What the Hell Happened to Venezuela?

Why is a once-promising Socialist state in disarray?

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Today’s piece looks at the causes of the economic and political turmoil in Venezuela. Enjoy!

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The Rightwing loves a good boogeyman. And for the last few years, the dreaded “Venezuela!” has been their go-to for shutting down debates about the merits of Capitalism vs. Socialism.

Whenever such a discussion arises, you can be sure a critic will pop their head in and smugly remark, “Well what about Venezuela? It’s proof Socialism doesn’t work!” And though this is often the prerequisite to a tribalist proxy war masquerading as a debate, Leftists need a thorough understanding of what went wrong in Venezuela so that we may explain it, and, perhaps more importantly, learn from it. After all, it is not our goal to win pointless debates against anonymous Twitter users, but to convince the masses that the Socialist mode of production is superior to the Capitalist one.

To do so, and to avoid the pitfalls that plagued the Venezuelan state, it is necessary to investigate the downfall so we may better answer the question, “What the hell happened to Venezuela?" for both our audience and ourselves.

Background

There’s no denying Venezuela has endured a calamitous decade. Though the country does currently appear to be on the upswing, years of economic recession and domestic turmoil have devastated a once-promising nation. With per capita income declining by 72% between 2012 and 2020, there’s little mystery as to why over six million Venezuelans decided to leave the country since 2014. But the issues that caused this crisis didn’t arise out of thin air. Instead, they were the product of specific decisions; some were well-intentioned mistakes, while others were outright malicious attempts to punish the Venezuelan people.

A real who-dunn-it!

In 1960, Venezuela came together with four other countries to found the Organization of Petroleum Exporting Countries, commonly known as OPEC. In 1973, OPEC established a 5-month-long embargo on the countries supporting Israel in the Yom Kippur War (namely the United States), leading to a quadrupling of oil prices. High prices for Venezuela’s primary export created a period of prosperity in which the country had the highest per-capita income in Latin America. Amidst this oil boom, center-left President Carlos Andres Perez nationalized the oil industry into the state-owned Petroleos de Venezuela S.A., known as the PDVSA.

But with every boom comes a bust, and oil is no exception. The 1980s saw a natural contraction of the Venezuelan economy. In 1989 the re-elected Perez accepted a loan from the International Monetary Fund to help the country get by. Entire books can be (and have been) written about the ways in which IMF loans are used to crush left-wing policies and pry open the gates for foreign capital investments. They are too numerous to detail in their entirety here, but what’s important to know is that by accepting the IMF loan, President Perez agreed to what is known as “The Washington Consensus,” a broad set of policy principles that severely curtail social spending, incentivize the privatization of state enterprise (oil), and invite international capital to invest — and eventually control — state resources. The end result of Venezuela taking on this IMF loan was large cuts to important social services. This caused the Venezuelan people to revolt, ousting Perez and electing Hugo Chavez as president in the 1998 Presidential election.

A democratic election in South America? “Never again,” vowed the CIA.

An open Socialist, Chavez reversed many of Perez’s decisions and began to use the country’s oil revenues to fight poverty. According to the Council on Foreign Relations (which is no fan of Chavez), these programs reduced poverty by a staggering 20%. Chavez also increased literacy, created the Petrocaribe (a plan to subsidize oil to Central America and the Caribbean), and bolstered anti-imperialist sentiment, specifically the urge for South America to move away from the very economic dominance of the U.S. and IMF that had led the country to austerity. 

Chavez died in 2013, and his Vice President Nicolas Maduro won the following special election just at the apex of Venezuela's economic prosperity. In 2012, oil prices peaked at $103.42 per barrel. But the good times wouldn’t last.

The 2014 Oil Price Crash

In 2014, global oil supply overtook demand, driving down prices. This over-supply was primarily caused by increased oil production in the United States, which had spent the post-9/11 years ramping up domestic production and relying less on foreign imports. With the crisis looming, OPEC met in November 2014 to discuss the situation. Though Venezuela (among other nations) strongly advocated for production levels to be cut to match the falling demand and avoid a crash, Saudi Arabia insisted output levels remain constant to equalize the market. In hindsight, we know the refusal to cut prices was a colossal mistake. By 2016 oil prices were under $30 a barrel, down from over $100 a barrel just a few years earlier.

Source: The Bureau of Labor Statistics

The Spiral

Here is where things begin to spiral. To be clear, it is undeniable that Venezuela’s leaders deserve partial blame for the country’s disarray. Venezuela’s economy was almost entirely dependent on oil exports, which comprised 96% of its income. By choosing not to diversify its revenue streams, Maduro, Chavez, and their predecessors inadvertently tied the fate of their very successful anti-poverty measures — and the Venezuelans who depended on them — to the price of oil. 

This was a blatant mistake, as like any commodity, oil prices fluctuate. (Plus, the oil will run out someday). What Chavez and Maduro should have done is invested surplus oil revenues in other markets, ensuring the vital anti-poverty programs wouldn’t be threatened by a price crash. For comparison, this divestment strategy is the key to Norway’s financial stability. The Norwegian government invests oil revenues in other sectors through the Government Pension Fund, ensuring if oil prices fall (or when all the oil is gone) their state income will be diversified and still able to provide citizens with education, healthcare, and social services. 

 I should also note that Maduro and Chavez have both been accused of cronyism and corruption. Even if these accusations are as severe as the State Department claims they are (which no one should believe), they are minimal compared to the failure to diversify.

So, looking at the 2014 crisis from inside Venezuela, we see a story of well-intentioned politics forgetting to cover its bases, leading to a severe but temporary recession, and hopefully, a lesson learned about the need to generate state income outside of petroleum reserves. Now if that was the end of the story, the Venezuela of today would be back on its way to economic success, as we can see from this chart of global oil prices

With exception of the COVID-caused 2020 plummet, oil prices have more than recovered from the 2014 crash. Logically, Venezuela’s economy should have followed this common pattern of boom, bust, then normalization. But as we know, that is not what happened. 

Instead, Venezuela was prevented from recovering from the recession by the malicious intent of the United States. 

Next time I’ll look at how U.S. sanctions and attempts at political destabilization are responsible for perpetuating the humanitarian crisis and crippling the Venezuelan state. If you’d like to read it, make sure you subscribe. 

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