Four Reasons Why the Venezuelan Economy Collapsed

Updated on September 20, 2019
JC Scull profile image

JC Scull worked in international market development and taught international business relations and strategies.

Source

This article will explore the four main reasons for the Venezuelan economy collapse.

  1. Holland disease and the collapse of oil prices.
  2. The propensity for "caudillismo" and corruption.
  3. The establishment of ALBA.
  4. The attack on the private sector by the government.

Source

Venezuela's Current Economic Outlook

The news and pictures that stream out of Venezuela, sometimes on an hourly basis, are both scary and ominous. They speak about the once bright star in the Latin American economic firmament, now a country which has imploded politically, economically, and socially. In the 1970s, Venezuela was the richest of all the countries in the American continent south of the U.S. Today, the economy is but a fraction of what it once was.

Due to its oil wealth, the Venezuelan workers of the decades between the 1960s and 1970s enjoyed the highest wages in Latin America. The government spent generously in health care, education, transport and food subsidies for the poor. Literacy and life expectancy were on the rise, and the upper middle class was known for buying investment and vacation condominiums in Miami.

Today, the per capita GDP stands at $6,890, while merely four years ago in 2015, it was at $17,300. This represents a double digit percentage drop on a year-over-year basis during this time, pointing to an economy in total free fall. In other words, since 2015, the economy has contracted by 60%.

Venezuela’s overall economic and social indicators are quite dire. The following chart shows the degree to which this is the case.

Venezuela Economic Data
Venezuela Economic Data | Source

Reason #1: Collapse of Oil Prices and Dutch Disease

Venezuela’s recent problems go back to the 1980s, when oil prices first began to plummet and the economy first collapsed. Oil exports are virtually Venezuela’s only revenue comprising of 95% of all export earnings and representing more than 50% of the country’s GDP. Today Venezuela is submerged in billions of dollars in debt with no relief in sight.

This crisis was long in the making. It boils down to a concept in economics known as the Dutch Disease which is the relationship between the development of a specific sector — in most cases natural resources — and the decline in other sectors such as manufacturing and agriculture.

Venezuela’s dependence on oil exports at the expense of other industries has caused poverty and inflation to increase, which in turn has triggered shortages in food, malnutrition, increase in crime and corruption. As the price of oil has continued to plummet these conditions have become exacerbated to the point where today the economy is a mere shell of what it once was.

Other countries, such as Dubai and Saudi Arabia have managed to reinvent their economies in order to navigate the volatility inherent in oil production and export.

In the case of Dubai, sound investments in science, technology, health and education while continuing to build infrastructure, has been Dubai’s way of maintaining a viable economy. In fact, its ruler prophetically announced more than a decade ago: "Build and they will come." Referring to his desire to shift his country’s dependence on oil production to one based on real estate value, promoting the UAE as a global trade and tourism hub, and developing industry.

Saudi Arabia’s King Abdallah incrementally modernized the Kingdom from 2005 to 2015. This was done by attracting foreign investment, increasing the role of the private sector in the economy and pursuing economic reform and diversification. Consequently, Saudi Arabia’s economy has maintained a high per capita GDP (PPP) that hovers around the $50,000 per year mark.

The only period of time, in which Venezuela took proper measures to mitigate the effects of sinking oil prices was during the 1980s, when the economy contracted causing inflation levels to peak in 1989 to 84%. Rioting followed as the government cut government spending. Then President Carlos Andres Perez took action by initiating liberal economic policies and a move to reorganize Venezuela’s debt. These actions allowed the economy, which had contracted by -8.3% to grow to 4.4% in 1990.

Unfortunately, the country has not been able to duplicate this accomplishment. As we will see later in this article, Hugo Chavez and Nicolas Maduro did the exact opposite.

Reason #2: The Propensity for "Caudillismo" and Corruption

Another problem Venezuela has faced since its independence from Spain in the first half of the 1800’s has been the profusion of Caudillos that have ruled the country.

In colonial Latin America a caudillo was a military-landowner that possessed political power and exercised it in a form considered authoritarian. A good English translation would be supreme leader, chief, dictator, strongman or perhaps even warlord. In modern-times the word continues to be used in Hispanic America to refer to a charismatic populist leader that runs his country with an iron fist. Modern day examples of caudillos would be Pinochet of Chile, Juan Peron of Argentina, Francisco Franco of Spain, Fidel Castro of Cuba, and in Venezuela's case, Hugo Chavez.

In Venezuela, caudillos dominated politics throughout the 19th century well into the mid-20th century. Since 1958 the country has had a series of democratically elected governments plagued by corruption, scandal and economic shocks. And it can be argued that the leaders of these democratically elected governments to some degree fit the description of a caudillo. For the most part these leaders were corrupt and attempted to create political environments that allowed them full control of all government institutions.

Oftentimes, these semi-democratic, corrupt and inept governments, open the door for other charismatic caudillos who promote themselves to the people, as being the solution to their problems. Unfortunately, allowing for the cycle to start over again.

Case in point was the political and economic crisis of the 1980s and 1990s that led to the deadly Caracazo ("uprising" in Spanish) riots of 1989. These riots railed against the neoliberalist policies of past administrations and were followed in 1992 by two attempted coups and the impeachment of President Carlos Andrés Pérez for embezzlement of public funds. These events, created the political environment that shepherd Hugo Chavez to power.

Source

Reason #3: Establishment of ALBA by Hugo Chavez and Fidel Castro

During his presidency Chavez’s inclination for financing socialist regimes throughout Latin America and in Spain put unnecessary strain on his country’s oil profits. During the time he was president he provided aid to Cuba to the tune of $6 billion annually. He also donated more than $10 million to the socialist Podemos movement in Spain. In 2007 Chavez agreed to finance the production of 4,000 tons of coca in Bolivia. He financed a refinery for Nicaragua; provided cut-rate fuel for Ecuador and continued bond purchases from Argentina. All of these are examples of the type of fiscal irresponsibility that has contributed to Venezuela’s economic collapse today.

In 2004, together with Fidel Castro, devised an organization they called Alianza Bolivariana para los Pueblos de Nuestra América or Bolivarian Alliance for the Peoples of Our America (ALBA). Originally conceived as an intergovernmental organization to economically integrate countries in the Caribbean and Latin America, which could eventually join together into one nation, capable of challenging the United States economically and ideologically.

The word “Bolivarian” refers to the ideology of Simon Bolivar, who sought independence for Hispanic America from Spain and also felt, that the countries from this region should unite into one single “Great Nation.”

Originally, meant as an alternative to the Free Trade Area of the Americas proposed by the US, and opposed by some of the countries in the region, ALBA aimed to create exchanges in goods, services, educational resources and petroleum between the participating countries. The countries that joined were:

  • Cuba
  • Venezuela
  • Jamaica
  • Bolivia
  • Ecuador
  • Honduras
  • Nicaragua
  • Antigua and Barbuda
  • Dominica
  • St. Vincent and the Grenadines
  • St. Lucia
  • Suriname
  • Haiti

Alba became nothing more than a way to utilize Venezuela’s oil profits to influence smaller countries in Chavez and Castro’s desire to challenge US influence in the region. It was also a way to create vassal countries of Venezuela and Cuba, which they could then manipulate at will.

As of 2018 ALBA seems to be inactive. However, in the interim, Venezuela sold billions of dollars of oil at substantially low prices to Cuba and many of the other member nations. In some cases, Chavez plainly traded free oil, for Cuban medical services, making Castro's island nation the net beneficiary of free oil, while the Venezuelan economy edged closer to collapse.

Reason #4: Attack on the Private Sector and Pervasive Corruption

One of the attempted coup d’etat of 1992 was led by Hugo Chavez who at the time was a career military person that had risen to the rank of lieutenant coronel. Chavez was imprisoned for two years after which he founded a political party known as the Fifth Republic Movement, and was elected president of Venezuela in 1998. He remained president of Venezuela until 2013 when he died of cancer.

Chavez rose to power by riding a wave of voter outrage and discontent at the traditional political elites responsible for corruption, economic failures and the plundering of the national treasury.

As the new head of Venezuela, he described his presidency as a Bolivarian revolution, a type of socialist movement aimed at bringing equality through the nationalization of key industries, the creation of participatory democratic Communal Councils and implementation of social programs known as the Bolivarian Missions to expand access to food , housing, healthcare and education.

High oil prices aided Chavez to improve quality of life as it related to poverty, literacy and income equality from 2003 to 2007. However mismanagement of the economy through overspending and price controls coupled by corruption proved destructive, causing economic failure with poverty, shortages and inflation to increase.

A great deal of the blame for Chavez’s economic failure can be attributed to the same corruption he came to power to eliminate. Corruption has become pervasive throughout Venezuela and government officials as well as high ranking members of the military are allowed to pilfer oil profits and the national treasury with impunity.

Further destruction of the economy came in 2010 when Chavez declared an “economic war” on all business sectors. The Bolivarian Government focused on expropriations, confiscations and control of several private food companies as well as other business associations. In a speech he delivered in June of 2010 he stated: “I declare an economic war. Let’s see who is more powerful; you the shoddy bourgeois or those who love their homeland. They know where we are headed; we are going to take from the Venezuela bourgeoisie,”

In 2010, Chavez began his attack on food retail outlets as 'capitalist' retailers' and blamed them for the higher prices. However, economists attributed Venezuela's inflation to loose monetary policy, exchange controls, rampant spending and weak domestic production.

As a further attack on retailers, Chavez established a chain of government own grocery stores subsidized by oil profits, which could sell products well below market price.

Additionally, the government initiated a takeover of farms, processing plants and large supermarket chains. Seized land belonging to corporations and impounded "illegally stored" foods.

But the biggest attack on the business sector came in the form of currency devaluation, which caused many multi-national companies to exit Venezuela, causing additional unemployment and lack of productivity. Companies like Goodyear, Kellogg, Kimberley Clark and a number of airlines pulled out of Venezuela in the last decade, leaving the country without many viable goods and services.

On the right is Nicolas Maduro. On the left is Juan Gerardo Guaidó Márquez, the current President of the National Assembly. He is challenging Maduro's presidency on the grounds it was fraudulently won.
On the right is Nicolas Maduro. On the left is Juan Gerardo Guaidó Márquez, the current President of the National Assembly. He is challenging Maduro's presidency on the grounds it was fraudulently won. | Source

President Nicolas Maduro

After Chavez’s death in 2013, Vice President Nicolas Maduro became president. Originally a bus driver, Maduro rose to power as a trade union leader, later elected to the National Assembly and eventually named Foreign Minister before becoming vice president.

Having never graduated from high school Maduro has not proven to be an intelligent or effective leader. As a confirmed Marxist, Stalinist, Communist, Maduro has continued with Chavez’s attack on Venezuela’s business class enforcing unrealistic price controls, and creating a government-controlled food distribution system that bypasses retail outlets.

Consequently now, Venezuela can only be described as a failed state in complete social and economic collapse.

Map and Flag of Venezuela
Map and Flag of Venezuela | Source

Questions & Answers

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      • profile image

        DC 

        2 weeks ago

        Ken explains it perfectly. Couldnt have said it any better. Smile and deal with your customers even when they suck, especially if they are the ones keeping you fed and fat.

        This article by the way is as accurate as it can be,. Been following the situation since 2001. Hope it teaches their people that free stuff doesn't really come free. Be aware of what sacrifices are being made for "socialism" (even when it's not easily known at the time)

        At the end of the day, such experiences will hopefully have lessons for the future generations. Assuming they can get out of their political situation and get a new government. Otherwise it's the new cuba

      • Ken Burgess profile image

        Ken Burgess 

        3 weeks ago from Florida

        JC

        I am sure my comment came across as harsh. And it was meant to.

        If Venezuela has a bad history with America, or if they don't like America, but the nation is dependant on America to refine its oil, and buy its oil, for its own sake, for the best interests of the country, you smile and like it.

        It's not complicated at all, you either grin and bear it so your country prospers... or you do what Venezuela did... and reap the rewards.

      • JC Scull profile imageAUTHOR

        JC Scull 

        3 weeks ago from Gainesville, Florida

        Thank you Readmikenow!

      • Readmikenow profile image

        Readmikenow 

        3 weeks ago

        Very well done article. It's a shame that a county that has the means to provide for its people doesn't because of politics. I agree with you, it is complicated. I enjoyed reading this.

      • JC Scull profile imageAUTHOR

        JC Scull 

        3 weeks ago from Gainesville, Florida

        They have lots of oil. If they can get a decent government, they can improve their economy substantially. Chavez's hatred for the US is not uncommon in Latin America. The feelings go back to the Banana Wars and the many times the US installed and gave aid to dictators. Let"s say, it's complicated.

      • Ken Burgess profile image

        Ken Burgess 

        3 weeks ago from Florida

        Interesting read. So, it seems they went extreme socialist, tried to rebel against the "West" (America in particular) and tried to become a big-brother to financially crippled nations like Cuba and Haiti.

        Railing against America when the U.S. is your primary source of income (American refineries & American consumers) is as idiotic as it can get.

        The dog that bites the hand that feeds it soon starves.

        The other idiotic decisions, like the state taking control of auto plants and oil rigs, just multiplied the level of failure. They will be the poorest and most backwards country on the planet in no time.

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