How Venezuela Fell Apart
In 1950, when the global economy was struggling to recover from World War II, oil-rich Venezuela was the world’s fourth-wealthiest country, boasting a per capita GDP of $7,424 exceeded only by the United States, Switzerland and New Zealand. Indeed, Venezuela’s per capita income was nearly four times higher than that of Japan (at $1,873), nearly twice that of Germany ($4,281) and more than 12 times that of China ($614), according to NationMaster.com, an economics statistics site. By 2012, Venezuela’s per capita GDP ranked 68th in the world, according to the World Economic Forum. But it has continued to shrink since then, dropping 5.7% in 2015 and by a projected 7.1% rate in 2016, according to the country’s central bank. Inflation in Venezuela, the highest in the world, reached 159% in 2015 and is expected to grow to 204% this year, according to the International Monetary Fund.
Those statistics only hint at the depth of the country’s humanitarian crisis, marked by dramatic shortages of essential foods and consumer products. Today’s Venezuela is not an attractive locale for investment, but a landscape where armed guards fend off consumers desperate to purchase essential foodstuffs and household goods in short supply. According to the Pan Am Post, an online regional publication, the Venezuelan government recently identified at least 15 food items and 26 personal care items in short supply or unavailable in Venezuelan grocery stores.
“In Venezuela we have the kinds of scenes that you don’t expect to see in a relatively developed, modern economy and one of the largest oil producers in the world,” Penn Law professor William Burke-White says in an interview on the [email protected] show on Wharton Business Radio on SiriusXM channel 111.“The experience of the everyday citizen in Venezuela on the ground today is one of hunger and starvation.”
Burke-White adds that former Venezuelan President Hugo Chavez, who was in office from 1999 until his death in 2013, and his successor, current President Nicolas Maduro, built an economy based on the assumption that they would be able to generate enough revenues from oil to finance a comprehensive system of social welfare benefits. But once that income dried up as oil prices collapsed, the model fell apart, Burke-White explains. After oil prices fell, and the country was hit by a serious drought, “there wasn’t just economic hardship, but mass starvation on the streets.”
[drizzle]With the collapse of its economy, the government has been printing and borrowing money to meet expenses. Adds Burke-White, “Inflation has skyrocketed and the currency is essentially worthless. So not only can Venezuela not produce food, it can’t buy it. And it doesn’t have the oil revenues to support major food purchases from overseas.”
A Broad-based Implosion
According to Kevin Casas-Zamora, senior fellow and program director of the Inter-American Dialogue’s Peter D. Bell Rule of Law Program, “We haven’t seen anywhere in Latin America an implosion across the board, the way we are seeing it in Venezuela,” at least not in the past few decades. Casas-Zamora says Chile at the end of former President Salvador Allende’s tenure in the early 1970s comes closest, but it was never nearly as bad as the situation in Venezuela now. “We are seeing in Venezuela the convergence of the trends of economic deterioration, political deterioration, the collapse of public order, and energy shortages; so it is really across the board,” he notes, adding that the country’s normal challenges have been “exacerbated by 10 years of horrific economic mismanagement done to prop up a political system that depended essentially on hand-outs and a kind of state socialism.”
“We haven’t seen anywhere in Latin America an implosion across the board, the way we are seeing it in Venezuela.”–Kevin Casas-Zamora
Economic imbalances accumulated in the past 17 years are a big part of the story, but the trigger for the current meltdown is oil, says Charles Shapiro, who served as U.S. Ambassador to Venezuela from 2002 to 2004. “The fact that oil prices have collapsed is not the root of the crisis, but definitely the trigger — at least, on the economic front,” Shapiro notes. “On the political front, over the past 17 years, we’ve seen an authoritarian slide which was very obvious — but in a very peculiar way.”
There was a very clear authoritarian tendency during the Hugo Chavez years, but he never quite shut down democratic spaces: “Elections were held and, for the most part, the votes were counted fairly, and very, very rarely would the government lose,” Shapiro says. Independent media never ceased to exist under Chavez. While their outlets were harassed and the government “bought off” a lot of media outlets, they were always part of the landscape, he notes. “So while it was an authoritarian leaning system, it was never a dictatorship. Chavez was no Abe Lincoln but he was no [Fidel] Castro. But what we are seeing now is something entirely different.”
The timing of President Maduro’s ascent to power exacerbated the situation, according to Shapiro. “In many ways, Hugo Chavez was the luckiest guy in the world,” he says. “When Chavez became president, Venezuelan oil sold for $8 dollars a barrel. … It reached $140 at one point, and was around $115 or so [when he died]” and when Maduro began his tenure.
But last August the price per barrel plunged below $40 for the first time since 2009; the price is now hovering around $50 and is expected to fall again. “[Venezuela] made long-term commitments that it could not meet with oil [prices so low],” Shapiro says. “Right now, prices would probably need to be at $150 [a barrel] to cover their commitments.” During the Chavez-Maduro era, Venezuela’s dependence on oil products grew from 70% of the country’s export basket in 1998 to 98% in 2013, according to researchers Dany Bahar of the Brookings Institution and Miguel Angel Santos of Harvard’s Center for International Development in a recent study.
Shapiro, currently executive director of the World Affairs Council of Atlanta, adds, “They spent money on all kinds of things: They de-funded the public health system and set up a parallel system with Cuban doctors. They built railroads across the country that were never finished; [they spent money] to extend subways that were never extended; to rebuild ports; to give away houses; [to build] a factory for assembling Iranian tractors [that has since been shut down.] They re-nationalized the electricity and phone systems; and turned PDVSA [the Venezuelan national oil company] from a fairly efficient company into an oil company that is hugely inefficient, [a company] where employment has tripled although production has dropped.”
The Collapse of Public Order
According to Casas-Zamora, the other big element in this crisis, which is often overlooked, is the collapse of public order. “No country — not even the highly violent countries of northern Central America, which have always done poorly when it comes to personal safety — has experienced over the past decade or decade and a half, the deterioration of public security and personal safety that Venezuela has undergone,” he says. “The place was never Denmark; but at this point, Caracas is, in all likelihood, one of the most violent capitals in the world.” Though the government stopped publishing security information years ago, non-governmental organizations in Caracas estimated