Venezuela's Inevitable Demise

As the clocks turned forward in the late 1800’s, dawning the beginning of the 20th century, the world was met with many startling and new events. We saw the horrors of zealous nationalism inflamed in Germany twice, the massive failures of communism in the Soviet Union, the failure of the Smoot-Hawley Tariff Act, among many failed regulations during the collapse of the US economy in 1930, and the devastation of the nuclear missiles launched at Japan at the end of World War 2. We saw these events unfold in modern history, and we were able to determine from them certain policies and actions that do not work, but Venezuela is an exception to this course of revision. What Venezuela has done is taken policies, even ones directly from its own history that have failed repeatedly, and said “Maybe they will work now” and, to the surprise of no one, they inevitably did not work.

To unveil the roots of Venezuela’s problems, we will need to examine multiple areas of their society, including their economy, political structure, culture, and history.

Discovery of Oil

Oil has been by far been the biggest problem for Venezuela throughout its history. Currently, Venezuela contains roughly 300 billion barrels of the world's proven oil reserves [1], and is ranked 9th in oil exports [2]. What this has resulted in is Venezuela essentially being a single product economy. Unlike places like the US, where we export and import a vast variety of products and services, 95% of Venezuela’s exports are oil exports [3], half of state revenues come from oil revenue [20], and 25% of their total GDP is the country’s oil and gas sectors [3]. This means that if oil prices drop significantly, a quarter of their economy could be in danger, causing a chain reaction of failure throughout the rest of their industries. This inevitably is happening in Venezuela. Oil prices in the last 6 years have been continuously falling, reaching $40 per barrel currently [4], and as a result, Venezuela’s economy has severely dragged. This has been largely due to the fact that the central authority cannot adjust to price changes and cannot see the obvious major risk factors in centering their economy around one commodity.

Venezuela initially had success with their strategy of relying on oil exports since their discovery of their oil all the way back after World War 1. Every time the world was at war or in a time of crisis, Venezuela prospered handsomely. The world is always in need of oil and fuel, especially to power their tanks in a war, and this need has been exploited heavily by the Venezuelan government. The country was relatively economically free pre-1946. It had low taxes, a stable monetary policy, and no extreme regulations until 1943 when Venezuela’s oil demand was rising rapidly due to World War 2. Then president Isaías Medina Angarita responded to this new demand by signing the Hydrocarbons Law of 1943, which seized 50% of all oil profits made. Due to oil demand rapidly increasing, the negative effects on the private market from the shock of the tax increase were counterbalanced, and the oil market was still mostly private until 1976, when the entire oil market was nationalized. The market for oil was looking good for Venezuela with oil costs rising, but then oil minister of Venezuela Juan Pablo Pérez Alfonzo warned in 1976 that: : “Ten years from now, twenty years from now, you will see, oil will bring us ruin... It is the devil's excrement.” Precisely 10 years later in 1986, the world had experienced an “oil gut”, where oil prices dropped from $102 to $59 [5]. This resulted in a decline in real GDP per capita (falling in correlation with oil production) for Venezuelans that would not end until 2003.

It is clear that the success of Venezuela's economy is directly tied to how much oil they can produce and sell. Almost any economic success in Venezuela can be tied to oil prices and production, which is a key point when criticizing Hugo Chavez’s so called “great” socialist rule. Author and journalist Robert Rapier summed up the scenario nicely in an article he wrote in 2007: “Despite having enormous oil reserves, he [Chavez] and his cronies are running Venezuela’s oil industry right into the ground. His generosity to the poor has only been possible because he had a goose that laid golden eggs because they constantly reinvested money back into the business. Once he kills the goose, where is he going to get the money to continue his programs?”

Before Venezuela was a lead producer in oil, they were heavily dependent on agricultural exports because of their vast natural resources found within the country. This was faded away when the government realized how profitable oil was for their country, and especially themselves. The only way in which Venezuela can truly prosper economically is if they are willing to start focusing on the production of other exports to diversify their economy to spread out economic risk, and return the oil industry back to the market, so it can respond to oil price drops appropriately. Venezuela has continually failed at keeping its proven oil reserve statistics at reasonable numbers, and it is not the most keen country towards private business.

Venezuelan Government

“So it comes as no surprise that Venezuela [...] suffers from grave human rights abuses” [17]. Venezuela's government has been the most consistent and arguably its largest issue ever. The massive amounts of corruption, greed, and ignorance that run rampant throughout the country have been a problem in Venezuela since its creation, so we must review the country's timeline to get a clear understanding of just how bad their government it, and how it came to be this way.

The political history of Venezuela is a dictatorial nightmare, and this nightmare truly began in 1830, when José Antonio Páez led a rebellion against the Gran Colombia, a collection of South American countries from 1819-1831, consisting of present-day Colombia, Venezuela, Ecuador, Panamá, northern Peru, western Guyana and northwest Brazil. After Venezuela had broken away from Gran Colombia, and had finally made itself a sovereign and independent state. The 2 parties at the time of Venezuela’s independence were the Conservative Party (CP) and the Liberal Party (LP). The CP held a monopoly on Venezuelan politics until 1851, when the LP started successfully nabbing elections. This, along with the LP taking power and altering previous CP laws led to the Federal War, resulting in thousands of people being killed in the fight. Domestic conflicts like this are not uncommon in Venezuela, they are in fact quite common. From 1863 - 2017, there have been 6 notable, successful domestic revolutions/coups, and 9 significant attempts, including the most recent fighting, lasting from 2014 to our present day, against current President Nicolas Maduro.

The Venezuelan people are hardly ever satisfied with their government, due to its continuous oppressive, and authoritarian nature. Ever since 1830, the elections in Venezuela have hardly ever been fair and democratic, and most presidents were past military members. It is known by most that Venezuela’s first true and fair democratic election occurred in 1947 (117 years after their independence!), after a successful civilian coup against then president Medina Angarita. Even today, President Nicholas Maduro is highly unpopular with his own people. "Maduro’s approval rating according to Datanalisis is 20.8% and is concentrated among the poorest Venezuelans where chavismo has always had its most solid support." Something worth noting is that a good amount of Venezuela’s presidential history consists of either the president being overthrown/removed, or the person was an acting president due to said coups (such as Pedro Escandon, who was President for only 3 days at one time). Mix that with Venezuela’s move towards nationalizing key sectors of its economy as early as 1971, with the nationalization of the natural gas industry [6], and you get an unhappy populace.

Notable examples of the Venezuelan government oppressing its people, and corrupting the political system include:

• Jose Paez making himself dictator from 1861-1863 [7].

• From The History of Venezuela (Micheal, Denova, and Fredrick, pg. 65): "Jose Tadeo Monagas used the political parties in order to govern as a dictator. He appointed inept bureaucrats [...] to high-ranking government posts, primarily because of their blind obedience to him. Opposition newspapers were closed down, and the Congress showed signs of submitting to Monagas's executive power. [...] the governments of Jose Tadeo and Jose Gregorio Monagas were the most defined examples of political personalism yet."

• Antonio Guzman becoming a provisional president, then making himself a dictator for 7 years [8].

• Cipriano Castro seizing power via military power, declaring himself as supreme military commander. He killed his opponents, worked poorly with other nations, embezzled funds, and had multiple groups attempt to overthrow him [9].

• Carlos Chalbaud established a military junta with himself as the president of it in 1948, after removing former president Angarita.

• German Flamerich resumed the rule of Chalbaud’s military junta.

• Marcos Jimenez was the last ruler of the military junta. Marcos was known for “Censorship, political persecution, torture and assassination...” and “...the secret police [that] were hunting down all those considered a threat to ‘national security’" [10] He was later ousted in a coup in January of 1958.

• Rafael Caldera rejected the Betancourt Doctrine, recognized geographically close military juntas, closed the Industrial Technical School permanently due to student protests, and for 2 years closed the Central University of Venezuela for the same reason.

• Carlos Andres Perez- “He [Perez] obtained special powers from Congress that enabled him to bypass both Congress and his own party. [...] he promoted a set of entrepreneurs who had backed his candidacy, the men called the Twelve Apostles, because they had a close relationship with the President.” [12] "He raised interest rates, [...] and liberated petrol prices, which promptly doubled. The result was rioting in and around Caracas in which some 400 people died, mostly shot by the national guard. [...] In 1993 Congress impeached him for diverting $17m of public money to a secret fund; he said it had gone to help Violeta Chamorro win the presidency of Nicaragua, but the Supreme Court nonetheless removed him from office and put him under house arrest."

• Jaime Lusinchi was responsible for the Yumare Massacre, the El Amparo Massacre, and for 36 billion dollars in funds being illegally pilfered and stolen from 1984-1994 [27]. "His reputation was tarnished after he left office by allegations of corruption, and in 1991 Venezuela’s Congress voted to condemn him for using his position to hand out money to associates and for stealing state funds to promote his party’s charismatic leader, Carlos Andres Perez..."

• Hugo Chavez “Hugo Chavez [...] spent most of 1999 dismantling Venezuela's political system of checks and balances [...] Congressional power was gutted, the judiciary was placed under executive branch tutelage, and Chávez’s army colleagues were given a far bigger say in the day-to-day running of the country. A constituent assembly dominated by Chávez followers drafted a new constitution that would make censorship of the press easier, allow a newly strengthened chief executive the right to dissolve congress, and make it possible for Chávez to retain power until 2013. Congress and the Supreme Court were dismissed after Venezuelans approved the new constitution in a national referendum December 15.” [13] He is also accused of stealing 22.5 billion dollars of public funds to buy out political loyalists [27]

• Nicolas Maduro “Yesterday's illegitimate elections confirm that Maduro is a dictator who disregards the will of the Venezuelan people.” [14], “The opposition candidate and at least one member of the electoral council have called for an audit, which ... in our view, seems like an important and prudent step to take.” [15], and “The Venezuelan intelligence service detained five opposition activists in what rights groups call another sign of a government crackdown on opponents trying to stage a referendum to remove embattled President Nicolás Maduro.” [16]

I certainly haven’t outlined everything corrupt and evil that Venezuela has done, and not every leader has been bad, but this list covers enough to clearly show the troubled history Venezuela has had. One thing I couldn’t add on the timeline of Venezuelan presidents is the fact that from 1972-1995, 100 billion dollars in oil revenues had been stolen or wasted in the hands of the government [27]. The citizens have only known a life and history of authoritarianism, limited freedom, corrupted government, and oppression, and their government still hasn’t learned anything in its 187 years of independence. If it hadn’t been for their oil supply, the Venezuelan people probably would have never had any prosperous era's in their history. They are plagued with unsubstantiated promises by seemingly populist leaders, false economic prosperity, and rampant corruption. It is clear by the recent riots and protests that the people of Venezuela have had enough of their government misleading them, and that the problems lie internally. As tensions grow worse due to Maduro’s blatant desire for totalitarian rule, it seems more and more possible every day that the only path towards fair and limited government in Venezuela is a full blown civil war.

Regulation and Inflation

Economically, we have already determined that oil is the sole reason that Venezuela’s economy has ever prospered, and that the only solution to that was by diversifying their economy, but why haven’t their other sectors done well or helped combat losses suffered due to oil prices dropping? Other countries were hit with the same drops in oil prices, but most were fine. Venezuela’s dependence on oil is to be blamed for most of it, but they have 2 other problems that are suffocating the rest of their economy: regulations and inflation.

In 2016, Venezuela was given a 17 on the Corruption Perceptions Index (CPI), ranking 166th out of 176 countries [18]. The scale is based off a 100 being the least corrupt, and 0 being the most corrupt. What is interesting to note about the CPI is its economic implications. A report entitled “Quantitative Relations Between Corruption and Economic Factors” found a positive correlation between a higher CPI and a higher GDP per capita, a higher CPI and a higher GDP per capita (adjusting for purchasing power), and a higher CPI and a higher direct investment per capita [19]. This has less to do with regulation and inflation and more to do with the Venezuelan government, but considering corruption weighs down on economic growth, I felt these findings should be noted here.

Another study I will be using is the Heritage Foundation’s yearly Economic Freedom Index. They examine 180 countries each year to determine each country's level of economic freedom. Unsurprisingly, Venezuela was ranked 179th out of 180, and was given a score of 27 out of 100 [20]. From the most recent report on Venezuela, it states: “Worsening shortages of food, medicines, and other consumer goods, combined with triple-digit inflation that has eroded monetary stability, have drastically undermined Venezuela’s already fragile economy. Years of interventionist and market-distorting policies, including nationalizations and restrictions on imports, have resulted in dire economic conditions. [...] Venezuela’s economy has been stifled by blatant disregard for both the rule of law and the principle of limited government. The private sector has been severely marginalized by institutional impediments related to government encroachment into the marketplace.” [20]

In key areas, the problems have been becoming much worse in more recent times. Under Hugo Chavez, Venezuela’s overall economic freedom score fell from a 57.4 to a 36.1, property rights fell from a 50 to a 5, government integrity fell from a 28 to a 19, business freedom fell from a 70 to a 45.6, trade freedom fell from a 65.4 to a 58.8, investment freedom fell from a 50 to a 5, and financial freedom fell from a 50 to a 20 [20].

Now that we have statistical ratings of freedom out of the way, let's move on to more specific examples. Here I am going to borrow a snippet from a Forbes article written by Panos Mourdoukoutas: “There's the wave of nationalizations back in the late 1970s under President Carlos Andres Perez [...], which placed the oil, iron, steel and construction industries in the hands of government [...]. Then there are the price controls and heavy subsidies under President Caldera [...] which made crude oil cheaper than water [...] Add the currency controls that favored foreign manufacturers over domestic manufacturers” [21].

A few major regulations/prohibitions on goods include: a total ban on the sale and ownership of firearms [22], a prohibition on narcotics, pornography, any palm tree products, heavy restrictions on medicines, live animals [23], an already discussed total nationalization of oil and gas production, a take over over General Motor factories [24], government price controls that have been restricting the supply of basic goods [25], attempts to force labor to increase the national food supply [26], private banks only allowing citizens to withdraw 30k bolivars ($2.88) at an ATM, government banks only allow withdrawals of up to 10k bolivars ($0.96) [28], and “Bureaucratic interference has severely undercut regulatory efficiency and productivity growth. The labor market remains rigidly controlled and severely impedes dynamic employment creation.” [20]

The last area we will be covering is Venezuela’s inflation problem. From 2010-2016, the world experienced an annual inflation rate of ~4.29% [29]. An ideal range of inflation is typically around 2-5%, so the world is within an acceptable amount. Contrast this with Venezuela’s current 741% inflation rate, and you can quite clearly see the issue [30]. Now, this shouldn’t be attributed solely to Nicolas Maduro, as inflation was already in the triple digits when he assumed office, but he has been a very large part in its recent decline. Venezuela’s massive inflation rate causes unstable price changes, devalues the country's currency, and shows the government is irresponsible and ignorant. As economist Steve Hanke puts it: “... stability might not be everything, but everything is nothing without stability.” [31].

The Bolivar (Venezuela’s official currency) has become worthless, losing 60% of its value in one month [33], and the currency cannot recover efficiently. President Maduro has even recently removed Venezuela’s 100-bolivar note (worth 2 US cents) in the midst of economic crisis [32]. It has become so worthless that virtual tokens from the game World of Warcraft has become worth more on Venezuela’s black market [33]. So what is the solution? The best and easiest way would be to ditch the Bolivar and officially dollarize Venezuela. The US dollar is one of the world's safest and most trusted currencies, and 3 Latin American countries close to Venezuela, Panama, Ecuador, and El Salvador, have done the same and benefitted [34]. To add on to the benefits, 62% of Venezuelans support dollarizing their country [35]. If Venezuela does not take some serious monetary action soon, their currency and economy will be devastated for years to come, and it is quite possible that it is already too late.

Conclusion

We covered Venezuela’s long tale of oil dependence, their history of authoritarian governing, corruption, lack of freedom, and some of their major regulatory and monetary issues. From Paez to Maduro, it seems that Venezuela has learned little from its own history. Venezuela has too many issues to cover all in one sitting sadly, and no person could physically cover all of them, but a step towards recovery is examining the largest issues and working from there. Their economic model was doomed to fail ever since they discovered oil, and they don’t seem to want to recognize this, as most of their issues stem from oil in some capacity. Recognition of their actual problems is something they must do eventually, but is something they will never do. As seen by this examination, Venezuela cannot fix itself from within. It has a vast 180 year history full of dozens of attempts to reform their government, and they all have inevitably failed. Foreign persuasion and intervention (primarily from the US and the EU) seem to be the only viable options for liberalization and stability. As the clocks keep ticking and moving time forward, the fate of Venezuela seems to be as clear as the burning sun, and as hazy as a morning fog. We’ll just have to wait and see how long it takes for something to change.

Sources:

[1] http://www.worldatlas.com/articles/the-world-s-largest-oil-reserves-by-country.html

[2] https://www.cia.gov/library/publications/the-world-factbook/rankorder/2242rank.html

[3] http://www.opec.org/opec_web/en/about_us/171.htm

[4] http://time.com/4342329/venezuela-economic-collapse-nicolas-maduro/

[5] http://www.nytimes.com/2008/03/03/business/worldbusiness/03cnd-oil.html?hp

[6] Gustavo Coronel (1983). The Nationalization of the Venezuelan Oil Industry.

[7] http://www.nndb.com/people/517/000096229/

[8] https://www.britannica.com/biography/Antonio-Guzman-Blanco

[9] https://www.britannica.com/biography/Cipriano-Castro

[10] https://www.theguardian.com/news/2001/sep/21/guardianobituaries1

[11] https://www.economics.utoronto.ca/diegor/research/MFHLA_paper.pdf [Figure 7]

[12] The Magical State: Nature, Money, and Modernity in Venezuela [Page 247]

[13] https://freedomhouse.org/report/freedom-world/1999/venezuela

[14] https://www.treasury.gov/press-center/press-releases/Pages/sm0137.aspx

[15] http://www.cnn.com/2013/04/15/world/americas/venezuela-elections/index.html

[16]https://www.wsj.com/articles/venezuela-detains-activists-calling-for-maduro-s-ouster-group-says-1467828376

[17]https://www.transparency.org/news/feature/corruption_and_human_rights_violations_in_venezuela

[18] https://www.transparency.org/news/feature/corruption_perceptions_index_2016

[19] https://arxiv.org/pdf/0705.0161.pdf [Figures 1, 4, and 7]

[20] http://www.heritage.org/index/country/venezuela

[21]https://www.forbes.com/sites/panosmourdoukoutas/2017/03/05/congratulations-bolivarian-socialists-venezuela-caught-up-with-north-korea/#4392fdf02dd5

[22] http://www.bbc.com/news/world-latin-america-18288430

[23] https://venezuela.visahq.com/customs/

[24] http://money.cnn.com/2017/04/20/news/gm-venezuela-plant-seized/index.html

[25]https://www.washingtonpost.com/world/the_americas/venezuelas-paradox-people-are-hungry-but-farmers-cant-feed-them/2017/05/21/ce460726-3987-11e7-a59b-26e0451a96fd_story.html

[26] http://money.cnn.com/2016/07/29/news/economy/venezuela-decree-farm-labor/index.html

[27] https://www.cato.org/publications/commentary/corruption-democracy-venezuela

[28] http://money.cnn.com/2017/07/28/news/economy/venezuela-cash-crisis/index.html

[29] https://www.statista.com/statistics/256598/global-inflation-rate-compared-to-previous-year/

[30] https://tradingeconomics.com/venezuela/inflation-cpi

[31]https://www.forbes.com/sites/stevehanke/2017/04/03/how-to-stop-venezuelas-fatal-inflation/#120f3e335d0d

[32]https://www.theguardian.com/world/2016/dec/12/venezuela-pulls-most-common-banknote-from-circulation-to-beat-mafia

[33] http://fortune.com/2017/08/01/venezuela-bolivar-world-of-warcraft-currency/

[34]https://www.forbes.com/sites/stevehanke/2017/03/30/on-venezuelas-death-spiral/2/#5c17eca210ca

[35] http://sites.krieger.jhu.edu/iae/files/2017/04/On_Venezuelas_Tragic_Meltdown.pdf