Venezuela’s 1980s and current crises: is it a déjà vu all over again?

To have an idea of what lies ahead Venezuela’s medium term future, it’s good to remember a series of events that took place after a strong oil price slump in the first half of the 1980s. These include violent upraises in the late 1980s that ended in more than 400 dead, followed in the early 1990s by two-failed coup d’états and the country’s major banking crisis.

In this piece, I will briefly present Venezuela’s economic rise and fall hand in hand with the development of fiscal oil revenue with the aim of comparing the current slump with the crisis lived in the early 1980s, when oil prices decreased after the second oil shock of 1979.

The idea is to see that far away from what the current revolutionary rhetoric of Maduro’s administration might have one think, the attitude and policies implemented by policymakers back then and now rather fit the mold of those that one would expect for a petro-state. The future perspectives are thus bleak.

Venezuela until the 1970s: from rags to riches

The oil industry affected the future development of the nation since it took place almost in parallel to the formation of a central state.

One can hardly talk about a central state in Venezuela before because during the century that passed since the country’s declaration of independence from Spain until the beginning of the oil industry, the country lived in constant turmoil, under the rule of regional caudillos and rather weak presidents/dictators. Such a state of affairs made Venezuela one of the poorest countries of Latin America by the end of the 19th century.

It was only when the country developed a central state financed by oil that it managed to sustain high per capita growth rates for over 50 years until the 1970s undertaking both the easy (consumer goods) and hard (steel, petrochemicals, cars, etc.) import substitution industrialization. During this time the Venezuelan state built what was until the early 1980s the world’s largest hydroelectric power station, the Guri, which serves with electricity most of the country and parts of Brazil. All this with one of the lowest inflation rates of the region.

In contrast to other developing countries with petro-states, oil also seemed to ease the formation of democratic institutions in Venezuela. The country established universal suffrage early on (1947), only one year after France. After a dictatorial parenthesis, the country managed to establish a stable democratic system since 1958, during a time when dictatorial regimes were omnipresent in Latin America, as well as Portugal and Spain. The country also managed to appease in the 1960s serious threats from left-wing guerrilla by integrating them into the democratic system.

Last but not least, as is common in petro-states, Venezuela during boom periods was an immigration magnet. During the oil boom of the 1950s the country attracted about a million European immigrants, and then during the boom of the 1970s more than 3 million South American immigrants.

The mirage of oil-based prosperity

Venezuela’s ascending trend happened without the state having to resort to the development of a broad based tax system. This is one of the most development-challenging features of petro-states that developed a centralized state at the same time than their oil industry, such as was the case of Venezuela in the early 20th century.

The state instead focuses its attention on capturing oil rents and thus becomes a prize to be captured by all major actors in society that have vested interests in the further development of the oil industry: political parties, the business elite, unionized labor and the military. Oil money allows the state to address claims of these different groups and Venezuela has been a showcase of appeasement through oil money.

Within such a system, the government can appease labor if it uses oil fiscal revenues to reduce inequalities. But given Venezuela’s limited state capacity its system of social protection consisted in maintaining high employment levels by the creation of public sector jobs and price controls on food. The government can also appease business elites by subsidized credits and protectionist measures.

The only feature of a petro-state in which Venezuela is an exception is that it was able to develop a democratic state, at least until recent years. Oil money has allowed most of the time to appease the military.

The success of Venezuelan system until the 1970s reduced the chances of the state implementing policies to develop alternative exporting sectors that could reduce the country’s dependence on oil.

The rentier system developed by petro-states allows average income levels to increase faster than productivity, which is a situation that overvalues the real exchange rate and hurts the competitiveness of non-oil exporting sectors.

Why Venezuela does not save for rainy days

The logical answer to prevent real exchange rate overvaluation during oil booms would be to save abroad most of the oil earnings. However, this is a very difficult task to achieve for a petro-state of a democratic developing or emerging country. Among the top 5 sovereign wealth funds belonging to petro-states there is no such country.

Norway, at the top of the list, was already a developed liberal democracy with a well-established tax system and relatively diversified economy when it started exporting oil from the North Sea in the 1970s. The other four major sovereign wealth funds belong to Gulf countries: United Arab Emirates, Saudi Arabia, Kuwait and Qatar. They are all high-income countries according to the World Bank’s development classification.

Moreover, these countries are far from being democratic and the majority of their population comprises foreigners from developing countries (excepting Saudi Arabia where foreigners represent “only” 40% of the population) that do not have access to the welfare state institutions reserved to citizens. Therefore, the poor do not have a democratic voice and the state is not compelled to alleviate their social problems.

Democratic developing countries with a petro-state such as Venezuela not only suffer from the lack of institutional development of a tax system that would minimize the state’s dependence on revenues from the oil sector, they also face more direct redistributive pressures because of the relatively high prevalence of poverty and the political empowerment of the poor.

Lack of willingness to save and adjust then and now

Apart from not being able to save during oil booms, petro-states in democratic and developing countries find it hard to adjust to lower oil prices.

The availability of external finance allows for this lack of adjustment. Back in the 1980s, when the continent was going through the debt crisis, Venezuela managed to secure private external financing, without adjusting to the new low oil price scenario.

The strongest measure taken during this period was the implementation in 1983 of hard currency rationing and a system of multiple exchange rates after almost two decades of a fixed, unified and convertible parity of the bolivar against the dollar.

The insistence that strong adjustment measures will not take place under Maduro’s watch, despite oil prices currently averaging less than 50% of the average price during the first two years of his presidency (2013–2014), resembles the attitude of the social Christian government of Herrera Campíns during the first half of the 1980s.

Despite their marked ideological differences, both governments exhibit commonalities in several policy measures. The most striking one is the insistence on keeping a system of hard currency rationing and multiple exchange rates. In both occasions such a measure being justified as a way to mitigate inflation pressures caused by devaluating.

Moreover, although Venezuela is no longer the high regarded borrower it was in the 1980s, the country currently enjoys from a source of external financing that allows the government to avoid major adjustment measures. The financial savior of Maduro’s government is not the international financial market but China.

The burden imposed by the increasing debt service of the 1980s, which reached a peak of around 40% of oil exports by the late 1980s is not that far away from the about 20% of oil exports that Venezuela has to send to China in accordance to these agreements.

A ticking bomb

The positive facets of the Venezuelan petro-state were the development of a peaceful and democratic state and the increase of living standards for at least 50 years.

Yet the development trajectory of Venezuela shows the limitations of oil-led development. The development of the oil industry in a weak institutional context will only help develop state capacity for capturing oil rents. To make matters worse, it will also align the interests of diverse social groups that have limited opportunities to profit from investments in the tradable sector to further the oil dependence.

These challenges increase not only during booms, but also during bust times, when petro-states such as Venezuela have a hard time adapting both in the cuarta as in the quinta república. The problem with the lack of political will to adjust is that the country will have to apply for a conditional loan at the IMF, as during the 1990s, if oil prices fail to increase anytime soon.

A longer version of this article is available in German at Makroskop