A brief history of what the hell is going on in Venezuela
Hugo Chavez’s biggest policy error has cursed his successor. And now that people want him gone, he’s becoming a dictator.
Last Sunday, amidst intense public protests, Venezuela’s Congress declared that President Nicolas Maduro’s administration had effectively staged a coup by blocking parliament’s efforts to recall him from office. Their attempt to oust him is no surprise, as Venezuela is suffering one of the most staggering economic collapses in recent memory.
The IMF estimates inflation will top 700 percent this year while the economy contracted 10.6 percent in 2015. Oil exports dropped 40 percent in 2015, depleting the nation’s foreign currency reserve and leading to shortages of basic and necessary goods.
Yet Maduro did not achieve this all on his own. This level of notoriety requires years of painstaking poor preparation.
The devil you know
Hugo Chavez, Venezuela’s President from 1999 until his death in 2013, drove Venezuelan politics, and as this crisis shows, he continues to drive them three years after his death. In a region famous for outsize political personalities, Chavez’s flair for the dramatic and flamboyance stood apart from the rest. He called George W. Bush the devil in a speech to the U.N. He hosted “Aló Presidente,” a weekly six-hour-long talk show in which he regularly sang and danced.
He also loved to thumb his nose at the U.S. government any chance he got. As a self-proclaimed socialist in the yanquis backyard, Chavez and the U.S. were natural antagonists, but Chavez relished embarrassing and annoying the Bush and Obama administrations. Venezuela sits on the largest oil reserves in the world, and Chavez used these riches to fund anyone willing to speak up against the U.S. Cuba received massive amounts of oil essentially for free. (In fact, Venezuela’s downturn likely hampered Cuba’s will to continue its 50-year standoff with the U.S.) In 2006, Chavez even offered to sell Bostonians and New Yorkers discounted heating oil in a critique of how the U.S. government treated its poor.
While this was a naked attempt to troll Bush, Chavez felt strongly about the government’s duty to relieve poverty. His administration increased public spending on a massive scale, funding education, health care and other social services. He even provided fuel subsidies so that the price for a gallon of gasoline was $0.01. (Maduro has since raised the price to $0.60.) These programs had an impact, decreasing poverty throughout Venezuela, improving equality and making education affordable for the first time for a massive swath of the population.
Resource curse
While other oil-producing nations, such as Norway, save substantial portions of their oil revenue in case the price drops, Chavez refused. His socialist programs and petro-diplomacy came with an enormous price tag. Even during the mid-2000s, when oil was selling for more than $100 a barrel, the Venezuelan government was running a deficit. To make ends meet, Chavez took large loans from China to be paid back with oil.
This illustrates how Venezuela functions essentially like a gas station with a national anthem: Over 95 percent of its export revenue comes from oil sales. Because of all the easy dollars coming from these exports, it has always been cheaper to import goods than develop local industry, leaving Venezuela very dependent on foreign-made basic goods.
Here is where the fundamental misunderstanding of the current situation arises. Venezuela was running a deficit when it was making money hand over fist, so of course it is struggling now that the price of oil has plummeted. But as the U.S. has shown, debt and deficits are not necessarily debilitating. Rampant inflation, on the other hand, is. And so we turn to a general strike of at Venezuela’s state-owned oil company, PDVSA, in 2003.
When a gas station stops selling gas, it stops making money. To keep the nation running, Chavez took emergency action and fixed the exchange rate of the Venezuelan Bolivar to the U.S. dollar and required all currency exchanges go through the government. It was an effective solution to the problem. Venezuela was able to ride out the strike without capital fleeing the country. Once oil production came back on, revenue began flowing back into Venezuela and there was no fear of wild currency devaluation or collapse.
But these currency controls have stayed in place even to today. High-ranking officials now had the authority to approve or reject any major transaction requiring dollars, giving them the opportunity to extract bribes for allowing deals to go through. What began as an emergency measure became another source of income for the Venezuelan elite—and a strongman (like Chavez or Madura) needs the elite to maintain power.
From bad to worse
And this is the time bomb that Chavez gifted Maduro. When Chavez died in 2013, the cracks in Venezuela’s fixed currency had never been exposed; the price of oil had always been high enough that Venezuela had plenty of dollars in its foreign reserves. Maduro, a former bus driver and technocrat from Chavez’s inner circle, lacks the charisma of Chavez and was narrowly elected to succeed him, despite the full support of Chavez’s party. Protests around the election sprung up, and almost since Day One, Maduro has been fighting to keep his administration above water.
Then, in 2014, the bottom fell out. The price of oil halved over six months. According to the IMF, the Venezuelan government received $80 billion from oil sales in 2013. This year, its revenue is projected to top out at $25 billion. The currency controls that had remained in place to keep Chavez’s—and now Maduro’s—supporters content became untenable, but to remove them would have meant that Venezuela’s currency would suffer a devaluation. This would have made local goods more expensive and potentially undone Chavez’s poverty relief programs. While neither option was particularly appealing, by letting go of the currency controls, Venezuela’s economy would be able to find a new equilibrium and rebuild. (NPR’s Planet Money did a great job of explaining Venezuela’s economic decline.)
The Maduro administration insisted on maintaining the government regulated exchange rate of 6 Bolivars to $1, but in the black market the exchange rate reached hundreds of Bolivars for a single U.S. dollar. This led to massive arbitrages in which individuals who could purchase dollars from the government would then sell them on the black market and make a fortune. To prevent this the Maduro administration doubled down on the currency controls by introducing three separate exchange rates. However, this only presented more opportunities for scammers to game the system.
In a staggering series of decisions, the Maduro administration decided to begin printing more money and introduce price controls. Inflation has soared and the already underdeveloped Venezuelan manufacturing and agricultural industry has crumbled. This has led to the rolling blackouts and shortages of basic goods that have been ravaging the country for months. Crime in Venezuela has skyrocketed. China has stopped lending and wants its money back.
Maduro, under increasing pressure from the opposition government and popular protests, has reacted with authoritarian measures. Political and military leaders critical of Maduro have been imprisoned, and military personnel have opened fire on protesters. In the 2015 parliamentary election, Maduro’s party suffered its worst losses since Chavez took power. However, just before the elections, Maduro stacked the Supreme Court by adding 13 new justices. The Court has since become another arm of the Maduro administration, overruling every piece of legislation the opposition-led Congress has passed. It also removed Congress’s right to oversee the budget and, making international headlines last week, suspended the recall referendum.
Going forward
As someone who studied political science and economics, the Venezuelan situation is fascinating. Maduro’s policy for the past three years is essentially like if I had written the opposite of the correct answer on every question in my comprehensive exam. While Chavez was an elected president with dictator-like qualities, Maduro, though also elected, has increasingly become a dictator behind a thin veneer of democracy. Maduro has systematically undermined checks on his power to subvert the will of a public that overwhelmingly wants to remove him from office.
At this point, even if oil prices were to rise to their mid-2000s level, the corruption and crime that Maduro has fostered to shore up his power base would likely stagnant any recovery.
