A revolution corrupted
Venezuela’s epic collapse cannot be understood without an analysis of the corrupt insiders that have taken control of much of the state and economy
It’s hard to overstate the scale of Venezuela’s current economic collapse. The economy has shrunk by nearly 40 percent over the last five years, making it the largest contraction not only in Venezuelan history, but in the history of the Western Hemisphere.
In per capita terms, the country has regressed at least 40, some say 50 years, with no signs of recovery on the horizon. Wages have collapsed by so much that the minimum wage earned by some 40 percent of the population now amounts to less than $5 per month. Not surprisingly, this has led to growing hunger and malnutrition, widespread looting, and mass exodus across the borders into neighboring countries.
The reasons for this situation have been much debated, and have usually been attributed to government mismanagement, the fall in world oil prices, or US sanctions and economic sabotage. But none of these can actually explain how Venezuela got to where it is today.
While low oil prices and US sanctions have exacerbated the crisis, neither of these occurred until well after the economic problems were already very grave. And while government mismanagement is a major factor, this explanation cannot account for why so little was done to rectify the problems, despite how obvious and easily fixable many of them are.
To really understand the roots of Venezuela’s epic collapse, it requires an understanding of the power struggles that occurred inside the government after Chavez’s death. These struggles led to the marginalization and dismissal of much of Chavez’s inner circle, and, eventually, to the takeover of large parts of the state and economy by corrupt insiders looking to enrich themselves.
Only in this way can it be explained why the massive economic distortions have gone unfixed for so long, despite their obvious destructiveness, and also why there was a major slide toward authoritarianism in recent years. Testimony from various inside sources reveals that after Chavez’s death, Venezuela’s revolution was hijacked by corrupt opportunists who began molding economic policy to serve their own interests, and, in the process, created an unprecedented tragedy for ordinary Venezuelans.
A house divided
For years there were rumors of internal divisions within the Chavez government. On one side were those aligned with the “Bolibourgeoisie” of insider capitalists and bureaucrats with lucrative business opportunities in the state. On the other side were the more ideologically pure socialists and leftists who sought to further the revolution, and denounced the corruption and abuses of the insider deals.
While many among Chavez’s inner circle were seen as more ideologically pure, his one-time vice president and housing minister Diosdado Cabello was long considered to be at the center of the “Bolibourgeoisie” faction. Though Chavez never publicly recognized this division, he did seem to hint at it when he named Nicolas Maduro as his successor in late 2012.
“Unity, unity, unity among us patriots! That must be our banner. There will surely be those who try to take advantage of difficult moments in order to restore capitalism,” he said on live television shortly before his death.
Not long after, a leaked audio recording of Chavista insider Mario Silva made it clear that the divisions were more than just a rumor.
“Are there internal divisions? Like crazy! Some going this way, others going that way, trying to see how they can get their hands on more money. And all of this is going against the 14 years that Chavez spent building this thing,” Silva said.
It was just two months after Chavez died, and Silva was warning about a major power struggle taking place within the state. According to him, it was between those that were still loyal to Chavez and the revolution, and a group of officials surrounding Diosdado Cabello that were “bleeding” the country of its dollar reserves through various “ghost companies”.
“We have to get to the root of this! We have to stop the hemorrhage of dollars being stolen by our own people!” he says as he pleads for help in neutralizing Cabello.
As for those who were still loyal to the revolution, Silva named oil minister Rafael Ramirez, planning minister Jorge Giordani, and defense minister Diego Molero, among others. If the corrupt officials were to be countered, these individuals needed to be kept in their positions of power.
“Molero cannot leave the Defense ministry. He can’t. If Molero leaves, we are screwed. Diosdado will take over,” warns Silva on the recording. “Ramirez and Giordani also must not leave…they are the key roadblocks to Diosdado within the government,” he said.
Two months later, Molero was gone, sent off to Brazil to be the ambassador there. A year after that, both Ramirez and Giordani were also out. Ramirez was sent to New York as ambassador to the United Nations, while Giordani was dismissed for denouncing Maduro’s inaction against corruption. It was clear that the roadblocks to Cabello’s power were slowly being removed.
In the years that followed, several other members of Chavez’s inner circle would also leave, citing corruption and growing authoritarianism as their reasons. As they did, it became clear that Diosdado Cabello and the “Boliborgeoisie” faction had won the internal power struggle. He and his cronies would now increasingly shape Venezuela’s state and economy to their liking, and it would have very little to do with furthering the goals of the revolution.
The rise of Diosdado Cabello
Cabello got his start at the military academy in the 1980s, where he first met Hugo Chavez and became a member of his fledgling revolutionary movement. In 1992, he would help carry out the aborted coup that would make Chavez famous, and catapult him to the presidency six years later.
When Chavez was elected in 1998, Cabello became an important figure in his cabinet, alternating between high-ranking positions, including a short stint as vice president. He also secured important posts for friends and family, like brother Jose David Cabello, who began operating various businesses through his position in the state.
By 2009, analysts were warning about the Cabello brothers and their growing economic empire. A series of wikileaks cables from that year detail how Diosdado was using his position as head of the Ministry of Infrastructure to seize privately owned port operations and place them under the control of companies headed by him and his nephews.
“Given the poor record for efficiency in other nationalized enterprises, we expect to see a negative impact on port operations in the months to come,” said the cable.
A month later, another cable discussed how Cabello and his allies were beginning to expand into the financial sector, taking over several small banks and insurance companies with the purpose of gaining access to Venezuela’s currency system.
Cabello’s group was reportedly one of several networks of corruption within the government, but according to a source cited in the cable, his group was known for its “fascist and military” trend, and a “desire for authoritarian control over society and the economy in a way that brooks no dissent.”
These words would prove prophetic in the years to come, as the rise of Cabello and his clan brought greater military control, and increasingly authoritarian rule.
The source also said that Cabello’s growing influence in the government was beginning to alienate the “traditional Marxist left”. This included people like planning minister Jorge Giordani, and finance minister Ali Rodriguez, who were driven more by socialist ideals than opportunities to enrich themselves.
“…the traditional left [is] becoming increasingly disenchanted with Chavez’s Bolivarian revolution, largely due to blatant corruption and the realization that desire for power, rather than achievement of socialist goals, was its driving force,” reads the cable.
Indeed, the more committed socialists would increasingly denounce the corruption in the years to come, and most would eventually leave or be dismissed as Cabello’s influence grew.
Pro-Chavez parliamentarian Luis Tascon was one of the first to publicly denounce Cabello and his brother, warning about the growing power of a right-wing within the government. As a result, he was labelled a traitor and expelled from the party.
The same would happen to high-ranking ministers like Jorge Giordani and Hector Navarro when they finally went public with their criticisms. Navarro explained that “a gang” had been formed inside the government, and that they were “only interested in getting their hands on the country’s oil revenue.”
“They are thieves with no ideology,” he said.
But the final nail in the coffin for the left came with the death of Chavez in 2013. It was at this point that Cabello and his allies were able to outmaneuver any remaining figures in the government that were still loyal to the revolution, and gain complete control over the state apparatus.
With his extensive ties to the military, Cabello was able to pressure Maduro into giving him control over the most lucrative parts of the state bureaucracy in exchange for the military’s continued support of his government. In a secret recording in 2015, one of Maduro’s nephews recounted how this happened, detailing how Cabello and Maduro made “a pact” after Chavez’s death to “divide up” Venezuela amongst themselves.
“They made a pact, behind closed doors… and [Cabello] said ‘you give me the tax administration, the mining sector, and the foreign exchange for food imports, and you guys can have the oil industry’… And so we left those things in [Cabello’s] hands, while the oil was left to us,” he explained.
In other words, Cabello and his cronies were left in control of much of the state, and they used this to begin enacting their “fascist and military” desires for the country. This included an increasing militarization of the state and economy, as numerous government ministries were handed over to army generals, and a whole slew of state-owned companies were put under military control, from banks, to television stations, to mining, and agriculture.
This was also accompanied by increasingly authoritarian rule, as the government began criminalizing dissent by deporting journalists, detaining online activists, jailing union leaders, and tear gassing food protests. Internal critics were increasingly jailed, forced out, or even murdered for voicing their dissent.
Meanwhile, Cabello’s control over foreign exchange and imports meant he could benefit greatly from growing inflation and the distortions in the currency. In other words, there was a powerful economic motive for not fixing the problems that were brewing with the economy, and this would be one of the driving forces behind the massive economic collapse in the years to come.
Creating the crisis
Though the crisis in Venezuela is often attributed to the fall in world oil prices, or economic sanctions from the US, it actually began long before either of these.
By the time oil prices fell in late 2014, Venezuela’s economy had already been contracting for three straight quarters, wages had already collapsed by 80 percent, and food shortages were already widespread. The major distortions behind all of this go back to late 2012, more than two years before oil prices fell, and more than 5 years before US sanctions became a factor.
In other words, neither oil prices nor sanctions can really explain the crisis. The real cause is to be found in a policy mix of high inflation and distorted currency that had reached critical levels by 2013, but which Maduro refused to rectify. Despite being fairly simple to solve, these distortions were allowed to get drastically worse from 2013 on, and the reason is that the corrupt “Bolibourgeoisie” faction was benefitting greatly from them.
Having gained control of food imports and other insider businesses, Cabello and his cronies now stood to make massive profits off an increasingly overvalued currency. This is because they had privileged access to US dollars at the very cheap official exchange rate set by the government. The more overvalued the currency, the more profit they could make by acquiring cheap dollars from the central bank, and then simply selling them on the black market or depositing them in bank accounts abroad.
Private sector companies had carried out similar schemes under Chavez, but they were somewhat limited by the fact that the exchange rate was periodically adjusted to account for inflation. However, once key economic advisers like Giordani were gone, and Cabello was in complete control, no more adjustments would be made. The currency was allowed to become so overvalued that the rate on the street was soon thousands of times higher than the official rate.
As a result, the “ghost companies” used by corrupt insiders were now acquiring hundreds of millions of dollars at a rate less than one percent of its real value. Numerous reports began to surface of those with insider connections making off with massive sums of cash. Even Maduro and his vice president have gotten in on the fun.
Meanwhile, ordinary Venezuelans have been forced to pay the price. With the state coffers leaking like a sieve, there was little money left over for basic necessities like food and medicine, or to maintain infrastructure like hospitals, schools, or even the electrical grid. Former planning minster Jorge Giordani has estimated that some $300 billion have been misappropriated through the currency schemes.
The obvious solution was to simply adjust the exchange rate and eliminate the distortions. Without a highly overvalued currency, the import schemes would not be possible, and the country’s foreign exchange could be used for more urgent needs. But Maduro refused to do this, despite numerous calls to do so from Chavez’s former advisors. Instead, he has continued selling the oil dollars to his friends at absurdly low prices, while at the same time imposing extreme austerity on the poor.
From 2012 to 2017, imports were slashed by over 65 percent, the largest percentage drop in Venezuelan history, even amidst widespread shortages of food and medicine. Social spending was also drastically cut, with overall government spending as a percent of GDP reaching its lowest point in decades.
In an attempt to cover budget shortfalls, the government ramped up the printing of money, creating massive amounts of currency with no backing. But this only exacerbated inflation and eroded wages, sending people’s income downward while prices continued upward.
Since 2013, wages have plummeted by over 90 percent in real value, as Maduro has repeatedly failed to match wage hikes to inflation. The current minimum wage amounts to only about $4 per month, not enough to buy even two cartons of eggs, or a single chicken with a whole month’s wage.
As would be expected, this has caused widespread hunger and growing malnutrition. Hospitals are collapsing, basic medications are unavailable, and essential services like water, electricity, and public transport are increasingly scarce.
The situation has become so desperate that an estimated 5,000 Venezuelans per day are now fleeing the country into neighboring countries, creating growing camps of refugees along the border with Colombia and Brazil. Others attempt the risky and often deadly trip by boat to nearby islands in the Caribbean.
Meanwhile, local production has collapsed in both private and public firms. This is partly due to the government’s slashing of imports, which has left local industries without needed inputs.
But the continual turning over of state-owned enterprises to political cronies and military officials has also played a major role. This was a practice that began under Chavez, but which was greatly accelerated under Maduro as a way to gain allies and keep the support of the military. Hundreds of private sector firms have been expropriated by the state in recent years, and then placed under the control of bureaucrats and military men who seldom have the needed experience or expertise, and are more interested in filling their own pockets than improving productivity.
In the food industry, for example, sweeping expropriations of farms and factories beginning in 2010 led to a sharp decline in food production from 2011 on, and became a major contributor to food shortages and inflation. Instead of redistributing the land to small farmers and turning factories over to worker control, most expropriated firms were put under the control of corrupt bureaucrats that made them into their own private domains, and then milked them dry.
Even in the all-important oil industry, which provides Venezuela with 90 percent of its export earnings, corrupt and incompetent leadership has led to a continual decline in output since 2014, costing the country billions of dollars in lost revenue, and bringing the nation’s refineries to the brink of collapse.
All of this has created a perfect storm of falling production, collapsing wages, and rampant corruption, leading to an unprecedented economic collapse. After more than four years of continual economic contraction, the crisis continues unabated, with no end in sight.
Rigged elections
Having overseen such a colossal economic disaster, it was clear Maduro could not possibly win free and fair elections. In fact, his government knew this, and so they prevented any such elections from taking place after the opposition victory in the 2015 parliamentary elections.
Starting in 2016, elections were simply blocked or postponed when it appeared as if the ruling party would lose. Then, in 2017, major efforts were made to ensure the government could win by manipulating the electoral conditions, holding snap elections that prevented opposition unity or primaries, and forcing state employees and poor sectors to vote in favor of the government.
This happened first with the constitutional assembly in July 2017. Knowing they could not possibly win a national referendum to initiate the assembly, Maduro simply skipped it, and proceeded to illegally alter the electoral bases to ensure a government majority would be elected with only about 20 percent of the electorate. During the election, the fraud was so obvious that the company that manages the voting machines immediately denounced the results, and the government never released the detailed tally of votes so that it could be verified.
Government officials have also increasingly made thinly veiled threats to state employees and welfare recipients that if they do not turn out to vote they could lose their jobs and benefits. After the July elections, it was made clear that these were not just empty threats, as many were denied food benefits for not participating.
Maduro has made the threats more effective in recent elections with a new ID card known as the “Homeland card”. Welfare recipients are required to use the card to receive food benefits and welfare payments, and then the government urges them to use the same card to vote on election day.
Though it is unlikely the government can actually track how people vote, the implicit understanding is that if they vote against the government, people will be risking their food benefits or state sector jobs. When meager food rations and welfare payments are the only thing separating many from starvation, they are not in a position to take the risk.
These kinds of tactics have allowed Maduro to obtain relatively high turnout among “supporters” in recent elections, whereas opposition voters have increasingly abstained due to exhaustion and the obvious bias of the electoral system. The government has also made it increasingly difficult for new voters to register, and for opposition parties to participate, causing high levels of abstention.
This is why the government decided to have a hurried electoral process last May, instead of the usual December date, as it made registration and participation more difficult for millions of people. High levels of abstention combined with the forced voting of state employees and welfare recipients has been Maduro’s formula for victory. Shortly after being reelected in May, a monetary “gift” was granted to “Homeland” cardholders to thank them for the win.
And while Maduro and his supporters have tried to paint the opposition as right-wing neoliberals and fascists, this is no longer as true as it was a decade ago. Nowadays, many prominent leftists and Chavistas, including many former high-ranking officials in Chavez’s government are now in opposition to the Maduro government.
Some among the opposition have promised to eliminate the currency distortions and raise wages with a partial dollarization of the economy if they took power. They have also promised to return the hundreds of expropriated firms to the private sector as a way to get production moving again. Maduro supporters have used this to show the neoliberal nature of the opposition, but in fact these are likely necessary measures if Venezuela’s economy is going to recover.
But with Cabello and his cronies firmly ensconced throughout much of the state, and in control of major sectors of the economy, it is unclear how the opposition would do this, even if they did take power. Many of the expropriated firms are under control of military officials who will not be interested in handing them over, and Cabello’s extensive influence in the military means he will be able to exert pressure over the government regardless of who is president, as even Chavista insider Mario Silva noted.
With the deck stacked against them, and corrupt officials entrenched throughout the state and economy, there is little that the opposition can do. And as long as Maduro, Cabello, and their cronies remain in power, Venezuela is unlikely to dig its way out of the current mess.
Chris Carlson is a PhD candidate in Sociology at the CUNY Graduate Center. His research is on the sociology of development, with a focus on agrarian relations and structural transformation in the Global South.