Where did Venezuela go wrong? - Shrey Srivastava

 In this blog, I will be discussing the reasons why Venezuela suffered one of the largest economic crashes in recent history. I will be talking about:

·       -Early boom of Venezuela

·       -Government policies

·       -The country’s oil industry, its benefits and its consequences

·       -The following hyperinflation

In my opinion, Venezuela is one of the most interesting case studies to investigate, this is because of a variety of factors, such as: the country’s initial booming success, in large part due to its large oil reserve; its transient experience of social welfare policies and finally its harsh economic downturn.

Venezuela has the world’s largest oil reserves which is estimated to contain enough oil to fill up 304 billion barrels which, for perspective, is 48.3 quadrillion litres of oil in Venezuela alone which is enough to meet the oil demand of the entire world for 8.6 years (according to the Energy Information Administration’s estimate on how much oil the world uses daily). Venezuela was the wealthiest country in South America. Its GDP per capita figures in 2014, 2 years before the crisis, was $16,054.59. this figure seems low in comparison to countries like the United States however, in comparison to other South American countries such as Brazil and Mexico, it was an immense figure. their GDP per capita figures were $12,112.59 and $10,928.92, respectively.

The social welfare and socialist policies began to take place after Hugo Chavez was elected in 1998, in his attempt to decrease the wealth inequality, in 2001 he began to use an enabling act to pass laws aimed at redistributing land and wealth taken from the rich to give to the poor. This however was not successful as the GINI coefficient rose from 47.2 to 49 from 2001-02 due to high levels of corruption in the socialist government. Then Chavez tried again in January 2005, he signed a decree in which he eliminated Venezuela’s large estates, this helped the agricultural poor however threatened ranchers as they rightly believed that the move is an attack on private properties. This however proved useful to decrease the income inequality as the GINI coefficient dropped from 49.5 to 44.8. Chavez also began nationalising key energy and telecommunication companies. Hugo Chavez was also revolutionary in reducing the avid corruption in government officials, he also replaced the inefficient workers with new ones causing the oil production to boom this also permitted the country to exploit the high oil prices in the early 2000s. He used the money to give hand-outs, in a very unsustainable, short-sighted manner thus the country’s new-found dependency in oil, this can also be called, “Dutch Disease”. This is when a country becomes over dependant on a natural resource.

“Dutch disease” hit Venezuela hard, this is because the immense and rapid deflation of the Venezuelan Bolívar caused by other countries converting currencies into the Bolívar to buy their oil. This caused products produced outside Venezuela to become relatively cheaper to the Venezuelans and the products produced within the country to become more expensive relative to their competition. This caused many Venezuelans to close their personal businesses, making the country extremely dependant on its oil industry, which, in turn, is dependent on international oil prices. Then in 2016, the price of oil dropped.

 

Due to Venezuela’s high dependency on oil, when the oil prices dropped in 2015-16 due to an excess of oil in the market, oil prices plummeted to $34.62, the lowest in 11 years, the country was left defenceless against a large-scale economical crash. This was also not aided by President Maduro- Chavez’ successor- opting to maintain massive government spending on social welfare programmes by taking even more international loans. Venezuela’s national debt was high during Chavez’s presidency as it reached $131 billion a year before Maduro came to power (2012).

 

As the oil price crashed, so did the Bolívar as there was little demand for Venezuelan oil anymore. It became more expensive to import goods from other countries, paired with a lack of local businesses, developed into a crisis. To resolve these issues, Maduro decided to print money to attempt to resolve the crisis as he assumed that the threat would only remain temporarily. However, the oil prices continued to drop. This denoted that the Bolívar would also drop. But now, the money printing backfired and contributed to the inflation. This caused hyperinflation.

Prices and poverty skyrocketed. The central bank of Venezuela estimates that the value of the currency inflated by 53,798,000% from 2016 to April 2019. As an estimate, in 2021 it costs upwards of 103 million Bolivars for one person to live in Venezuela.

Why is Venezuela different than the successes of the middle east and Norway? (part 2 of this explanation will be comparing Venezuela to other OPECs and Norway.) Put simply, the difference in government spending.