What Caused the Venezuelan Collapse?

A lot of simplistic explanations have re-emerged about what caused the crisis. From "Socialism" to "US Imperialism" to a host of conspiracy theories. So what really happened?

"We are Venezuelans. Please help us with the passage, thank you and God bless" Feb 29th Pamplona, Colombia (Joshua Collins)

Medellín, Colombia-

15 years ago Venezuela was the richest nation in South America. It boasts the largest known oil reserves on the planet and considerable gold deposits. It now faces a humanitarian crisis and is on the verge of complete economic collapse. Furthermore it is being rocked by massive protests led by an opposition leader named Juan Guiado, leader of the National Assembly, who recently declared himself the true President of Venezuela. The Venezuelan currency is effectively worthless, often worth less than the paper it is printed on. The monthly minimum wage is the equivalent of 7 dollars a month, a pitiful amount that only buys food for a day or two. There are massive food shortages, a completely non-functional health system in which not only is there no medicine, but there are no basics such as surgical gloves or disinfectants. And insecurity is rampant, with the government unable or unwilling to protect its citizens. The UN estimates that 3.6 million Venezuelans have fled the country, and the situation has worsened considerably in the last year and a half. 

So what caused the crisis? The economic problems of Venezuela are caused by a myriad of factors and a long series of decisions by both it's leaders and the people. A lot of very simplistic answers have emerged over the last few years, and I find that they reflect more the political viewpoint of the person or organization speaking than an attempt to get at the truth. Muros Invisibles has spent over a year on the ground in Colombia, and an extended period of time on the Venezuelan border talking to hundreds of Venezuelans and Colombians. In this article we are going to take a serious look at some of the most popular explanations. 

Popular theory number one: "Socialism Bad"

Right-wing publications and personalities often use the dreaded term "Socialism" as a one-word retort to anyone advocating for public programs, and Venezuela is one of their favorite examples. Usually, when the Libertarian speaks of Socialism, they don't have in mind the Nordic European Nations such as Sweden or Norway, but rather one of their favorite boogey-men, Venezuela. They speak of bare shelves in the stores and the "brutal horror of Socialism". Is it true that Socialism is what collapsed the Venezuelan economy? Well, sort of. But also, no. Let me explain:

Victor Chavez was elected President of Venezuela in 1998 after running a platform of ending corruption as well as a Socialist platform of helping the poor. He immediately began a series of programmes known as "Missions" that were aimed at combating and alleviating the widespread poverty and wealth inequality in Venezuela. He called this ambitious program aimed at redistributing oil-wealth "21st Century Socialism".

These programs provided free health care, imported doctors from Cuba, provided education and training opportunities to the poor and the subsidization of certain goods to the people of Venezuela, including food and gasoline. 

But some of these programs had disastrously unintended consequences. 

When faced with fluctuations in the price of oil beginning in 2000, Venezuela's oil dependent economy began to experience capital flight. Due to the need to import the majority of their consumer goods, Chavez began trading oil to his allies for the things he needed. As part of his plan to diversify the economy he set up what was initially supposed to be a stop-gap measure to prevent inflation.

The government of Venezuela began to offer currency trading at a fixed rate to combat inflation, the unintended consequence was the Venezuelans in the Military and the Elite-class (who despised Chavez for his attempts at redistribution, directly challenging their wealth and status) began to buy the discounted dollars in mass and sell them on the black market for a profit. This put in place a huge incentive for corruption. As it was effectively possible through arbitrage to simply buy discounted dollars through government connections and sell them for a personal profit. That is to say more plainly: take wealth directly from the government coffers for goods that never existed, items never imported and companies that were never more than paperwork.

This also created a short-term reward for Venezuelans to avoid diversifying the economy. It was more profitable for the private sector to grab petro-dollars than invest in infrastructure for diversification, or even for expanded oil production. Thus, the program led to nepotism and the beginnings of what would eventually evolve into todays' Venezuelan kleptocracy. The exchange rate for dollars on the black market was thousands of times higher than the rate offered by the government, creating huge incentives for abuse.

Is that a Socialist program? That is a great question. It is certainly part of a "planned economy", so a free-market purist would say that it is VERY "Socialist". But at that period, the economy in Venezuela was driven almost entirely by the private sector.  And it is also true that currency management is something every country does, and if we are going to take the viewpoint of the free-market purist, then the United States is also a mixed-economy. That is to say, just like Venezuela then, the majority of the market is driven by the private sector with currency policy managed by the State. And it should also be stated that the expensive Mission social programs were a drain on the flailing economy during downturns, absolutely, but they were far from the gravest of the many problems Venezuela faced. So the answer is "Yes, it is Socialist". But the answer is also "It was also an incredibly stupid decision for a vast array of other reasons as well as startlingly corrupt."

And while Chavez was able to manage the program by incrementally devaluing the Bolivar during inflationary periods, his successor Maduro plunged the economy into a tailspin through breath-taking mismanagement. Chavez’s former finance minister, Jorge Giordani says that 300 billion was embezzled in this manner between 2003 and 2012. When a second drop in the price of crude oil by 70% jilted the Venezuelan economy in 2014, instead of ending these currency programs, diversifying the economy, or trying to alleviate the suffering of the Venezuelan people, Maduro simply began dissolving Democratic institutions, and handing over more economic power to the Military, who grossly mismanaged everything they touched, but especially the state run oil company PDVSA. They created an inefficient system of corruption, nepotism and often times outright theft, ignoring the plight of ordinary Venezuelans at every turn.

Why? Because Maduro and other government officials benefited greatly from the arrangement. And he needs to keep the the Military loyal. Unlike Chavez, he is unable to do this through any other means than rampant bribery.

Verdict? Socialist programs played a role in the economic collapse, but to say that they were the root cause is extremely misleading. It is more fair to say that expensive social programs were a drain on the economy during downturns, but far more devastating to Venezuela was a level of corruption difficult to achieve in most countries as well short-sighted decisions to neither diversify nor build infrastructure for more oil production. 

Popular Theory Number Two: International Sanctions and "Capitalists"

Dec 26, 2018- Simon Bolivar Bridge from Colombia to Venezuela- Venezuelans carry goods home across the bridge. The border has since been closed on the Venezuelans side, but smuggling continues through informal paths across the border or "trochas" (Joshua Collins)

This is Maduro's all-time favorite talking point as he complains of "economic warfare" and "Yankee imperialism" to explain away the problems of the Venezuelan economy. It is a claim that the real problems are sanctions and "capitalist outsiders" smuggling consumer goods into the country to sell on the black market. And it's one I am starting to see parroted in some ultra-leftist American media as they try to avoid further American intervention. (For the record: We at Muros Invisibles are firmly against any American military intervention in Venezuela. It would be mind-bogglingly stupid, as well as counterproductive).  

The "capitalists" and food traffickers smuggling goods into Venezuela are simply taking advantage of a system of incentives put in place by the Venezuelan government. I've been to the border. These "capitalists" are Venezuelans carrying heavy loads of toilet paper, food, tires or whatever consumer good they can into Venezuela. And some of the biggest contrabandistas of black market goods into Venezuela have been, guess who? That's right, the military. It would seem they are not above taking advantage of problems they publicly bemoan if it means they can make an outrageous profit doing so. 

As for economic sanctions, until very recently, the US bought the majority of Venezuelan oil. Until the economic sanctions were tightened considerably by the Trump administration this year, they had a negligible effect on the Venezuelan economy, which had already been in a death spiral for four years. However, since  the recent sanctions, the Venezuelan government has been completely unable to obtain credit and oil production has slowed considerably- which has worsened the daily lives of the Venezuelan citizens. This policy is inhumane and seems intended to provoke popular unrest, and so in this aspect Maduro has a bit of the truth. 

Verdict?  Although it is true that recent sanctions are challenging some cash flow of the current government, it is no way at all a cause of the crisis. However, we agree that the more recent sanctions have worsened the situation considerably and continue to make things worse, particularly for the poorest of Venezuelans.

Then what's the deal? What happened?

The economic disaster happening in Venezuela can be squarely traced back to decisions made by the Venezuelan government. Programs initiated under Chavez, whom despite how you may feel about his politics was a very charismatic and effective leader, had unforseen effects under Maduro, whom whatever you may think of his politics has turned out to be an utterly corrupt bonehead.

 

These decisions have some of their roots in socialist policy, but it is far more accurate to describe the mismanagement as mind-bogglingly brazen theft. It is an ideology of greed, and cynicism more than any economic system. Under Maduro, Democratic institutions were eroded and slowly replaced by a Dictatorship completely unconcerned with the Venezuelan people. And he has been doubling down on his brazen theft at every turn in ever more desperate attempts to keep the Military on his side. He has put the economy squarely in the hands of his military elite, who are using the opportunity to fill their pockets as quickly as possible. And whenever an opposition party has protested, it has been forcefully stomped into non existence. 

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