By Richard Snow. 15 February 2018
An image of a child’s throat stares out at me from the TV: pink flesh with several white patches clearly visible. The child has diphtheria, and a five to ten percent chance of dying. The shocking thing is that this child lives in Venezuela, which once had the highest standard of living in South America and has the world’s largest proven oil reserves. Now the hospital system is falling apart, children are dying of vaccine preventable diseases, and three quarters of the population say they have lost weight in the last year because of food shortages. How could this be happening?
Dr Raul Sanchez Urribarri, a Venezuelan lawyer who now teaches at La Trobe University in Australia, tells me that Venezuela has experienced a cascade of economic problems, which can be traced back to the 1970s and 80s, and has grown worse over time. Governments began to borrow against future oil revenue in the 1970s and 80s. People argue about how much blame to lay at the feet of the previous Social Democratic and Christian Democratic governments, before the current socialist governments of Hugo Chavez and his successor, Nicolas Maduro, came to power. Those who want to defend the current socialist government lay more blame on the previous one, he says, and those who blame the current regime place less.
Adrian Soh, whose PhD thesis was on the economic policies of the Chavez government agrees the country was already in trouble in the 1980s. “In order to control inflation when the oil price was high, several previous governments overvalued the currency and imposed price controls. When oil prices fell there were cuts in fiscal spending, rising interest rates, and a sharp increase in poverty. This happened in 1982, 1989 and 1994. Inflation hit 100 percent in 1996,” he says. Chavez was elected in December 1998 with 56 percent of the vote.
“Venezuela has a long history of problems establishing strong boundaries between the public and private, and having political elites being responsible to the citizens,” says Urribarri. “Corruption has existed for years, and people who control the state use it to distribute largess to their voter base, a practice known as “clientelism”. Clientelism is where the voters for a political party are seen a “clients”, of the political party. It’s basically on-going pork-barrelling on a grand scale. “Political parties in Venezuela can be viewed not as groups arranged around ideology, but as clientelistic cartels,” he says. The country has always acted like this.
When Chavez came to power he promised to create a more inclusive society, to stop end corruption and to look after the poor, says Urribarri. His economic policies began as fairly cautious. After an attempted coup in 2002, he began making threats to nationalize industries, and politics became more polarized. Price controls meant that non-oil business sold overseas, and the economy didn’t diversify away from oil. The government introduced foreign exchange controls, and rationing of foreign currency meant that companies like Coca Cola and Polar Beer ceased production for a period as they couldn’t import ingredients like sugar and malt barley.
Chavez instituted programmes, called missions in Spanish. These programmes which began around 2004, redistributed income to the poor, which made the government very popular. With oil prices climbing at the time, the government could afford these programmes. The years 2004-07 are regarded as Chavez’s “golden years”, says Urribarri. The economy was doing well. Chavez was re-elected in 2006, with 60 percent of the vote, and after this, his policy platform began to move further left. He began to talk about “21st century socialism”, and became the darling of the international left.
In response, the private sector reduced investment and began to increase imports. (Why build a factory if you fear being nationalised?) By 2008, oil prices had reached $130 a barrel, and the government could afford to subsidise food and fuel. With the collapse in oil prices since 2014, to around $50 a barrel, the government has not had the revenue to fund its programmes, and it has resorted to printing money. In 2017, the budget deficit was equal to 18 percent of GDP, a figure most countries have never experienced. GDP has shrunk by 35 percent, and is predicted to shrink by another 11 percent in 2018.
Some oil and mineral rich countries establish sovereign wealth funds to hold the proceeds from resource sales in preparation for a time when export prices might not be high, or mineral reserves run out. The previous government established such a fund in 1998, but Chavez drew on it to fund his programmes, and the fund has been dormant since 2003.
Public protests over the economy have grown, and students have been shot in the streets. In a country where there has never been a tradition of independent non-partisan jobs such as an auditor-general or ombudsman, the government has stacked the judiciary, begun controlling the media, and dismantling checks and balances. Institutions have been dismantled before new institutions were ready to properly replace them, says Urribarri. Last year the government de-registered the three main opposition political parties.
Corruption is endemic in the society, says Urribarri. You might need an imported medicine from a hospital, and it might not be legally available, but for a bribe, someone might obtain it. Only those approved by the government can get US dollars to pay for imports. This means many businesses can’t buy spare parts, and if something breaks down, it stays broken, says Urribarri. That “something” might be a watch, a car, or a hospital x-ray machine. The regime boasts that (until late 2017) it was servicing its debt, but much of that debt was owned by people with connections to the state, so their interests got priority.
In August 2017, the government instituted a new second chamber of parliament, the Constituent Assembly, which stripped the old parliament, the single house National Assembly of its powers. The same month, the US imposed sanctions which make it impossible for Venezuela to access capital markets in the US. The EU has placed sanctions on individual politicians, citing human rights violations.
There is a spirit of hopeless and despair, in the country Urribarri says. In the last five years, about ten percent of the county’s population has left the country. Venezuelans are claiming asylum in nearby countries. Young professionals see this as the only way to improve their situation.
The situation has become so bad that Ricardo Haussmann, a former minister of planning of Venezuela, now living in the US, has called for a the National Assembly to name a new government, and for that government to call for a coalition of South American countries including Chile, Argentina, Peru and Brazil, to invade Venezuela.
Given the state of Venezuela, there seems no way out of its current problems without the possibility of violence.
15 Feb 2018
Summary of various statistics by business insider. The economy has contracted by a third, and inflation is well over 1,000 percent here.
Over 400 diphtheria cases a year here.
Budget deficits here.
Congressional research report on the Venezuelan economy here.
Article on Ricardo Hausmann’s call for a South American counties to occupy Venezuela here.