezuela and it’s unfortunate residents.
    I have a client who is from there and I know it is hard whenever she want’s to go visit family to try to even get a confirmed flight for her.
    I hope lots of people get to see your post. There is power in knowledge.
    Thanks for sharing!

    • Peter Barban says:

      Thank you very much. In researching and writing this post I went from curious to heart sick. Things will get worse before they get better. The most recent news I saw, said that the army (which is thoroughly corrupt) has taken control of the capital’s water supply and is now making the poor pay even more than usual for water.

  5. Stephen says:

    Wow. Thanks a lot for this informative post, it really engaged me and made me feel quite nostalgic.

    I went to Venezuela in 2015 to do some volunteering and indeed witnessed several of the things you’ve just mentioned. It’s devastating how such an amazing country can become so crippled. It’s hard to see any recovery in the near future. When I was there £1 was 1000 Bolivares. Last I heard £1 is around 500,000 Bolivares. This inflation rate is hard to fathom and makes it nigh on impossible for the locals to flee.

    Thanks again for making it known what’s going on in Venezuela. A part of my heart will always lie in this country and it’s somewhere not many people hear about – mainly because the media’s priorities lie elsewhere.

    • Peter Barban says:

      Thanks for sharing your personal experience with Venezuela. This helps me better understand the human dimension of this tragedy. Oil combined with a culture of corruption have made Venezuela what it is today, and may forever shape its future.

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