Why is Venezuela in crisis? - Answers

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Why is Venezuela in crisis?

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Infographic on Venezuela crisis

The present crisis in Venezuela traces back to Hugo Chavez taking over as President in 1999, and the chain of poor decisions taken during his tenure. After his death in 2013, Nicholas Maduro won the Presidency but continued to pursue the policies of Chavez, leading to the economy sliding further into trouble.

So why has Venezuela, a founding member of OPEC and a leading producer of crude oil, found itself in this situation?

Four reasons stand out:

  • Falling prices of crude oil
  • Mismanagement of currency
  • Excessive spending on social welfare
  • Corruption

The crisis can be attributed to repeated failures of the government since 1999 on all parameters of performance in crucial areas – economic, social, financial, and diplomatic.

Venezuela today is one of the poorest countries in the world, faring poorly on all economic indicators. IMF predicts hyperinflation reaching 13,000% by the end of 2018, and the economy contracting by 15%. Compare this with projections for neighboring Latin American countries – Peru 4%, Chile 3%, Colombia 3%, Argentina 2.5%, and Ecuador 2.2%. The international reserves are below $12 billion this year.

The problem for international agencies is compounded by the lack of official data from the government. In May 2018, IMF has threatened Venezuela with expulsion if it does not comply with access to official data on the economy, as per international norms.

Hugo Chavez and his Bolivarian Revolution

A career military officer, Chavez developed strong socialist ideals inspired by Simon Bolivar, an 18th Century revolutionary leader, and the country’s third President. Chavez founded the Revolutionary Bolivarian Movement and led an unsuccessful coup against the government in 1992. After spending two years in jail, he founded a political party, Fifth Republic Movement, and won the elections, becoming the President in 1999.

On taking over, he initiated the process of nationalization of the petroleum industry, seizing assets of companies like Conoco Phillips. The nationalization of the oil industry gave the government control of the large amount of revenue, which worked in its favor during the period when prices began to rise between 2007 and 2012.

The social programs he initiated made him very popular among the poorer sections of society, which formed the bulk of the country’s population. With increasing support, he further accelerated the process of redistribution of wealth (read, oil revenues) and spent heavily on providing free medical care to common people, free education, and started affordable housing projects. He also initiated a program to supply heavily subsidized fuel in the domestic market and at low prices to friendly Latin American countries and those in the Caribbean.

Between 1999 and 2009, the social welfare programs benefitted large sections of people and this is demonstrated in significant improvement in the overall health of the people. Infant mortality rates came down while the percentage of educated and skilled people went up. There was a rapid increase in the number of pensioners as well.

Contrary to popular perception, between 1999 and 2011, the share of private enterprise in the economy rose from 65 percent to 71 percent.

However, excessive spending on social welfare without reinvesting petrodollars in consolidating and modernizing the oil industry resulted in dropping revenues and fiscal imbalances.

Poor diplomacy

Antagonistic policies with western countries, especially the United States, resulted in sanctions and diplomatic isolation. Investment began to dry, and domestic production fell rapidly. Prices of raw materials increased sharply, and production cost exceeded the selling price in many essential commodities. The reduced production caused inflation to rise significantly.

The Maduro years

After the death of Chavez in 2013, President Nicholas Maduro continued to pursue policies initiated by his predecessor. While Chavez had the benefit of high oil prices during most of his two terms, Maduro inherited an economy in shambles.

Instead of initiating market-driven reforms that could encourage private enterprise and production, his continued hostile stance against the United States and other western nations and increased Venezuela’s isolation. For a country with 96 percent of its export revenues coming from oil export, falling prices of international crude oil to sub-$50 per barrel post-2015, hastened the downward spiral of the economy.

Investment in new enterprises, private or government, has come to a standstill. Foreign companies have almost all pulled out. Most major international airlines operating in Venezuela have ceased operations resulting in business travel to Venezuela coming down significantly.

People have been suffering food shortages that have touched crisis levels. All the gains of the health-related welfare programs under the Chavez years have reversed. Surveys have shown 59 percent of the people have lost an average of 19 lbs. in weight and case of malnutrition in children has risen significantly. Long lines outside grocery stores with empty shelves are a regular sight. People have begun scavenging garbage cans in search of food. Crime rate, including looting and murder, has gone up significantly since 2010.

Violent clashes with the police are a regular occurrence, and the situation seems to be turning critical. Unemployment has risen to among the highest level, forcing skilled Venezuelans to migrate overseas.

Corruption has been a problem in Venezuela and has been partly responsible for leakages in the system where the full benefits of the government’s special welfare programs have not reached the people that need it most.

Mismanaging the currency

Poor policies of the government under Hugo Chavez and later Maduro have resulted in the currency losing its value. The wide difference between the official and black market rate of exchange between the Venezuelan Bolivar and the USD is an incentive for government officials to siphon off and sell USD in the black market. The excessive cash is fueling inflation with too much money chasing too few goods.

The Army, along with government officials, has been accused of corruption and bribery along the entire supply chain from the time goods arrive in the country to its limited distribution.

Under these circumstances, it is interesting to note that majority (61%) is very unhappy with the situation in Venezuela but only (39%) want a regime change. This shows that people have largely welcomed the social welfare measures undertaken by the government, but they are not ready for a regime change, at least not yet.

The Alfonso Prophesy

The words of Juan Pablo Pérez Alfonso, the popular Venezuelan diplomat and politician and founding member of OPEC, in 1976 seem prophetic when he said, “Ten years from now, twenty years from now, you will see, oil will bring us ruin… It is the devil’s excrement.”

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