Dude, what happened to Venezuela?

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The economic issue with Venezuela comes from a recession gap. If you’re not familiar with the term, it’s caused when there’s a gap between the countries actual, and potential production economically. Every modern economic model being used in the world today is top down, that means GDP is your economic “north star.” The issue with Venezuela specifically is the financial needs of the governmental social programs, surpass the capability of GDP. I think we all know it’s more complicated than just that, though. Let’s take a deep dive, and try to find out what’s really going on with the economy in Venezuela.

The free market economy of Venezuela

From 1920 to 1960, Venezuela had a booming economy and a limited government, as a result, it had the highest growth rates and the lowest levels of inequality in South America. Venezuela was supporting the highest GDP in its history. However, after a rise in oil prices in the 70’s Venezuela experienced a per capita income increase of 40%. By the time the 80’s hit there were other players in the game and Saudi Arabia entered the market and began producing a large amount of oil at low prices, driving the global prices down to compete (this conflict with Saudi Arabia is a recurring OPEC issue.) As a result, the per capita income decreased by 25%, with the market soft and the economy feeling pressure. 

The move to an authoritarian socialist state

Hugo Chavez - Venezuela
Hugo Chavez

Hugo Chavez had his eyes set on ruling Venezuela early on, as in 1992 he staged a coup and failed. This had landed Chavez in jail, after being there for 2 years, he was released under the condition he retire from the military. Fast forward to 5 years after his release, and Chavez is elected into rule. Literally hours after being sworn in, Chavez moves on his intentions on adjusting the constitution, which was met with wide public support.

When Chavez took over in 1999, despite the Saudi competition and its effect on prices the oil industry was still producing at a surplus. Chavez used a large amount of revenue, including this surplus, to fund the many socialist programs he built his empire of support on. As time passed, Chavez accumulated fanatic support among the poor and lower class. He changed the constitution in 2000 and solidified his longevity in the position of ruler giving himself the option of re-election. In 2002, there was another coup – he remained in power and was restored to the presidential palace, but he was desperate to garner more social support. To do this, he doubled down on his social policies, an attempt to drum up support, in the same manner he had previously.

In 2012, Chavez won the election to stay in power, due to the loyalty gained from the collective accumulation of support. Although, crime was a large issue and inflation was beginning to take its toll. The corruption inherent in politics that Chavez has publicly voiced that he’d fight to abolish had grown a new flavor but was still rampant nonetheless. Mismanagement of funds toward state and large private industry were also starting to change the landscape of the Venezuelan economy.

Foreign Policy Issues

Throughout all of this, one thing was for sure. The Chavez regime was fucking terrible with foreign policy. The international policy of Venezuela was two things: Oil and Socialism. The desire to control as much of the oil industry as possible with strategic operations is made clear when you look a bit further.

One-third of the actions that were taken were ones to keep friendly relationships in the oil industry that strategically benefited Venezuela.

One-third was to eliminate what Chavez saw a corrupt political body from the trade conversation (largely most of North America) as a means to ensure strategic benefits in the oil industry. 

The last one-third was social outreach. International campaigns aimed at helping relieve situations for those in surrounding Latin countries who had fallen on hard times. All of this while the programs on Venezuela’s own soil started going sour (2007 marked the beginning of the end) and battling crime became 2nd fiddle to domestic and international social agendas. The further the economy falls, the harder Venezuela’s leadership leans on their talent for drumming up social support by way of social government programs.

These foreign relations, built on the exclusive importance of the mono-commodity focus (oil) of the country, creates a situation for the country much like a drug addiction. By putting on horse blinders and focusing all of your effort on one area it comes at the cost of effort toward other areas. This kind of approach only further solidifies dependency on the commodity and eliminates the viability of other possible opportunities.  This is a dangerous position as; if anything happens that threatens the economy (or the drug, for the sake of the previous metaphor) it can potentially cause a recession (withdrawal.)

The death of Hugo Chavez, and promotion of Nicolas Maduro

Nicolas Maduro - Venezuela
Nicolas Maduro

On March 5th, 2013, Hugo Chavez passed away, and someone was needed to step in and take his place. Who better than the head of foreign policy: Nicolas Maduro. And, wouldn’t you know it, the same individual who was so passionate about solving problems for the disenfranchised abroad was on a mission out of the gates to double down and reap some of the benefits that came with Chavez’s approach he’d witnessed for so long.

Mismanagement of funds toward the mono-commodity dependence plays a very large part to why things crumbled and continue to crumble. It’s foolish in the first place to put so much of your economic feasibility into an exclusive, single industry with confidence, it’s another entirely to then ignore the maintenance and repair of said critically important industry. The excessive spending of the social welfare programs in attempts to drum up social support led to deficits of revenue available for the improvement of the Venezuelan oil fields, industrial maintenance, and industry business obligations. These oversights have led to the state managed oil company (PDVSA) neglecting financial obligations to third parties that assist in the production of oil. As a result, the compound damage of causal effects continues to gain cumulative force in its damage to the Venezuelan economy.

The power of inflation

Venezuelan Inflation
The history of Inflation in Venezuela (Average Consumer Prices) from 1980 to 2015 – Source: Wikipedia Commons

And oh, the inflation. Inflation often happens as the result of various sources; activity in the central bank, government activity such as increasing the money supply, taxes, minimum wage laws, tariffs, the list goes on and on. What flavor is Venezuela dealing with? All of the above and the result was a sharp decline in the nation’s currency value. When you start to consider trading for commodities, things that were once inexpensive, and easy to attain, are now priced out of the range of affordability for most the citizenship. To give you an idea of the damage inflation can do consider this: In 2008 Venezuela’s foreign reserves were valued at $42 billion. In 2016 that value was $12 billion.

To add to this blissful economic situation, oil prices are now dropping – and what was once the powerhouse of the Venezuelan economy is slowing down. As a result, the lowered oil prices have caused an inflation on the price of Venezuelan oil as they struggle to not only even generate a profit, but also meet financial obligations tied to the industry.

Because of the dire economic situation, the government had to act in a way that it felt was flexible in the face of a challenging situation: enact critical regulations and restrictions. The significant increase in the cost of basic goods put what was once common and easy to attain into something only attainable by the wealthy. The state attempted repair by way of controlling the price of goods inside supermarkets in an attempt to offer citizens fair prices for basic goods. This restriction created a negative incentive for providers of said goods. Since there is no capital to gain from such behavior – suppliers to supermarkets simply did not sell their products to said supermarkets, and what followed were widespread shortages of resources. It’s not commonplace for Venezuelans to stand in long lines as they wait for chances to procure items that fill their basic needs (like… bread?)

Venezuelan Shortages

Summary: What have we learned?

I believe there are a few interesting things we can take away from this situation:

  1. The sun will set, the sun will rise, and state intervention into economic industries retard growth, stagnate competition, and annihilate innovation. In a more open market, the state can get away with doing a little more here and there when the resources that contribute to GDP are various and wide-ranging. In a situation where you rely on one single industry the most foolish thing that can be done is to put that industry into the hands of an entity that historically, and consistently, manipulates and suspends growth.
  2. When the government plays the part of the mechanic, lifts the hood up and starts tinkering with the engine, you’re going to have a bad time. If you were paying attention during the article, you’ll notice that every single step was taken by the state, to control the desired outcome for the people. It’s bad enough to base your economic environment on a top-down approach that relies on GDP. It’s even worse when that top-down approach rests completely on a mono-commodity dependence. And it’s made even worse by neglecting the mono-commodity that you’re dependent on.

And now, Maduro is arming his supporters as those who stand against him are growing by the day. GM was seized by the Venezuelan (Yes, they legitimately seized the means of production) government, and there doesn’t appear to be an economic nightmare end in sight, as it was released recently that Maduro is now anticipating spreading health care to more Latin communities and raising the minimum wage by 60%.

This is a hard sneeze away from communism if it’s not considered such already – and should serve as a stark reminder to the people of the world that re-distribution of wealth, vast state control, and that a vigorous focus on framing what is best for “the greater good” has, and will always lead to bloodshed, starvation, and suffering for those involved.

You can read more from Vinny Marshall on Think Liberty here.

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