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The reasons for Venezuela's Failure

Updated: Oct 10, 2019

Venezuela's economic and social disaster is far from being a surprise. Years of economic mismanagement coupled with utopian social promises created a deadly cocktail for what once was the most prosperous country in South America.


Venezuela has a history of utopian, yet unrealistic socialist governance. It all started with Hugo Chavez, who launched his “Revolucion Bolivarana” when he assumed the Presidency in 1998, which was aimed at helping Venezuela’s lower classes rise out of poverty. These social policies did indeed have a positive effect, as they led to “a drop in the poverty rate from 48.6 percent in 2002 to 29.5 percent in 2011”. According to Index Mundi, child mortality decreased, and literacy and access to public education increased throughout the country. However, the way Chavez funded these programs proved to be not only Venezuela’s rise to prosperity, but also its downfall: oil.

Venezuela is the country that holds the largest amount of oil reserves (over 300 million barrels), surpassing Saudi Arabia by almost 40 million barrels. The way those resources have been managed are disastrous. When Chavez assumed his presidency in 1998, one of his main goals was to take control of the state-run oil company, PDVSA (Petróleos de Venezuela), in order to gain funding for his expensive social programs, called “misiones”. In 2004-2005, when the price of oil was at around $100 a barrel, Chavez could allow his country to heavily spend on his revolutionary social programs. He started borrowing heavily from foreign capital markets, eventually septupling the national debt between 2004-2014. Chavez not only dangerously relied on oil, but he also grossly mismanaged Venezuela’s oil industry. Indeed, in 2006 and 2007, Chavez led to the nationalization and seizure of assets of international oil producers such as Exxon Mobil (USA),Total (France) and Eni (Italy). Venezuela was left deprived of technological advances in oil mining adopted by foreign companies, thus not achieving the full potential of the country’s still rich oil fields. This heavy reliance on oil led to a non-diversification of the Venezuelan economy, which is demonstrated in the fact that 90% of Venezuelan exports are from oil.

The main reason the present crisis in Venezuela is catastrophic could be the following: during the Chavez years, the government used oil revenues to import basic goods such as food and medicine, in order to sell them at a cheaper, subsidized price to Venezuelans. When oil prices dropped, Chavez’s successor, Nicolas Maduro, found himself in a position where the country could not longer pay for imports, and had to use the little money it had left in order to pay for the massive foreing debt they had accumulated. This led to a scarcity in food and medicine, which made the Venezuelan not only economically worrisome, but also caused a large scale humanitarian crisis. As Carlos Machado, an expert on Venezuelan agriculture states: “The government has made the decision to be the producer, processor and distributor, so the entire chain of food production suffers from an inefficient agricultural bureaucracy.

Nicolas Maduro’s time as President has been chaotic, and although he inherited a mess, he did not do much to change it. The country’s decreased oil revenues, combined with its astronomical debt- According to Reuters, mismanagement of Venezuelan oil supplies has led to the country’s extreme undebtement. Indeed, “Venezuela and PDVSA are estimated to owe more than $100 billion to bondholders, suppliers, allied governments, lenders and creditors holding judgment”. This situation has led to the largest economic recession in the Western Hemisphere, twice as big as the 1930’s US Great Depression. This terrible economic crisis implies multiple things. First, a failing currency, the Bolivar, who’s rate of inflation is higher than any other currency in the world. At the end of 2018, the Venezuelan Bolivar’s annual inflation rate was 80,000%. One of the solutions to reboosting the Venezuelan economy would be so-called “dollarization” or the switch of the country’s national currency from Bolivars to Dollars. In March 2017, a survey by Datincorp in Caracas found that 62% of the public favorized dollarization. As Steve Hank -professor of applied economics at John Hopkins University- explains: “Since things have considerably deteriorated since that survey, my conjecture is that the proportion of Venezuelans favoring dollarization has substantially increased. “. Second, the lack of money, combined with the reliance on imports for basic necessities such as food, medical equipment and vaccines, has led to an urgent and catastrophic humanitarian crisis. The situation is so deficient that for the first time in its history, Venezuela is importing diluents, needed to make the country’s heavy crude oil commercially viable. According to Francisco Monaldi, fellow in Latin American energy policy at Rice University in Texas, Venezuela is doing so as they need the exports to repay their debts with China and Russia. He also states that “one of the craziest things is that a part of Venezuela’s imports is for the domestic market, but given its price, they practically give gasoline away for free. They are importing barrels that cost $80 to $90 and selling them at $0.”. The new US sanction that prohibits US firms to export those same diluents to Venezuela will considerably weaken the Maduro’s regime main source of income.

Needless to say that the country is in a terrible state. The failing economy and the lack of basic necessities has lead to the mass exodus of over 3 million Venezuelans, according to the United Nations,and most of them to neighbouring Colombia. This also poses a problem for Colombia as “traditional” anti-immigrant sentiments have started to arise within the Colombian population, where refugee camps based on French camps hosting Syrian refugees have been established. The economic strain this refugee crisis will cause on Venezuela could amount to between 0.23% and 0.41% of Colombia’s GDP, according to the World Bank, causing instability in a country already riddled with issues related to guerillas such as the ELN (National Liberation Army), accused of “serious abuses against civilians, including, for example, killings, forced displacement, and child recruitment in the province of Chocó.

As a conclusion, the terrible mess Venezuela is currently engulfed in is a result of utopian communist policies, topped by gross mismanagement of what could've made the country the most prosperous in South America: oil. Venezuela is not doomed however. In my article "Making the most out of the Venezuelan Crisis", I highlight how the Venezuelan crisis might be the electroshock the country needed to finally take advantage of their incredible potential.


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By Timothy Motte

French student studying international relations at the University of California, Santa Barbara. I was born in London, raised in Paris, and moved to the US my freshman year of high school. Along with my involvement with the AfterThought Institute, I am actively pursuing Mandarin and Spanish. Very internationally oriented, my goal is to work for any multilateral international organization, geopolitical consultancy, or foreign policy think tank. I am planning on studying at SciencePo Paris, as well as Shanghai Fudan University my junior year. Open minded and hardworking, I always strive to understand each side’s point of view before giving my opinion on it.

Contact:

mottetimothy@gmail.com

https://www.linkedin.com/in/timothy-motte-27470a169/