How Socialism destroyed Venezuela.
The Venezuelan disaster is homemade and the result of socialist policies including expropriation, nationalisation, price controls, extensive regulations and incompetent use of the national oil company PDVSA for political purposes.
According to people claiming to show solidarity with Venezuela, the economic disaster that has plagued the country is the result of falling oil prices and US sanctions. But no, it is homemade and the result of socialist policies.
The economy of Venezuela, which used to be one of Latin America’s richest countries has been in free fall since Chavez but more severely so during Maduro’s incompetent reign. Growth began to slow down before the oil prices plunged. Since 2014, the situation has become so bad that the government, which previously delayed and manipulated statistics, has stopped publishing data all together. (My anti-virus programme even prevented me from trying to access the web site of Venezuela’s statistical office.)
IMF does however publish data for 2015 and 2016. The oil price and percentage change of real GDP for Venezuela 1999-2016 are presented below, cf. Figure 1.
Figure 1. Oil price (left axis) and annual percentage change of real GDP (right axis) for Venezuela
As you can see the last plunge started one year before oil prices began to fall. And in case you still doubt you may ask yourself why other oil-dependent countries did not experience the same thing as Venezuela, cf. Figure 2.
Figure 2. Annual percentage change in real GDP in oil-dependent countries.
Source: International Monetary Fund (IMF) https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/RUS/NGA/AGO/SAU/KWT/VEN
So, when some people, usually on the Far Left, realise that oil prices cannot be blamed, then it must be “the imperialist state” i.e. USA whose presidents have been imposing sanctions targeting the Venezuelan economy. However, the recession started in 2012 and US did not impose any economic sanctions until 2017.
Alas for the “anti-imperialists” and Kremlin apologists shouting, “coup d’état”, neither oil prices nor US sanctions can be blamed. It is the disastrous socialist economic policy that has caused the disaster. Some prominent economists at Harvard University, among them Ricardo Hausmann have analysed the development in the country which you can read more about here:[1] A detailed analysis of the effects of different policies is found here. Spoiler alert: the main conclusion is:
“The dreadful economic performance of the country is the consequence of an economic model based on all-mighty State, which gradually took over different areas of the economy, eliminating incentives to private initiative, efficiency, productivity and investment.”
Chavez launched a “new economic model” already in 1999. Private ownership did not get a favourable treatment in the development plan 2001-2007. The next plan “First Socialist Plan for the Nation” was bolder as the intention was to build a socialist society,” The Twenty-first Century Socialism”, according to which state ownership and a” social economy” would dominate the economy where private enterprises were regarded as less relevant. Therefore, property rights were severely hollowed out.[2] The expropriations began already in 2001 with the approval of a “land law”. Since then almost 4 million hectares of land has been expropriated and assets in food manufacturing, agrochemicals, construction inputs and more.
The policies have led to a decrease of the number of firms and therefore production. Price controls were introduced in 2003 and has been extended ever since covering more and more of the products. Price and foreign currency controls together with extensive regulations have made matters worse and the people of Venezuela have witnessed hyperinflation and scarcities of goods, c.f. Figures 3 and 4.
Figure 3. Annual rate of inflation in Venezuela (%).
The authorities have, for obvious reasons, ceased to publish statistics on scarcity of goods. But it is safe to assume that the situation has not improved. According to surveys, people spent on average 35 hours per week in 2016 to buy groceries.[3]
Figure 4. Scarcity of goods in Venezuela until January 2014.
Source: https://growthlab.cid.harvard.edu/publications/binding-constraints-venezuela
Many intermediate goods are imported which requires foreign currency. Access to foreign currency is controlled and it is often necessary to pay bribes to get a permission to buy foreign currency. This has led to black markets for foreign currency as well as the final goods that the imported intermediates would have been used to produce. A sad example of this is medicines.
The policies of expropriations and nationalisations have not helped as foreign firms have left the country and the net inflow of foreign investments is practically zero. The net inflow of foreign direct investments to Venezuela was comparable to Chile’s and twice as large as Colombia’s in the beginning of the millennium. In 2014 did Venezuela’s net inflow of FDI amount to just above 0.2 percent of GDP, cf. Figure 5.
Figure 5. Net inflows of FDI in percent of GDP 1998–2014 for Chile, Colombia and Venezuela.[4]
Source: https://databank.worldbank.org/
And lower investments lead to lower or stagnant production, c.f. Figure 6.
Figur 6. Manufacturing industries’ production in Chile, Colombia and Venezuela 1998–2014.
Source: Source: https://databank.worldbank.org/
And considering how much worse the situation has become since 2014, when the government stopped publishing statistics, the production is no doubt much lower now.
Venezuela’s lower production of oil is a consequence of Chavez’ and Maduro’s meddling with national oil company PDVSA. Chavez started to replace its management in the beginning of the millennium because he was not at ease with its independence. The management did not think that the company’s affairs should be justified by political ends such as selling to Cuba far below the market price and offering countries in the region oil at favourable prices in return for political influence and favours. The employed who went on strike to protest against Chavez’ disposal of meritocracy and the company’s independence were fired and blacklisted so they could not again be employed by the government.[5]
That example shows how Chavez regarded people with different opinions. And it soon became worse. In May 2007 was the TV-station” Radio Caracas Television” closed since it aired critical reportage about Chavez. The shut-down marked the beginning of several measures where independent media either were taken over or forced to close their activities. Chavez’ negative attitude towards human rights attracted attention also from abroad. Since Chavez did not appreciate this attention, researchers from Human Rights Watch were thrown out of Venezuela in 2008.[6] Following Chavez’ bad example, Maduro has continued to oppress the opposition and strike hard against demonstrations and protests. In 2014 where demonstrators killed by his security forces and a leading politician of the opposition was imprisoned.[7]
The opposition won the elections to the National Assembly in 2015 but Maduro soon adapted to the new situation. But by violating the Constitution, including the establishment of a non-constitutional electoral commission, imprisonment of politicians belonging to the opposition and manipulation of the election in 2018, Maduro remans in power. The elections in 2018 was of course recognised by pariah states as Russia, Iran and North-Korea.
The tearing down of free and independent institutions and violations of human rights is impressive also in an international comparison. Venezuela is now regarded as one of the 30 least free countries in the world, c.f. Figure 7.
Figure 7. The least free countries in the world 2003 and 2017.
And the effects of the socialist experiment on Rule of Law and Corruption is shown in Figure 8 below.
Figure 8. Venezuela ranks for Rule of Law and Controll of Corruption 1998-2017.
Source: http://info.worldbank.org/governance/wgi/#home Note: Rank: Percentile rank among all countries (ranges from 0 (lowest) to 100 (highest) rank)
So the people, predominantly on the Far Left, claiming to show solidarity in reality show solidarity with a brutal and corrupt regime, not the people of Venezuela who suffer the consequences of the regime's incompetent policies.
This post only contains a brief account of the consequences of Chavez’ and Maduro’s incompetence’s. I have barely touched upon the humanitarian catastrophe that are the consequences of this socialist experiment. Starvation, lack of medicines and proper health care, increased violence, persecution of people protesting against the president. I have listed a few sources of information below.
Read more:
A twitter account with loads of information about the humanitarian crisis in Venezuela: https://twitter.com/paulocanning
An overview of developments until 2015 https://www.pri.org/stories/2015-03-02/timeline-venezuelas-slide-toward-disaster.
An overview that is more current. https://www.bloomberg.com/graphics/2019-venezuela-key-events/?utm_medium=social&cmpid%3D=socialflow-twitter-graphics&utm_campaign=socialflow-organic&utm_content=graphics&utm_source=twitter
Economic analyses of developments in Venezuela: https://growthlab.cid.harvard.edu/venezuela.
A wealth of information here: https://www.caracaschronicles.com/
And here: https://caracaschronicles.wordpress.com/beginners-guide-to-the-chavez-era/
[1] When Hausmann critizised Maduro’s decision to not default on Wall Street but on Venezuela’s people who needed food, he was branded by Maduro as a traitor and threatened. https://www.project-syndicate.org/commentary/ricardo-hausmann-and-miguel-angel-santos-pillory-the-maduro-government-for-defaulting-on-30-million-citizens--but-not-on-wall-street?barrier=accesspaylog.
[2] https://growthlab.cid.harvard.edu/publications/binding-constraints-venezuela
[3] https://growthlab.cid.harvard.edu/publications/binding-constraints-venezuela
[4] Feel free to compare Venezuela with other countries.
[5] https://www.bloomberg.com/graphics/2019-venezuela-key-events/?utm_medium=social&cmpid%3D=socialflow-twitter-graphics&utm_campaign=socialflow-organic&utm_content=graphics&utm_source=twitter
[6] Ibid.
[7] https://www.pri.org/stories/2015-03-02/timeline-venezuelas-slide-toward-disaster