Venezuela’s worst economic crisis: What went wrong?

Wafa Sbaiti

Venezuela, the country that sits on world’s largest oil reserves in the world, is going through the worst economic crisis in its history. It is on the verge of a collapse as its economy and political situation have deteriorated. Shortages of basic goods, from food to medicine all incredibly scarce all around the country as the government massively cuts imports in a bid to save money.

Hospitals are running dangerously low on medicine, the public hospitals have fallen apart causing many people including infants to die because of scarcity of basic medical care. Inflation has reached ridiculous levels, it is expected to be 1160 percent by end of 2017 and 2280 percent in 2018 if the government continues running out of money and responded simply by printing more money.
Unemployment is set to surpass 25 percent and the employed people actually have just meaningless salaries due to this hyperinflation.

How did the country get here?

How did a country with such amazing wealth and potential get this close to total disaster? To better understand what is going on in Venzuela we need to go back to 1998, upon the rise of Chavez’s power. After he has been elected president he began his reforms with a new constitution, socialist policies and an extreme anti-US foreign policy. Due to increased demand from China and other emerging markets, oil prices rose again after many years, resulting in the period of higher oil revenues the history of Venezuela. With all this money suddenly in their hands, the Chavez government began to make some amazing things, such as promoting economic growth and fighting poverty with many social programs. In 2005 Chavez signed a decree on land reform that basically eliminated all largest states to supposedly benefit the poor. In 2006 Chavez won his third presidential election which considered an overwhelming victory for him.

Between 2005 and 2008, the country’s economic performance was impressive. Poverty rates were almost halved, and there were important improvements in health and education. All this made him a kind of hero in the eyes of many Venezuelans. After he felt comfortable with the power, he began his nationalization process. In January 2007 Chavez announced key energy and telecommunications companies to be nationalized. In June 2007 his administration expropriated Exon Mobil’s and ConocoPhillips oil operations in the Orinoco belt which basically meant seizing control of other assets and operations. In February 2009 a referendum was put out to vote to abolish the term limits on the presidency which would allow Chavez to run again for office once his term expired in 2012.

Chavez succeeded to style himself a champion of the poor during his 14 years in office, pouring billions of dollars of Venezuela’s oil wealth into social programs. He sought to reduce inequality by lifting many Venezuelans out of poverty. After he changed the Constitution to be able to be re-elected as often as possible, he used the country’s money to buy political support from the army and accepted unprecedented degrees of corruption in exchange for loyalty politics.

The situation did not last for long and by the end of 2009 Venezuela’s economy started shrinking fast. At the same time tensions started rising with Colombia over allowing the US to use their military bases. Venezuela’s ties with Russia were growing fast. Chavez was then forced to devalue the currency against the US dollar to boost their local economy but the move had a very negative effect on the country.

By 2012 things in Venezuela started to turn for the worse, as the government printed more money, inflation was getting out of hand and the oil prices were at an all-time low for his presidency.

In the meantime, poverty levels and social indicators stopped improving, and the economy stagnated. In fact, Venezuela’s economic performance after 2008 has been the worst in Latin America. On top of that, negligence and corruption of the government allowed crime rates to skyrocket.

Chavez died of cancer in April 2013. His closest confidante and at the time Vice President Nicolas Maduro became the interim president. With the death of Chavez and fall in oil prices, the situation had only got worse. Since Nicolas Maduro, took office in 2013 crime rates continued to increase, inflation reached 180 percent, the economy fell into a recession and poverty was on the rise again. Throughout 2016 protests arose and the people started blaming Maduro for the economic crisis.

On March 2016, 29th the Supreme Court in Venezuela dissolved the Parliament. This of course did not augur well for the Venezuelan people who have gone through very tough times lately. This decision was reversed three days later but it was too late given the protests had already erupted all around the country.

President Nicolas Maduro declared a state of emergency in May 2016 which despite being challenged by the opposition controlled National Assembly was backed by the Supreme Court.

Venezuela is the perfect example of how even a promising, wealthy country can be a victim of a charismatic leader being seduced by power, and a corrupt government unable to learn from their mistakes.

Where the economy is heading for?

The International Monetary Fund (IMF) has predicted that the Venezuelan economy will contract by 8 percent in 2016. While it shrank around 5.7 percent in 2015. The economic situation is bleak and analysts are predicting that it will only get bleaker. The IMF estimated that inflation could rise to as much as 720 percent in 2016 tipping Venezuela into collapse. The country is also heavily in debt with no immediate means of paying off what it owed. According to the Telegraph, around $116 billion is due over the next two decades, with a fifth of payments are due in the next two years.

Depending on a single commodity

Venezuela is an example of extreme dependency on oil which accounts for a shocking 95 percent of Venezuela’s export revenues. Venezuela’s economy has been through some exceptionally positive spells in recent history. However as the price of oil drastically declined in the last two years the current economic crisis is distinctly caused by changing prices. According to IMF estimates, the Venezuelan state earned around $80 billion through oil in 2013 the year Maduro took over as President. However, the projected figure for 2016 is only between $20-25 billion. Venezuela also has a problem with violence and crimes levels and has one of the world’s worst homicide rates. Therefore, analysts are worried that increasing public anger could result in bloodshed.

The government failed to use their surplus in the short run to substitute oil for a more sustainable source of revenue. Indeed, the recent oil price decline, created a major problem for the Venezuelan economy. As a major exporter of oil, its budget saw a massive deficit which naturally led to chaos.

Reliance on imports

The heavy dependence on oil revenues means that the economy is import-driven and not self-sufficient which makes the economy is vulnerable to any shock. This indicates, once again, a lack of long-term strategic planning and myopia that left Venezuela worse off, both economically and politically.
Any oil dependent economy must shift towards something more sustainable in the long run, and developing various types of industries, to ensure that it does not rely purely on external imports in order to sustain its economy and avoid being vulnerable to any chock in oil prices.

By Wafa Sbaiti

 

This article was published on 12/08/2017