Venezuela is reeling under a severe economic crisis, one that has spilled over into its politics. Massive protests have erupted against President Nicolás Maduro with growing demands for his ouster through fresh elections. Mr. Maduro has called the protests an “economic war” waged by elite business interests. But much of Venezuela’s problems are the doing of its own leaders, as confirmed by history.
Hugo Chavez, Venezuela’s former President, came to power in 1998 promising to fight poverty and inequality through socialism. He soon nationalised huge amounts of private assets, including oil companies, and expanded social spending on food, housing, education, etc. To fund these programmes, Chavez made use of his nation’s oil reserves, the biggest in the world, at a time when oil prices were at historic highs. Petróleos de Venezuela, S.A., a state-run firm that controls all oil production in Venezuela, was tasked with the job of exporting oil to spend the revenues on social welfare.
Short-lived success
As a result, Venezuela’s poverty rate fell from 50% in 1998 to 30% in 2012. This apparent prosperity, however, was only short lived. As oil prices slipped from well over $100 in 2014 to as low as $27 in 2016, the flow of dollars stopped and the government could no longer fund its social spending except by borrowing freshly created bolivars from the central bank. Venezuela’s money supply thus grew from 10.6 billion bolivars in 1998 to 290 billion bolivars in 2010, and later reached 7,513 billion bolivars by 2016. The result was rapid domestic price inflation and a drop in the bolivar’s value, that crippled most Venezuelans.
Further, the government’s approach in dealing with rising price inflation, particularly under Mr. Maduro, aggravated the crisis. The prices of essential commodities such as food, medicine, toilet paper, etc. were capped, which in turn led to shortages fuelled by excess demand and a steep drop in supplies as business profits declined. According to reports, 75% of Venezuelans lost at least 19 pounds in 2016 due to shortages.
The authorities resorted to rationing to deal with the crisis, which naturally led to corruption of various kinds. Some goods were rationed to friends of bureaucrats. Others, such as bread, were sold in the black market for higher prices.
Mr. Maduro, rather than seeing these as the unintended consequences of his own policies, has taken to vilifying private enterprise. According to leaked estimates by Venezuela’s central bank, Venezuela’s GDP shrunk by 18.6% in 2016.
The International Monetary Fund projects that inflation could be over 700% in 2017, and as high as 2,000% next year. These are clear signs of an economic disaster. Nevertheless, it is still not too late to rescue the Venezuelan economy. It would require a decisive end to price controls, serious currency reform, and the fostering of greater market competition in the economy.
