What’s Really Going on In Venezuela
by Benjamin Studebaker
Many in the western press are oversimplifying the story about Venezuela, blaming its economic crisis more or less exclusively on the socialist policies of President Nicolas Maduro and his predecessor, the late Hugo Chavez. Government policy has contributed to the shape the crisis has taken, but there is a lot more going on than meets the eye. I want to try to tell a fuller story.
The fundamental problem in Venezuela is that 25% of Venezuelan GDP depends exclusively on oil and gas exports. In the late 00’s and early 10’s, oil prices soared from less than $30 a barrel to over $100:
This effectively tripled oil revenue in petrol states. There were three different kinds of things countries did with this money:
- Invest in increasing living standards, relieving poverty and importing more consumer goods from abroad.
- Invest in diversifying the economy to make it less dependent on oil.
- Invest around the world so as to grow a very large fiscal reserve.
Venezuela primarily chose the first option. This may seem short-sighted in retrospect, but it produced very real benefits for poor people in the country that we don’t talk about enough:
- Unemployment was cut in half, falling from 14.5% in 1999 to around 7%.
- Extreme poverty fell from 23.4% in 1999 to 8.4%.
- Infant mortality fell from 20 per 1,000 to 13.
- The college enrolment rate increased from less than 30% in 1999 to more than 70%.
- Life expectancy increased by two years, from 68 to 70.
When fracking brought the oil price back down under $50 a barrel in 2014, countries that had diversified were less affected and countries with large fiscal reserves could cushion the blow. Look at what Saudi Arabia has done–for years it stockpiled money, and now it’s begun running huge deficits to keep its economy afloat:
Saudi Arabia is now running a deficit at close to 20% of GDP. But it gets away with this because for years it ran a surplus of well over 10%, making its debt burden negligible. Even now, Saudi Arabia has only accumulated a debt of about 13% of GDP:
The Saudi strategy essentially turned the country’s oil wealth into a massive rainy day fund, giving it piles of fiscal space. So now Saudi Arabia can sit around a wait a few years for oil prices to come back up. And in the meantime, its reserves blunt the economic impact of the low oil prices–only just recently have the Saudis allowed the country to go into recession, and even now it’s quite mild:
But there was a cost to this approach–more than 20% of Saudis still live in extreme poverty. And if oil prices don’t come back up, eventually even Saudi Arabia will have to pay the piper. They never achieved any real diversity–50% of the Saudi economy still relies on oil and gas. Their crisis may be merely deferred, and if we fast forward five years, they could find themselves in the same dilemma as Venezuela.
When oil prices collapse, countries like Saudi Arabia with large foreign currency reserves can prop up living standards by blowing through their money. Saudi Arabia still has significant cushion:
But Venezuela has little left in the tank:
While Venezuela did run budget surpluses in years past, these surpluses were much smaller than their Saudi equivalents. So even though Venezuela now runs a deficit that is smaller, as a percent of GDP, than Saudi Arabia’s, it finds it much harder to support that investment:
This is because Venezuela depends very heavily on imports. The whole country has functioned for years by exchanging oil for US dollars and then exchanging those dollars for imported consumer goods. The Venezuelan currency has always been subject to high inflation and has never been a great medium of exchange. The country can’t just use the Bolivar to buy the goods it used to purchase with dollars, and insofar as it tries to do so, the Bolivar inflates rapidly. Inflation was too high even before Chavez and Maduro came to power (there were moments in the 80s and 90s where it exceeded 100%, and it hasn’t been below 10% since 1984), but now it’s ridiculous:
Why is Venezuela beating its currency into the ground? When 25% of your country’s GDP collapses in value and you run down the foreign currency reserve to next to nothing, your country is going to get poorer. The only question at this point is distributive–who will be hit hardest by the crisis? There are really two ways to do it:
- Make poor people pay: slash government spending, defending the currency and the value of rich people’s savings and investments but creating lots of unemployment and depriving poor Venezuelans of hard won public services and state benefits. Eventually you end up with extraordinarily high levels of poverty, but by keeping your currency stable you leave your rich people in a position to make private sector investments going forward.
- Make everyone pay: obliterate the currency, defending public services and welfare programs but creating lots of inflation and destroying the value of rich people’s savings and investments. Eventually you end up with brutal goods shortages, but with a shortage everyone suffers together.
These are both horrible outcomes, but without enough dollars Venezuela cannot avoid a horrible outcome. What Venezuela really needs to stabilize is a large influx of dollars. This is where the right makes its case–if Venezuela would defend its currency, if it would abandon socialism and privatize more of its economy, foreign investors might be willing to invest more dollars into Venezuela, helping it diversify its economy. They will only invest in Venezuela if they are confident that their investments are secure, and they don’t trust the socialists not to seize, tax, or inflate their assets away.
But because this would involve gutting the poor people of Venezuela, Maduro can’t do this–they are his political base. Insofar as he retains support, it is because poor people in Venezuela know that if he goes, a right wing government will sell them out for cold, hard cash. So Maduro would rather let the currency go to hell in a hand basket while he waits for oil prices to recover and desperately throws more Bolivars at other sectors, hoping to diversify the country on his own, without support from outside capitalists.
This has produced a deep class conflict in Venezuela, in which the poor Maduro supporters know that they face destitution if he goes and the rich Maduro opponents know that their wealth won’t be safe while he stays. As time goes on, the shortages shift more of the folks in the middle away from Maduro. But this only makes Maduro’s people more desperate to save him. It’s a recipe for political violence. Maduro’s supporters are not above concentrating power in the executive branch to keep him around. Maduro’s opponents are not above threatening Maduro’s supporters with absolute destitution if they fail to preserve him. For both sides, lives and livelihoods are on the line. Neither will go quietly into the night.
In a different world, Venezuela might not face this kind of choice. In a different world, the international community might be willing to help Venezuela diversify its economy without making it accept a massive decline in living standards for its poor and working people. But we don’t have the international institutions to live in that world. Most of the time, we leave countries more or less on their own, offering help only if those countries agree to adopt an economic system focused around pleasing international investors. If they’re not willing to do that, we’re willing to let their people starve to death. It’s a cruel system.