This is the first in a series of 4 posts taking a closer look at Venezuela’s past and present social, political, and economic circumstances, the role socialist policies played, and how this relates to conversations within our own government. Understanding the history of such an evolution is an important way to keep similar tendencies from reaching other shores, including our own.
Venezuela was once one of Latin America’s most economically prosperous countries. Its economy was fueled by strong agriculture and oil industries, and its GDP was close to that of the United States. Today, Venezuela is poorer than it was prior to its economic boom in the 1920s, its infrastructure is deteriorating, and its economy has been shrinking since the turn of the century (Luis Ball). The toll on human life has been devastating: Since 2014, over 3 million Venezuelans have fled the country’s inhospitable conditions. Of those who remain, 90 percent live in poverty. Hyperinflation (out of control price increases) has left the currency worthless and made it almost impossible for Venezuelans to afford basic necessities such as food, toiletries, and medicine (BBC).
How did the nation that is home to the world’s largest oil reserves find itself in its current situation, so different from that of Saudi Arabia with the second largest oil reserves? According to political scientist Michael Ross, part of Venezuela’s crisis stems from its most abundant resource: oil. Compared to non-oil states, oil states are more likely to be authoritarian, less likely to transition from autocracy to democracy, and “are today no richer, no freer, and no more peaceful than they were in 1980.” Like many other oil states including Iraq, Libya, and Sudan, Venezuela’s reliance on and regulation of oil has let it fall prey to what Ross refers to as “the oil curse.”
Before the country found oil in the early 1920, Venezuela’s economy was dominated by agriculture and livestock; coffee beans were the top exports. In 1922, geologists from the company Royal Dutch Shell struck oil in the northeast region of Venezuela, rocketing the country to the top of the oil industry. Annual production during the 1920s increased from over 1 million barrels to 137 million, putting Venezuela second only to the United States in total oil output. By the mid-1930s, oil totaled 90 percent of exports and was pushing out other economic sectors, including agriculture. However, foreign companies, including Royal Dutch Shell and Gulf, controlled 98 percent of Venezuelan oil. In response to this foreign monopoly in the industry, the Venezuelan government enacted the Hydrocarbons Law in 1943, which required “foreign companies to give half of their oil profits to the state. Within five years, the government’s income had increased sixfold” (Council on Foreign Relations).
Venezuela’s prominence in the oil market continued through its long succession of military coups and dictatorships during the 1940s and 1950s, and the country elected its first stable democratic government in 1958 (BBC). The three major political parties then signed the Punto Fijo pact, “which guaranteed that state jobs and, notably, oil rents would be parceled out to the three parties in proportion to voting results.” This ensured that profits from oil companies would be concentrated in the government and also served as a guard against future dictatorships.
Government oversight of the oil industry continued in 1960, when Venezuela increased the income tax on private oil companies to 65 percent of profits (Council on Foreign Relations). That same year, Venezuela became a founding member of the Organization of the Petroleum Exporting Countries (OPEC), through which the world’s largest oil producers coordinate prices to give states more control over national industries. Joining OPEC substantially benefited Venezuela during the 1970s, when an OPEC embargo during the Yom Kippur War caused oil prices to soar. Venezuela’s per capita income quickly rose to become the highest of any country in Latin America (Council on Foreign Relations).
As oil revenues quadrupled, Venezuela began to turn even more towards nationalization and government ownership, and away from free enterprise and the private sector. In 1976, President Perez created the state-run oil company Petroleos de Venezuela, S.A (PDVSA) to coordinate and supervise the oil industry (Council on Foreign Relations). The steel, mining, aluminum, coffee, and cocoa industries were all nationalized (brought from private to state ownership), as was the country’s central bank. Foreign investment was also prohibited in a number of industries and price controls were set for all goods (Luis Ball).
The boom lasted until the 1980s, when global oil prices plummeted. Because Venezuela was almost entirely reliant on oil, this crash brought Venezuela’s economy down with it. Inflation skyrocketed, and the Venezuelan government took on massive debt by purchasing foreign oil refineries, such as Citgo in the United States. Refineries became subsidiaries of PDVSA, under state control. Additionally, the billions of dollars added to the government’s coffers during the economic boom had been mismanaged and embezzled during the 1970s (Council on Foreign Relations). In 1989, President Perez implemented an austerity package as part of an International Monetary Fund bailout. Riots and strikes ensued, followed by an attempted coup by Hugo Chavez in the early 1990s. Although unsuccessful in his initial overthrow attempt, Chavez rose to fame and was eventually elected president in 1998 (BBC).
Chavez’s socialist platform was extremely appealing for the majority of the Venezuelan population that suffered from the austerity measures. Chavez drastically raised oil income taxes on foreign companies in Venezuela, and he promised to use the oil revenues to expand government-run social service programs and hire more government workers, raise the minimum wage to lift Venezuelans out of poverty, and redistribute land. This “Bolivarian Revolution” initially succeeded in improving a number of social indicators such as literacy, income per capita, unemployment rates, and infant mortality (BBC, Vox).
Chavez took measures to expand the powers of the presidency: He ended term limits, increased government oversight and regulations of private businesses such as energy, telecommunications companies, and the media, and expanded control over the Supreme Court.
Meanwhile, the state-run oil industry suffered. After a strike in 2002-2003, Chavez fired thousands of PDVSA workers and replaced them with loyal supporters, leaving the company to be run by government employees with no oversights or cost controls, and little technical or managerial expertise. Foreign investors and foreign oil firms in Venezuela disliked the government interference and lost faith in PDVSA, and many stopped their operations (Council on Foreign Relations). Since oil revenue was being used for the government’s programs, no revenue was available to reinvest in the oil industry and pay service companies; oil reserves dwindled and government debt doubled (Foreign Policy).
Exchange rate controls and price controls on more goods did little to offset inflation; instead, they “broke the basic link between supply and demand, creating surreal economic distortions” (WSJ). This suffocated private enterprise; businesses were unable to control prices, concerned by constant hiring and firing, and plagued by the weight of corruption and red tape. Both foreign- and domestically-owned companies stopped investing in Venezuela, and new businesses did not replace them for fear their private property was not secure (Bloomberg). In 2011, Latin America received over $150 billion in foreign investment; Venezuela only accounted for $5 billion of this amount, while neighboring Brazil received $67 billion. The number of private industry companies in Venezuela, already at a low of 14,000 in 1998, dropped even lower to 9,000 in 2011 (ABC).
Instead, government agencies, cooperatives, and state industries made up the bulk of the economy, including the mining, transportation, telecommunications, electricity, and agricultural industries. None of which produce much return, and co-ops in particular often “wound up in the hands of incompetent and corrupt political cronies” (NY Times). For example, nationalizing Venezuela’s once prosperous agricultural sector made it dependent on the government for seeds, fertiliser, and pesticides. The government has frequently not delivered these necessary supplies, making it impossible for farmers to successfully grow their crops. What they do produce is regulated by price controls, meaning crops are sold for much less than what it costs to produce them (BBC). For more on supply and demand, markets, and price controls, watch It’s a Wonderful Loaf from Russ Roberts at Stanford University’s Hoover Institution.
What did this mean for day-to-day living? Agricultural production has plummeted. According to the director of Venezuela’s Confederation of Associations of Agricultural Producers, “Venezuela used to produce 70% of its food – now we import 70% of the food. Restaurants frequently do not have many of the items on the menu. People standing in long lines to get into grocery stores found a severely limited selection on the shelves once inside.
One Russian journalist in Venezuela noted, “like Russia in the 1980s, people dealt with shortages by resorting to the black market.” Other areas of society suffered as well: “The so-called Socialist government made no attempt to shield health care and education, the two supposed pillars of its program.” Teachers left schools to work other jobs, and exchange rate controls led to a shortage of imported medical equipment and medicines (WSJ).
Chavez was able to foresee many of the impending disasters coming from his policies, and he garnered strong relationships with countries such as China, Russia, and Cuba to endure them. In one agreement, Cuba promised to provide doctors, supplies, and medical training in exchange for low-cost oil (The Lancet). Chavez would frequently announce new government programs to deliver free or heavily discounted goods that resulted from these relationships, such as refrigerators and cars, to the poorest in the nation (Bloomberg). These efforts kept the worst case scenario of Venezuela’s impending crisis at bay, and also continuously won Chavez popular sentiment around election times. That savvy threading of the needle stopped when Chavez died, reportedly of cancer, in 2013.
Chavez’s death and the assumption of power by his Vice President in 2014 did not change the economy’s trajectory. Oil prices tumbled, inflation reached over 50 percent, and the government of new president Nicolás Maduro responded with cuts in public spending. By mid-2016, hundreds of thousands of Venezuelans were protesting and Maduro’s response was to crack down on dissent and to replace the opposition-led National Assembly with the new Constituent Assembly, packed with Maduro’s supporters (NY Times).
In May of 2018, Maduro “secured re-election” in a race that a number of international powers have deemed undemocratic. Protests, political upheaval, disputed leadership, and economic turmoil have continued (Council on Foreign Relations).
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