Venezuela and the socialist nightmare

Facts:

Venezuela is the country with the biggest crude oil reserves on earth.

List of countries by proven oil reserves | Wikiwand

But

1. Venezuela is ranked 187 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. The rank of Venezuela deteriorated to 187 in 2016 from 185 in 2015. Ease of Doing Business in Venezuela averaged 180.44 from 2008 until 2016, reaching an all time high of 187.00 in 2016 and a record low of 175.00 in 2010.
2. Venezuela is the 166 least corrupt nation out of 175 countries, according to the 2016 Corruption Perceptions Index reported by Transparency International. Corruption Rank in Venezuela averaged 118.82 from 1995 until 2016, reaching an all time high of 172 in 2011 and a record low of 38 in 1995.
3. Standard & Poor’s credit rating for Venezuela stands at CCC- with negative outlook, even worse than the rating of the Republic of the Congo which is CCC+. Moody’s credit rating for Venezuela was last set at Caa3 with negative outlook. Fitch’s credit rating for Venezuela was last reported at CCC with n/a outlook. In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Venezuela thus having a big impact on the country’s borrowing costs.
4. Consumer prices in Venezuela jumped 741 percent year-on-year in February of 2017, according to estimates from Venezuela’s opposition-led congress. Inflation Rate in Venezuela averaged 32.42 percent from 1973 until 2017, reaching an all time high of 800 percent in December of 2016 and a record low of 3.22 percent in February of 1973.
5. Venezuela recorded a trade deficit of 782 USD Million in the third quarter of 2015. Balance of Trade in Venezuela averaged 4520.58 USD Million from 1990 until 2015, reaching an all time high of 17732 USD Million in the third quarter of 2008 and a record low of -2015 USD Million in the fourth quarter of 2008. In other words, in USD terms they are exporting more than they are importing inspite of the massive oil reserves.
6. Consumer Confidence in Venezuela remained unchanged at record low of 57 in the fourth quarter of 2016 from 57 in the third quarter of 2016. Consumer Confidence in Venezuela averaged 71.48 from 2011 until 2016, reaching an all time high of 89 in the first quarter of 2012 and a record low of 57.

The obvious question is:

How can a country with the biggest crude oil reserves on the planet be constantly on the brink of economic collapse for half a century?

The answer: Socialism, Corruption and Lack of intelligence within the local population.

Socialism

Venezuela is a typical example of a country which went through the death cycle of a civilisation.

They went from an unimportant colony to self administered poor country to rich country with dictatorship in the moment the vast oil fields were discovered, to rich country with democracy to rich country with a socialist government and eventually becoming a poor country through socialism.

To understand Venezuela’s long-term decline, we must look back at what made it so prosperous at the time. Before the exploitation of its first oil field on April 15, 1914, Venezuela was essentially a Banana Republic marked by political turmoils. The discovery of oil in the early twentieth century completely changed the entire landscape in south america. The powerful agricultural aristocracy would be supplanted by an industrialist class that sought to open its oil markets to multinational exploitation and foreign investment. For the first time in its history, Venezuela had a relatively liberal, free market economy and it would reap countless benefits in the decades to come.

From the 1910s to the 1930s, the much-maligned dictator Juan Vicente Gómez helped consolidate the Venezuelan state and modernized an otherwise neocolonial backwater by allowing market actors, domestic and foreign, to freely exploit newly discovered oil deposits. Venezuela would experience substantial economic growth and quickly establish itself as one of Latin America’s most prosperous countries by the 1950s.

In the 1950s, General Marcos Pérez Jiménez would continue Gómez’s legacy. At this juncture, Venezuela was at its peak, with a fourth place ranking in terms of per capita GDP worldwide.

While oil exploitation did play a considerable role in Venezuela’s meteoric ascent from the 1920s to 1970s, this only scratches the surface in explaining how Venezuela became so prosperous during this period. A combination of a relatively free economy, an immigration system that attracted and assimilated laborers from Italy, Portugal, and Spain, and a system of strong property rights, allowed Venezuela to experience unprecedented levels of economic development from the 1940s up until the 1970s.

As mentioned earlier, Venezuela was at the height of its prosperity during the military dictator Marcos Pérez Jiménez’s regime. Like Juan Vicente Gómez’s regime, Pérez Jiménez’s stewardship of Venezuela was characterized by heavy political repression.

Venezuela’s capitalist structure remained largely intact during Pérez Jiménez’s tenure, albeit with creeping degrees of state involvement. Pérez Jiménez did introduce some elements of crony capitalism, pharaonic public works projects, and increased state involvement in “strategic industries” like the steel industry. Nevertheless, the Pérez Jiménez regime was open to foreign investment, let the price system function normally in most sectors of the economy, and did not embark on creating a profligate welfare state.

Despite the prosperity brought about by Venezuela’s booming economy in the 1950s, Marcos Pérez Jiménez’s government drew the ire of many left-leaning activists due its heavy-handed measures. The tipping point came in 1958, when these leftist activists, working in tandem with a sympathetic military, successfully overthrew Pérez Jiménez in a coup. Pérez Jiménez would live the rest of his life in exile and would be a figure of derision among Venezuelan intellectual and political elites, despite the unprecedented economic and social development under his watch.

Following the 1958 coup, naval officer Wolfgang Larrázabal occupied the presidency briefly until general elections were held later that year. Notable social democrat political leader Rómulo Betancourt would come out on top in these elections and assume the presidency from 1959 to 1964. The Fourth Republic of Venezuela — Venezuela’s longest lasting period of democratic rule, was established under Betancourt’s administration. In 1961, a constitution was introduced, dividing the government into 3 branches — executive, legislative, and judicial — and establishing an activist role for the Venezuelan state in economic affairs.

This political order was further consolidated by the establishment of the Punto Fijo Pact. The Punto Fijo Pact consisted of a bipartisan agreement between two political parties — Acción Democratica (Democratic Action) and COPEI (Christian Democrats) — that laid the foundation for a social democratic political order and alternation of power between the two parties.

What seemed like a genuine move toward democratic stability, Venezuela’s Fourth Republic marked the beginning of a process of creeping socialism that gradually whittled away at Venezuela’s economic and institutional foundations.

Venezuela’s current collapse did not happen overnight. It was part of a drawn out process of economic and institutional decay that began decades before.

When Venezuela returned to democracy in 1958, it looked like it was poised to begin an era of unprecedented prosperity and political stability.

However, Venezuela’s democratic experiment was doomed from the start, and one needn’t look any further at the political background of its very own founder, Rómulo Betancourt, to understand why it’s entire political system was built on a house of cards.

Rómulo Betancourt was an ex-communist who renounced his Marxist ways in favor of a more gradualist approach of establishing socialism. Despite evolving into more of a social democrat, Betancourt still believed in a very activist role for the State in economic matters.

Betancourt was part of a generation of intellectuals and student activists that aimed to fully nationalize Venezuela’s petroleum sector and use petroleum rents to establish a welfare state of sorts. These political figures firmly believed that for Venezuela to become a truly independent country and free itself from the influence of foreign interests, the government must have complete dominion over the oil sector.

Under this premise, a nationalized oil industry would finance cheap gasoline, “free” education at all levels, healthcare, and a wide array of other public services.

This rhetoric strongly resonated among the lower and middle classes, which would form the bulwark of Betancourt’s party, Acción Democrática, voter base for years to come.

At its core, this vision of economic organization assumed that the government must manage the economy through central planning. Oil would be produced, managed, and administered by the state, while the government would try to phase out the private sector.

Betancourt’s administration, while not as interventionist as succeeding 4th Republic governments, capped off several worrisome policies, which included:

1. Devaluation of the Venezuelan currency, the Bolívar.
2. Failed land reform that encouraged squatting and undermined the property rights of landowners.
3. The establishment of a Constitutional order based on positive rights and an active role for the Venezuelan state in economic affairs

Betancourt’s government followed-up with considerable tax hikes that saw income tax rates triple to 36%. In typical fashion, spending increases would be accompanied with these increases, as the Venezuelan government started to generate fiscal deficits because of its out of control social programs. These growing deficits would become a fixture in Venezuelan public finance during the pre-Chávez era.

While Betancourt did not achieve his end goal of nationalizing the Venezuelan oil industry, his government laid the foundation for subsequent interventions in that sector.

Thanks to the large oil boom of the 1970s, the government of Carlos Andrés Pérez capitalized on the unprecedented flow of petroleum rents brought about by the 1970s energy crisis where oil-producing countries like Venezuela benefited handsomely from high oil prices.

Betancourt’s vision was finally achieved in 1975, when Carlos Andrés Pérez’s government nationalized the petroleum sector. The nationalization of Venezuela’s oil industry fundamentally altered the nature of the Venezuelan state. Venezuela morphed into a petrostate, in which the concept of the consent of the governed was effectively turned on its head.

Instead of Venezuelans paying taxes to the government in exchange for the protection of property and similar freedoms, the Venezuelan state would play a patrimonial role by bribing its citizens with all sorts of handouts to maintain its dominion over them.

Countries based on more liberal frameworks of governance have citizens paying taxes, and in return, these governments provide services that nominally protect the life, liberty, and property of its citizens. The state is not the owner, thus giving the citizens a strong check against the Leviathan should the government overstep its boundaries.

Pérez would take advantage of this state power-grab to finance a profligate welfare state and a cornucopia of social welfare programs that resonated strongly with the populace. As a result, deficit spending became embraced by the political class and increasing levels of foreign and public debt would become the norm in Venezuelan fiscal affairs.

At this juncture, Venezuela’s economy became overwhelmingly politicized. Oil boom periods were characterized by an inflow of petrodollars that the state used for pharaonic public works and social projects as a means to pacify the populace.

In reality, no real wealth creation took place during these boom periods, as the state redistributed the rents according to political whims and usurped functions traditionally held by civil society and private economic actors. When politicians and bureaucrats oversee businesses, decision-making is based on partisan and state interests rather than efficiency and consumer preferences.

Although the nationalization of the petroleum industry did not result in an immediate economic downturn, it laid the groundwork for institutional decay that would clearly manifest itself during the 80s and 90s.

Corruption

Independently of the structure of the government, corruption has been traditionally very strong in the latin american countries.

IQ

Like in all latin american countries the average IQ is at about 84 in Venezuela.

Average IQ by Country

I think it is not necessary to mention that this is a very low measure. For those who don’t know, the world average IQ is 100. The UK is at 100, Germany at 99, the US at 98, Asian countries rank higher with Japan and China at 105 and Hong Kong and Singapour at 108. There are scientific studies that claim that if the average IQ in the US would fall 3–6 points the US economy and society would implode and fall apart. The chances any latin american country ever to reach a similar standard as in the developed western nations are thus very small for not to say non-existant as long as the standards are not imposed by force.