Venezuela: Anatomy of an Economic Collapse. Part 1
February 8, 2019
For some, the crisis in Venezuela is all about the endemic corruption of Nicolás Maduro, continuing the broken legacy of Chavez's ideological experiment in socialism under the mounting insidious influence of Putin. For others, it's all about the ongoing counter-democratic United States meddling, which has for years wanted to bring Venezuela -- with its huge oil reserves -- back into the orbit of American power, and is now interfering again to undermine a democratically elected leader in Latin America.
Neither side truly understands the real driving force behind the collapse of Venezuela: we have moved into the twilight of the Age of Oil.
How did it all start and why is the main reason for the economic collapse the total dependence on oil?
Venezuela has experienced a number of oil booms and recessions throughout the 20th century and has come out of the cycle weakened almost every time. The beginning of the 21st century was even more difficult: Petrodollars allowed the country to experiment with radical socialist practices (New socialism of the 21st Century), which eventually put the country on the verge of a humanitarian disaster.
The discovery of oil fields Mene Grande near the Gulf of Maracaibo in 1914 marked the beginning of the oil history of Venezuela. The oil stake in exports grew rapidly from 1.9% to 91.2% in 1920-1935. At the same time, the oil sector attracted more and more labor, which flowed primarily from agriculture. The rise in the Bolivar against the dollar led to a loss of competitiveness of domestic production. In 1940, the government realized that it was cheaper to import many foreign goods than to produce them internally.
In 1943, an increased tax on the income of international oil companies was introduced. This, in turn, sharply increased the government's dependence on the oil sector and reduced the role of taxation of the population. The lack of reporting on the use of a small share of tax revenues from the population led, according to Stanford professor of political science Terry Lynn Karl, to the development of an unhealthy democracy with authoritarian tendencies.
Aware of the dependence of the country's economy on imports, in the 1960s the government introduced the fashionable policy of import substitution in Latin America, the theoretical basis of which was laid by the Argentine economist Raúl Prebisch. The young Venezuelan industry, which immediately became the recipient of state transfers, lost motivation to improve product quality and increase productivity. Despite GDP growth of 4.6% per year between 1960 and 1974, investment efficiency fell and per capita GDP growth declined.
Lancaster University Professor Richard Auty estimates that the impact of the Dutch disease in 1972 meant that the share of agriculture in non-oil GDP was twice as low as expected, while the industrial sector produced only two-thirds of the expected volume. At the same time, as the researcher notes, the impact of the Dutch disease remains underestimated, as it's necessary to take into account the state protectionist policy.
The 1973 oil shock caused a significant increase in government revenues. In 1975, the state received $9.68 from each barrel of oil sold abroad, while in 1972 it was only $1.65. This led to a sharp increase in government spending.
In 1973, Carlos Andrés Pérez won the presidential election and began to implement the Great Venezuela mega-project. This period in the country called Venezuela Saudita. Pérez created a subsidy system, which was later improved by Hugo Chavez. The plan assumed not only the expansion of the state in the labor market -- job creation and wage increases -- but also attempts to diversify exports through government meddling in the non-oil sectors of the economy. Most of the new jobs were created in the state sector and financed by the government, which caused a growing need for petrodollars to pay salaries.
The subsequent fall in oil prices, obviously, caused the budget deficit, the growth of public debt and the refusal to further implement large-scale plans. Since 1979 and for the next 23 years, non-oil per capita GDP has fallen by 0.9% annually (a total decline of 18.6%), although at that time there has been an increase in the labour force, which, all other things being equal, should have had a positive effect on this indicator. Non-oil GDP, divided by the number of workers employed in the non-oil sectors of the economy, fell by 1.9% annually. For the entire period, the decline was 35.6%.
On February 18, 1983, Venezuela received the name "Black Friday" when the Bolivar sharply collapsed against the backdrop of high foreign debt and falling oil prices. Average annual prices fell in 1983 to $29.5 (from $32 in 1982 and $33 in 1981). The welfare of the majority of the country's inhabitants was undermined. The state became unable to finance its social programs. The days of "Saudi Venezuela" went down in history.
Another oil prices collapse in the 1980s put additional pressure on the government. In 1989, the Central Bank was deprived of almost all its foreign reserves. In Venezuela, we all remember the bloody Caracazo riots after the presidential elections of 1989. Then Carlos Andrés Pérez won his second presidential term. The first fell on the oil boom, but in the late 1980s oil collapsed, and Pérez decided to start a new term with reforms. The increase in gasoline prices by 100% (from almost zero) turned into riots, the intervention of the army and the death of about 300 people. By the way, it was Caracazo that became the prologue to the revolt in 1992 and Chavez’s subsequent arrival to power.
In the last decade of the twentieth century there was a gradual decline in confidence in the political establishment. Huge oil wealth and ongoing political promises of a good life inflated public expectations of economic development, which were constantly met with the one-sidedness of the resource path. At the same time, the idea of economy reforming was not popular among the population and politicians, as it was inevitably associated with a transformational recession. Against this background, the emergence of a figure, to practice the populism of the socialist persuasion, was a matter of time. The words that national wealth is only because it doesn't benefit the country, which are in the hands of corrupt politicians, quickly found a response from the population.
This figure was the Venezuelan Army Officer Hugo Chávez. In 1992, he attempted a coup d'état, but failed and ended up in prison. However, public opinion was on his side, and within a few years, he and his supporters were amnestied.
In 1998, Chávez won the presidential election. The new economic program of Venezuela was the "Bolivarian project of XXI century socialism." The combination of populism and resource wealth (associated with a new wave of rising oil prices) has led to an incredible scale of state expansion, strengthening of authoritarian trends and the subsequent economic decline.
Rent Distribution: Too Much For People?
The authorities, who have a large rent amount, most often count on its distribution among a relatively narrow circle of people who guarantee support to the existing regime.
However, in the case of the "socialist project," Hugo Chávez’s rent began to come primarily to the general population with low incomes.
An appeal to them, rather than to the existing establishment, allowed Chávez to have high popular support throughout his regime.
Immediately after the 1998 elections, Chávez began to realize his plan to change the Constitution. Despite the Congress resistance, he managed to hold a referendum with a proposal to gather a so-called Constitutional Assembly. 87% of the population voted "for". Following the referendum, elections to the Constitutional Assembly were held. The boycott of the elections by the opposition parties secured 123 out of 131 seats for the President's supporters. Further, the Assembly adopted a number of authoritarian laws: on the abolition of the upper House of Congress, the transfer of the center of the powers of the regions, and assigning the President the right to convene referendums. The President's control over the military was also increasing. The new Constitution was voted for by 79%, and already under it, in 2001, Chávez was re-elected President with 59.7% of the vote.
During a two-day coup in April 2002, when the Presidential Palace was occupied by opposition forces, thousands of supporters took to the streets. The coup failed. In 2003, the opposition demanded a referendum for the resignation of the President (according to constitutional norms, after the expiration of half of the term, the President can be recalled). In 2004, following a referendum, Chávez won again from 59.9%. In 2006, he was re-elected with 63% of the vote, and in 2012, in his last election, received 55%. Thus, every time one way or another Chavez managed to mobilize the electorate need.
The end of each electoral cycle was accompanied by generous social programs to support low-income households.
Chavism combined the features of participatory democracy and clientelism. On the one hand, the regime has repeatedly mobilized its supporters, demanding their participation in political life. On the other hand, access to rent was strictly dependent on political beliefs and therefore formed its own, although quite broad, client base.
Official Statistics on the Success of Oil Development
Many researchers note -- some even enthusiastically -- that the disparity level fell under Chávez. If you look at the Gini coefficient, which measures this parameter, it becomes clear that by the beginning of 2010 inequality in Venezuelan society really decreased: In 1998, the index was 49.5 and in 2009--41. First, however, other Latin American countries have experienced an inequality decline. Secondly, it is possible that it was due to the impoverishment of the Venezuelan rich devastated by expropriations. Third, the quality of Venezuelan statistics is, to put it mildly, imperfect.
Poverty also dropped by the end of 2000. In 1999, about 42% of households were considered poor, and 17% of the families belonged to the extreme poor category. At the beginning of 2007, 28% of families were in the first category and 8% in the second.
Education access has increased. In 2006-2007, 86% more students enrolled in universities than in 1999-2000. More than 54% of boys and girls also enrolled in high school. Elementary education was also obtained for 10% more children. The schools introduced free food, which was used by about 3.9 million students.
Official unemployment has fallen due to social programs for job creation. In 1999, at the dawn of the Chavist Era, unemployment was 15.6%. In 2008, the figure fell to 8.2%. The downside of these programs is the great difficulties with the staff dismissal and the actual ban on dismissal without the consent of government agencies. Such a system, on the one hand, protects workers, including the negligent, and on the other -- demotivates the business to create jobs.
Described back in 1990 by the New York Times as "one of Latin America’s oldest and most stable democracies," the newspaper predicted that thanks to the geopolitical volatility of the Middle East, Venezuela "is poised to play a newly prominent role in the United States energy scene well into the 1990s." At the time, Venezuelan oil production was helping to "offset the shortage caused by the embargo of oil from Iraq and Kuwait" amidst higher oil prices triggered by the simmering conflict.
But the NYT had camouflaged a deepening economic crisis. As noted by leading expert on Latin America, Javier Corrales, in ReVista: Harvard Review of Latin America, Venezuela had never recovered from currency and debt crises it had experienced in the 1980s. Economic chaos continued well into the 1990s, just as the Times had celebrated the market economy's friendship with the US, explained Corrales: "Inflation remained indomitable and among the highest in the region, economic growth continued to be volatile and oil-dependent, growth per capita stagnated, unemployment rates surged, and public sector deficits endured despite continuous spending cutbacks."
Prior to the ascension of Chavez, the entrenched party-political system so applauded by the US, and courted by international institutions like the IMF, was essentially crumbling. "According to a recent report by Data Information Resources to the Venezuelan-American Chamber of Commerce, in the last 25 years the share of household income spent on food has shot up to 72%, from 28%," lamented the New York Times in 1996. "The middle class has shrunk by a third. An estimated 53% of jobs are now classified as 'informal' -- in the underground economy -- as compared with 33% in the late 1970s."
The NYT piece cynically put all the blame for the deepening crisis on "government largesse" and interventionism in the economy. But even here, within the subtext the paper acknowledged a historical backdrop of consistent IMF-backed austerity measures. According to the NYT, even the ostensibly anti-austerity president Rafael Caldera -- who had promised more "state-financed populism” as an antidote to years of IMF-wrought austerity -- ended up “negotiating for a $3 billion loan from the IMF" along with "a second loan of undisclosed size to ease the social impact of any hardships imposed by an IMF agreement."
So it is convenient that today's loud and self-righteous moral denunciations of Maduro ignore the instrumental role played by US efforts to impose market fundamentalism in wreaking economic and social havoc across Venezuelan society. Of course, outside the fanatical echo chambers of the Trump White House and the likes of the New York Times, the devastating impact of US-backed World Bank and IMF austerity measures is well-documented among serious economists.
Development economist of London School of Economics and Professor Jonathan DiJohn of the UN Research Institute for Social Development found that US-backed economic "liberalisation not only failed to revive private investment and economic growth but also contributed to a worsening of the factorial distribution of income, which contributed to growing polarisation of politics."
Neoliberal reforms further compounded already existing centralised nepotistic political structures vulnerable to corruption. Far from strengthening the state, they led to a collapse in the state's regulative power. Analysts who hark back to a Venezuelan free market golden age ignore the fact that far from reducing corruption, "financial deregulation, large-scale privatisations, and private monopolies create[d] large rents, and thus rent-seeking/corruption opportunities."
Instead of leading to meaningful economic reforms, neoliberalisation stymied genuine reform and entrenched elite power. And this is precisely how the West helped create the Chavez it loves to hate. In the words of Corrales in the Harvard Review:
"… Economic collapse and party system collapse -- are intimately related. Venezuela’s repeated failure to reform its economy made existing politicians increasingly unpopular, who in turn responded by privileging populist policies over real reforms. The result was a vicious cycle of economic and political party decay, ultimately paving the way for the rise of Chavez."