Destroyed by socialism! Savaged by a dictator that doomed the poor! Drowned in their own dependence
on oil! We’re sure by now you’ve heard a lot of reasons why Venezuela is in crisis,
and noticed the reasons tend to differ based on the speaker’s political orientation. In fact, the
current terrible situation in Venezuela has a lot of complex causes. Pinning them down can be hard
because people use the crisis to support their own political agenda on both sides. So, we sent our
most non-partisan researchers into the mix to find out...what actually went wrong with Venezuela?
If you had told South Americans 50 years ago that one of the most unstable and poverty-stricken
nations on the continent in the early 21st century would be Venezuela, they would have laughed. Why?
Since the country overthrew its military dictatorship in 1958, Venezuela had been one
of the wealthiest countries in Latin America, thanks in part to its large oil reserves.
Forget Saudi Arabia and Texas...Venezuela actually has the largest oil deposits in the world;
as of 2016, about 18.2% of the world’s entire oil reserves.
Leaning on its oil industry and exports, Venezuela became richer and richer during the 1960s,
and insanely wealthy during the 1970s, when an OPEC embargo against the US and other countries
caused the price of oil to quadruple in a ridiculously short time span.
But because of its resource wealth, Venezuela fell into what some economists term the “resource
curse”, or “Dutch disease”. Basically, the country failed to diversify its economy or its exports,
making it incredibly reliant on oil. Instead of further developing its
agriculture or other manufacturing and industries,
the country imported most of what it needed and used its oil money to pay for it.
Unfortunately, here’s what happens when a country concentrates all its efforts,
infrastructure, and manpower on a resource-dependent industry; that nation’s
entire economy and future becomes dependent on the price, and demand for, that resource.
This became a problem for Venezuela way before Hugo Chavez’s government ever touched the country.
In the 1970s, economic and energy crises around the world severely decreased the demand for oil,
at a time when oil prices were at a peak, further discouraging oil demand. This caused a)
people to exchange their block-long Cadillacs for compacts and b) the 1980s oil glut.
In 1980, the world price of oil had peaked at around $35 per barrel - $110 per barrel in 2020
dollars. By 1986, that price would fall to below 10 dollars per barrel - about $24 in 2020 prices.
That meant Venezuela’s oil went from making them live like royalty
to a relatively worthless product in the span of just a few years.
It signaled the beginning of the end for Venezuela’s prosperity.
With no money left in its reserves and no projected profits coming in for a while,
the Venezuelan government found itself deeply in debt.
$33 billion worth of it, to be exact. What could it do?
Well, what it did was turn to the IMF. Which, as many other countries
who have pursued the same tactic found, ended up hurting more than it helped.
The IMF, especially at the peak of neoliberal economic ideology in the Reagan era,
had pretty much one prescription for every country’s economic woes:
deregulate, cut welfare, and privatize everything.
If any country wanted an IMF loan,
it would have to follow its rules. And that’s what Venezuela did.
The government removed price controls on gas, transportation, and other utilities,
and slashed social programs to the bare minimum, if that. The Venezuelan people reacted...poorly.
As just one example, when the government slashed gas subsidies, the fare for buses rose 30% almost
overnight. Daily life in Venezuela in general suddenly became much more difficult and expensive.
Further aggravating the population was a loss of trust in their elected
leadership. As Francisco Rodriguez, a Venezuelan college student at the time
who is currently Chief Economist with Torino Economics said,
“You either had to tell voters what you were going to do and face the prospect of losing the
election, or not tell them what you were going to do and then do it once you gained power.”
Politicians lying about their intentions and then delivering brutal austerity
measures to the people caused a lot of anger. So people took to the streets.
Riots and clashes broke out in 1989, starting in Guarenas on February 27,
and spreading to the capital of Caracas and the surrounding
country. This period of protests and looting was known as the “Caracazo”.
With the trust between people and government already frayed,
the brutal police crackdown of the riots broke whatever thread was binding the population
and the authority of the state together. Hundreds of Venezuelans - some sources
estimate the number could be up to thousands - died at the hands of police and military forces.
The government, continuing its proud tradition of mounting the worst possible
response to every crisis, decided that to appease people and boost the economy,
they would artificially inflate the value of the Venezuelan bolivar.
With this financial move, imported goods would be significantly cheaper,
which leaders hoped would boost their support.
What happened instead is that Venezuela’s rich got a nice little bubble in which to protect
themselves from the ongoing economic fallout, and everyone else got pissed.
The bolivar being artificially high led to a phenomenon called capital flight:
the rich bought up US dollars and set up foreign bank accounts for their money. This meant their
wealth was now protected from the fluctuating inflation rates and ongoing economic crisis
back home. It also meant their wealth was...no longer in Venezuela, or serving it in any way.
To top it off, the cheapness of imported goods further stifled domestic industry and growth,
as domestic businesses couldn’t compete. In an economy that exceedingly relied on
oil and hadn’t diversified its economy this exacerbated a very real existing problem.
Deepening the resentment of the Venezuelan people was the rampant corruption within
Venezuelan politics. As Michael Shifter, president of the Inter-American Dialogue think tank put it,
corruption tainted “everything, everybody. The system was that they would take
off the top of these huge profits. They would not distribute that to
public funds and public spending, but would be used for private use.”
This rapidly worsening political and financial situation defined Venezuela through the 1990s.
Even when the economy stabilized a bit, too much had already been destroyed;
the country’s inequality was immeasurably worse than in earlier decades, and the
middle class and poor were even poorer, without many prospects for improvement.
Enter Hugo Chávez. A former lieutenant colonel in the military, Chávez was not an
unknown entity in Venezuelan politics. In fact, Venezuelans had caught wind of him a whole six
years earlier, when he tried to overthrow the government in a failed coup attempt.
This time, he realized that he could tap into the anger and resentment of the Venezuelan
poor and working-class to legitimately rise to power. And so in 1998, this third-party outsider
candidate was surprisingly elected to the highest office in the land.
Using leftist rhetoric and policies, Chávez proceeded to go on a massive spending spree
on social programs. To do this, he had to use the country’s oil profits;
thereby indirectly creating an even bigger dependence on oil
for Venezuela - sensing a theme yet? Good, because Venezuela’s leaders sure didn’t.
So even though there was a fair amount of cronyism and ineptitude
in Chávez’s administration, his policies did, in the short-term,
benefit the poor - poverty was cut by 20% between 2002 and 2008. And the people loved him for it.
The problems started showing slowly. First off,
though Chávez created a public economy that absolutely depended on the oil sector,
he didn’t spend money upgrading or even maintaining oil facilities, leading to an
eventual decline in production. Why? Well, he knew nothing about oil, and refused to learn.
When your whole country’s economy is based on oil that decision seems...ill-advised.
Former Petroleos de Venezuela board member Pedro Burelli gave a blunt assessment of Chávez’s
shortcomings: “he was ignorant about everything to do with oil, everything to do with geology,
engineering, the economics of oil. His was a completely encyclopedic ignorance.”
That seems to be the closest oil executives can get to calling someone an idiot in the media.
Second, as pretty much every Venezuelan leader had before him, he failed to diversify the economy.
A country cannot depend on only one resource or industry for its entire survival,
a lesson that Venezuelan leaders apparently kept forgetting.
Then again, the US still thinks that trickle-down economics will work after
fifty years of being proven wrong on that front, so who are we to judge?
Third, as usually happens when charismatic leaders with autocratic tendencies enjoy broad
popular support, Chávez decided he had supreme power and could start doing whatever he wanted.
He started seizing private wealth, especially from individuals and companies who didn’t support him,
put friends and supporters in positions of power - regardless of their expertise
or ability - and expanded the military’s powers and control.
On June 2, 2010, looking around at his country and apparently deciding things weren’t falling
apart fast enough, Chávez made one last horrible financial move. Noticing a drop in the global
price of oil and noticing the shortages it was starting to cause in the Venezuelan economy,
Chávez declared an “economic war” against private companies and the rich.
He devalued the bolivar to attempt to slow capital flight
and close the budget deficit. What actually happened, as many economists had predicted
and Chávez had refused to hear, was massive hyperinflation.
Consumer prices skyrocketed, shortages affected the whole economy, and poverty
gripped the nation even more tightly. Rampant inflation made the bolivar essentially worthless.
People in Venezuela, previously one of the wealthiest nations in Latin America, had to
resort to using a barter economy and often went hungry. Remember that most of Venezuela’s food was
imported; and that import system collapsed, exacerbated by eventual sanctions on the country.
Before he could reap what he sowed, Chávez ducked any consequences by dying of cancer in 2013,
leaving a disaster in his wake.
Nicolas Maduro, his successor, stepped into his place...and
proceeded to obliterate whatever was left of the country.
With oil prices continuing to drop and rampant corruption and economic mismanagement in the
country, the Venezuelan economy entered freefall. Maduro, sensing the population’s unrest,
started to act more and more like a dictator. He ruled by decree, arrested opposition leaders
and journalists, shut down sites critical of him, and promoted the theory that his political
opponents were behind an international economic conspiracy to wreck Venezuela. We can’t make
a joke here because all of this is sounding more and more common in our world nowadays.
By 2016, inflation in Venezuela was at around 800%,
the highest in its history. A study done that same year found that 75%
of Venezuela’s population had experienced “involuntary weight loss” due to famine. Violence
was rampant throughout the country due to peoples’ desperation and brutal authoritarian crackdowns.
With society in chaos and poverty at an all-time high,
outside observers assumed Maduro would lose the next election of May 2018 in a landslide.
Shockingly...or...what’s the right word...suspiciously!...he won.
This was even more confusing since the first time Maduro was elected,
he won by just 1.6 percentage points. How did he manage to get re-elected
after presiding over one of the most disastrous eras in Venezuelan history?
Well, because, as the US mission to the United Nations tweeted right after Maduro “won”,
the “so-called ‘election’ in Venezuela is an insult to democracy”.
Maduro banned opposition parties from participating,
jailed opponents, and his party intimidated voters across the country. It’s easy to win
a race when all the other candidates are in prison. At this point it should be mentioned
that Venezuelan security forces have been found guilty of thousands of extrajudicial killings
by international bodies. The Venezuelan people lived, and live, in hunger and terror.
Over forty countries around the world pressured Maduro to abdicate,
but he would not heed the call, doubling down on his conspiracy theories
about how the world was out to get Venezuela. In 2019, the National Assembly, one of the few
political bodies left to check presidential power in Venezuela, declared the 2018 elections invalid.
They declared the president of the National Assembly, Juan Guaidó, as acting president.
Though Guaidó enjoys support from countries around the world,
and from many people within the country, it is not enough to put him in power in Venezuela.
As you can see, Venezuela’s collapse was caused by many factors. It started from the country’s
extreme dependence on oil - the “resource curse”. Political and economic mismanagement,
a failure to diversify the economy,
coupled with corruption and plummeting oil prices worsened the situation immensely.
Then the arrival of charismatic strongmen appealing to a trodden-down population,
passing unsustainable policies while completely mismanaging their economies,
without proper knowledge of their own industries, suppressing journalists,
opposition, and all checks on power, decimated Venezuelan society entirely.
At the end of the day, no matter what the reasons for Venezuela’s current situation,
the price is paid by the people. Most Venezuelans go to bed hungry every night. Those who could
leave the country have left, and those left behind barely have access to food, medicine,
and other essentials. This is why it’s always important to remember, while arguing about
politics and economics, that the results of these policies have real effects on real people.
What do you think of why Venezuela finds itself in its current crisis?
Comment below! In the meantime, check out a more fun, distracting video here, or right over there!