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The History of the Venezuelan Crisis: How Did We Get Here?

Less than fifty years ago, Venezuela was the richest country in Latin America. Hard to believe when dramatic inflation numbers and deadly protests have recurrently made the headlines over the past four months. During the Venezuelan crisis, more than 100 people have been killed in protests that started in April 2017, with thousands wounded and hundreds arrested. Tensions between the local population and President Nicolás Maduro’s autocratic government have increased. Venezuela faces a deadlock. But, how did we get here?

Venezuela’s current crisis started over two decades ago. For years, the country has become trapped in a downward spiral of corruption, poor leadership, and mismanagement of its most important resource: oil. Venezuela owns the largest reservoir of extra heavy oil in the world and is the world’s fifth largest oil exporter. A rewind of Venezuela’s economic and political history offers the best chance of understanding the crisis it faces today.

Poor management: a tale of two decades

Years of poor management have contributed to the slow degradation of Venezuela’s economy. Today, political mismanagement has taken a toll on Venezuela’s society, blamed by many as the root cause of the country’s political and economic crisis.

Yet who is to blame: Hugo Chávez, President of Venezuela and leader of the Bolivarian Revolution from 1999 to 2013, or Nicolás Maduro, the successor of Chávez and current President?

Hugo Chávez rose to power in 1999 under a populist banner, one that swore to defend the voice of the people and to end the succession of corrupt traditional political parties in power previous to that date.

Yet Chávez’s 14-year legacy has revealed deep flaws, many of which help to explain Venezuela’s current economic situation. First, as part of the President’s wide nationalization program, Chávez took to the expropriation of thousands of private firms and took control of agencies that encompassed all of Venezuela’s main industries: oil, food, transport, finance, agriculture, and health. The result of this was the near destruction of the private sector and with it, the subjugation of Venezuela’s industries to government manipulation.

Second, Chávez has been repeatedly accused of providing ‘oil gifts’ to both his Latin American neighbours and abroad, which have emptied Venezuela’s oil reserves without generating enough profit. Blessed with high oil prices yet determined to spread the influence of his Bolivarian Revolution, Chávez sold oil to all but the United States at well below market value during his presidency. According to Gideon Long, Andean Correspondent for The Financial Times, only 55% of oil under Chávez was generating actual money. The remaining 45% was either sold at very low prices or simply given away to Venezuela’s neighbours, mainly Cuba, in exchange for popular support.

Maduro and the Venezuelan Crisis

Maduro and Chavez

In January 2013, when Nicolás Maduro took over the presidency after Chávez’s death, GDP growth rate was – 1.4%.

Third, in response to a failed coup d’état attempt in 2002 aiming to force Chávez’s resignation, the President pronounced an ‘oil purge’, firing 40% of PDVSA’s (Petroleum of Venezuela, the country’s national oil company) workforce. Many of PDVSA’s workers had taken part in a strike protesting the appointment of political allies to high-ranked posts in the company. For Chávez, these strikers posed a threat to his government authority and therefore had to be dismissed.

PDVSA’s fired employees, around 18,000, were not only banned from jobs within Venezuela’s national oil company but from all companies in business with it. The result was a dramatic loss of human capital and expertise in Venezuela’s industry, one generating almost all of the country’s income. Intevep, PDVSA’s research branch, lost 80% of its staff. The result was the loss of Venezuela’s oil intelligentsia, a fatal blow for the future development of PDVSA.

Since 2003, PDVSA’s oil production has stagnated, in great part due to the handicap caused by the loss of skilled personnel. Despite the government’s launching of a training program, the recuperation of years of accumulated expertise in the oil industry proved almost impossible. The purge has impeded PDVSA to function to its full potential, the effects of which are still felt today.

Ironically, Venezuela’s loss has been other countries’ gain, especially Colombia. In response to the purge, thousands of PDVSA workers moved to Colombia, Mexico, Canada, the United States, and the Persian Gulf. Columbia’s oil production renaissance in 2003 is in part thanks to the Venezuelan exodus. In fact, the arrival of experienced, professional, and ambitious workers revolutionised Columbia’s oil industry. In 2003, former Venezuelan oil minister Humberto Calderón founded oil firm Vetra. A few years later, former chairman of PDVSA Services Ronald Pantín bought Colombia’s Meta Petroleum, now the country’s largest producing oilfield. In 2014, these two firms accounted for more than a quarter of Columbia’s oil production.

Evidence shows Chávez’s 2003 oil purge was a fatal economic mistake both for PDVSA’s development and production, one that has cost Venezuela precious expertise whilst aiding neighbouring states.

Nicolás Maduro, in power since Chávez’s death in 2013, has had to pick up his predecessor’s bill. Some claim Maduro came to power in a situation too hard to deal with and with scarce resources to provide solutions.

Yet Maduro has done little to address Venezuela’s simmering economic issues. Inflation in December 2016 rose to 800%. The International Monetary Fund estimates this number to increase to 1,134. If estimates are correct, a litre of milk, which may have cost $1 before inflation, may rise up to $11 at the end of 2017.

Today, the prices of basic necessities are already out of proportion. According to CENDA, Centre for Documentation and Analysis for Workers in Venezuela, a basket of basic grocery items in March 2017 – including milk, eggs, and fruit – cost 772,614 Bolivares, close to four times the monthly minimum wage currently at 200,021 Bolivares.

Since February 2017, prices of milk and cheese have risen by 33%, meat 19%, fruits 14%, and fish 17%. A carton of 30 eggs in March cost 9,600 Bolivares, approx. eight times more than in March 2015.

These prices could double, even triple, in the coming months if inflation continues to increase.

Coupled with inflation is the drastic loss of value of the Bolivar, Venezuela’s national currency. In the past five years, the bolivar has lost 99,8% of its value; $100 in 2012 would be worth $0.20 in 2017.

In response to its currency crisis, the government has been printing new bank notes starting in December 2016. In 2008, a 100 Bolivares note could be used to buy more than 50 litres of milk. Today, approximately 18 of those notes are needed to by a single litre. The largest note in circulation this year, a 500 Bolivares note, is not enough to buy a cup of coffee in Caracas.

Sure, the government is attempting to facilitate Venezuelans’ purchasing of goods, yet printing higher denomination notes is a temporary fix that in no way counters the issue of skyrocketing inflation that has accompanied the bolivar’s value loss. The value of banknotes is so low that Venezuelans today are carrying bags of money to their local supermarkets to cover the cost of even basic necessities. Some stores are now weighing stacks of banknotes instead of counting them.

A way out of the Venezuelan crisis: Dollarization?

One of the solutions to the Bolivar issue is currency substitution, potentially dollarization. Ecuador – like Panama and El Salvador – have been using the Dollar as its official currency since 2000 instead of its national currency the Sucre.

Dollarized Ecuador has seen many benefits drawn from its currency change. First, the switch to the Dollar has allowed the country to maintain its inflation rate at about 5.2 percent over the past ten years. Since 1999, Ecuador’s GDP in dollars has almost doubled and its oil output has risen over 40 percent since the Sucre was in use.

Could Venezuela do the same? Dollarization in Venezuela stands little chance of even being considered since its ruling government is outspokenly anti-American. However, the replacing of the Bolivar with the Chinese Yuan might be a beneficial alternative, one with double benefits: switching Venezuela’s currency to the Yuan as a means of repaying China, one of Venezuela’s biggest creditors. Either way, the hope of preserving the Bolivar grows slimmer each day.

Faced with an economy that is spiralling out of control, Maduro has done little to quell popular unrest. On the contrary, the President has secured the army’s support and denounced protesters as traitors of the ‘Bolivarian Revolution’.

Ironic that Bolivarianism’s main principle is the people’s right to participative democracy.

Corruption: an inevitable bond with oil

Venezuela’s dependence on oil has made it extremely tolerant of corruption. In many ways, the link between oil wealth and corruption is inevitable. According to Transparency International, Venezuela is ranked 166 out of 176 countries according to the corruption index.

Corruption in Venezuela’s oil industry has been especially detrimental to the economy. The main reason for this is that there is little or no transparency in the way oil revenues have been spent over the past decades.

Where has the money from oil gone?

Oil revenues over the years have been funnelled into the hands of a few individuals, one of who is the President himself. Under Chávez, the national investment fund Fonden was created in 2005 and allowed the President to control the country’s purse strings.

Known as Venezuela’s national development fund, Fonden has received between 25 and 30% of total oil income since 2005. The corporation has absorbed more than $100 billion of Venezuela’s oil revenues since its creation.

Fonden has invested billions of US dollars from oil exports into domestic projects such as hospitals, housing, and public transportation. According to a Reuters’ 2012 Special Report, Fonden accounted for one-third of all investments in Venezuela. Yet the fund has published scarce accounts of the details of the projects it finances. In addition, Fonden operates without parliamentary oversight; Chávez personally approved funding for projects without review from Congress.

Although several have been successful, many projects have stalled, been left abandoned or half-built. One example is the Pulpaca project, a newsprint factory construction site left empty despite having received half a billion dollars from Fonden. Another is a transit project planned in the city of Barquisimeto, which received $301 million from Fonden. The construction site has been deserted and a trail of mossed-up buses left unused.

Thus, the corporation’s shady funding transactions and investments have made it impossible to know for certain where and how the money from oil is being used.

The result of a lack of transparency of oil wealth, in great part due to shady investment funds such as Fonden, has been a little to no trickle-down effect in Venezuela’s economy. Most of Venezuela’s population has experienced very little benefits from one of the world’s richest countries in oil. Today, 82% of households in Venezuela live in poverty, compared to 48% when Chávez reached the presidency.

The irony is such that a figure who rose to power pledging to end corruption, coupled with Maduro’s pledge to pursue Chávez’s legacy, has in actual fact fallen into the footsteps of Venezuela’s long history of corrupt traditional political parties.

Oil price volatility: outside government control?

Oil price volatility has been an issue since the discovery of oil reservoirs in Venezuela at the beginning of the 20th century; oil price falls are nothing new.

Yet major falls in the oil price, most recently in 2014, has seen oil barrel prices halve in the period between 2014 and 2015.

In itself, oil price volatility is outside Venezuelan government’s control, some may say even purely bad luck. Yet it is how governments have dealt with oil price falls that has negatively affected Venezuela’s economy.

First, presidents over the years have perpetuated the idea of oil being inexhaustible, meaning there is no need to worry about periods when oil prices plummet. This illusory thinking means Venezuela has ignored the risks of overdependence on oil.

In fact, a country that relies almost solely on oil wealth (oil exports make up over 95% of the country’s income), risks high chances of bankruptcy if the economy is not diversified. Drastic falls in oil prices have meant there is less and less money to spend; Venezuela is down to its last $10 billion. Chávez and Maduro’s failure to diversify the country’s economy partly explains why the country struggles to survive during periods of low oil prices.

Other oil dependent nations have faced similar issues, especially oil-rich Gulf countries such as Iran. For years, Iran’s leaders have called for the reduction of dependence on oil but done little to meet this objective. Yet since 2014, reducing Iran’s dependency on oil revenues by diversifying its income sources has become a top priority.

Indeed, Iran is growing increasingly less dependent on oil wealth, reverting to exports of non-oil products such as metals and petrochemicals. In 2015, President Hassan Rouhani declared that Iran was earning more from tax than oil for the first time in almost 50 years: “only around 10% of Iran’s GDP is currently dependent on oil.” Plummeting oil prices in recent years in addition to the US/UK economic embargo, alleviated as part of the 2015 Joint Comprehensive Plan of Action, have forced Iran to turn to new forms of income.

Although still in its initial phase of diversification, Iran’s economy is headed towards a more sustainable future. Could Venezuela do the same? Venezuela would most definitely benefit from widening its category of exports, mainly by improving productivity in agriculture and industry. The neglect of these sectors in view of the perceived inexhaustibility of oil in recent years has led to today’s deep economic crisis.

A lack of investment has also contributed to Venezuela’s economic decline, further evidence of the government’s shortcomings in responding to oil price falls. Although Venezuela may have been experiencing bad luck with oil prices, the government has certainly failed to prepare the country for it.

What now?

Hundreds of protests against President Maduro’s government have taken place since April 2017. Yet this week’s protests could prove decisive in the run-up to the National Assembly vote scheduled for July 30th. The voting of a new Constituent Assembly in Venezuela would allow Maduro to effectively consolidate his dictatorship.

Thus, the Opposition has urged new strikes demanding both new presidential elections, scheduled for October 2018, and for Maduro to scrap this weekend’s election. The risk is that expected low turnout from Venezuela’s Opposition party in the upcoming vote could tip the balance towards the Government, thus replacing the current opposition-controlled National Assembly. Protesters say a new Congress would ensure Maduro’s tenure for years.

A truck burns out during a protest in Caracas

In an unofficial referendum called by the National Assembly on July 16th, 98 percent of the 7.5 million Venezuelans who voted disagreed with the Bolivarian government’s proposed Constitutional Assembly. The vote indicates the strong support the Opposition holds in fighting against the upcoming election.

Colombia and Brazil have urged the Maduro government to abandon the Constituent Assembly vote and the United States have threatened to impose economic sanctions if it is maintained. Oil-related sanctions, such as banning Venezuelan crude imports to the United States, could bankrupt the Maduro government and intensify food shortages.

Yet the National Assembly election remains on the agenda. Maduro has vowed that the election would go ahead despite escalating protests and foreign condemnation. The President insists that the vote will serve to empower the people and bring peace after months of unrest.

Gideon Long says Columbia might be facing an influx of Venezuelans through the Columbia-Venezuelan border ‘if things spiral out of control’, especially if the Maduro government wins the July 30th elections. Indeed, the current humanitarian crisis in Venezuela might spread beyond its national borders if election results prove in favour of the current government.

Years of poor management, especially under Chávez, a history of corruption and overdependence on oil have amalgamated to produce the most violent crisis in Venezuela’s history. President Nicolás Maduro is clinging to power with the support of government allies and Venezuela’s army force, which he hopes to pursue after the end of week’s election.

Whatever the results, the National Assembly election will prove a turning point in Venezuela’s current crisis. Election turnout may provide a good idea of where the country is heading.

 

Emma Bapt is the Founder and President of the News Decoder Society at King’s College London, a student in War Studies and History and a contributing writer for PGW.

 

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