In 2011, in the waning years of Hugo Chavez’s premiership, Venezuela was a beacon of socialism, a shining light of South American prosperity. Between 1999 and 2009 unemployment had fallen from 14.5% to 7.6%, GDP per capita had more than doubled and extreme poverty had fallen from 23.4% to 9.5% (Guardian data). Socialism could work, and Venezuela was a model of how.
Fast forward to 2017 and the wheels have fallen off the petroleum fuelled band-wagon. By the end of the year:
“the Venezuelan economy will likely have shrunk by 30% in three years. The IMF forecasts that inflation will average 720% this year and top 2,000% in 2018.”
RBC Capital Markets
Inflation rates mean worker’s salaries have been eroded to the point of worthlessness and much private enterprise has shut down, with it impossible to operate in such a climate.
Poverty is back on the rise, with The Guardian reporting that 82% of Venezuelans live in poverty, and violent crime has got to the point that there is 100 times the likelihood of dying on the streets of Caracas than London. Venezuela is on the precipice, if not already in freefall.
So What Caused the Calamity?
Like many South American countries, Venezuela is a country of incredible natural resources. It is estimated to have the world’s largest reserves of crude oil. Yet with this asset comes dependency. Over 50% of the country’s GDP is accounted for by revenue from petroleum exports. During times of high commodity prices, it was able to build up a trade surplus which in the third quarter of 2008 was $17.73bn, a figure higher than the entire GDP of Senegal, a country half its size by population. Venezuela was booming.
Yet Chavez, and later, Maduro, failed to invest appropriately. A constant theme across South America, there remains a large infrastructure gap, with it being estimated in 2014 that the state required $90bn dollars just to maintain the existing infrastructure network, with the gap only to widen in the future. Yes, over 75% of Venezuela’s power needs are now met by hydro-electric plants on its rivers, and it has plentiful resources of natural gas, but successive governments failed to tackle the country’s complete dependency on crude oil. KNOEMA estimates that to meet current government expenditure, the oil price would have to be $117.5 dollars per barrel. It is currently around $45.
Food Crisis: Where Did the Money Go?
It is correct to assume that despite levels of corruption which mean that Venezuela ranks 166/176 countries on Transparency International, not all of it went into the pockets of state representatives. Oil was and still is used to subsidise goods, including housing, cars, food and even DVD players. It meant when times were good, wealth was spread to the masses, creating a fervent group of Chavistas who remain supportive of his legacy in spite of the downturn seen today. For them, it is his successor, Maduro who is to blame. In truth, Maduro has largely continued similar policies, albeit with increased government suppression of opposition.
To maintain the low prices, grain was imported from abroad, as it was cheaper to maintain prices through importing than production by state-led farms at home. Price controls have made private business unprofitable, meaning as governments have struggled to maintain imports through dwindling funds, Venezuelan farmers are unable to meet the shortfall, put off by price controls that make their business wholly unprofitable.
In a state of complete dysfunction, Venezuelans are going hungry, to the point of illness and malnutrition. The Washington Post estimate that 11.5% of children under 5 suffer from “moderate to severe malnutrition”, with 48% “at risk of going hungry”. International groups offer aid, but Venezuela is not a charity case, according to its benevolent quasi-dictator Maduro, and such aid is rejected.
Maduro and his government are growing increasingly desperate, with a recent deal agreed with two Russian companies to deliver 600,000 tonnes of grain. The sustainability of such an approach does not even beggar discussion.
Boom or Bust
In most other countries, an election to choose a constituent assembly to redraft the constitution would mark a significant juncture in the country’s future direction. Nevertheless, with the opposition parties boycotting it, decrying it as an inexcusable power grab by a beleaguered president, the election of 30th July loses a lot of its significance.
Venezuela is on the precipice of not just economic implosion but also political upheaval. How long its citizens will accept an economic ideal which has disastrously affected their everyday lives remains to be seen. The good times of Chavez will be fade into nostalgia, but how long it takes Venezuela to adapt, open its door to foreign investment and abandon its protectionist bubble will tell the real tale of its economic future.