What Are the Causes of Venezuela’s Economic Crisis?

History Hit Podcast with Micheal Tarver

6 mins

19 Sep 2018

This article is an edited transcript of The History of Venezuela with Professor Micheal Tarver on Dan Snow’s History Hit, first broadcast 5 September 2018. You can listen to the full episode below or to the full podcast for free on Acast.

Venezuela boasts the largest oil reserves of any country in the world. Yet today it is facing the worst economic crisis in its history. So why? We could go back decades if not centuries in search of answers to this question. But to keep things more concise, a good starting point is arguably the election of former president Hugo Chávez in 1998.

Oil prices vs. government spending

With the money coming in from oil in the late 1990s, Chávez established a number of social programmes in Venezuela known as the “Misiones” (Missions). These programmes aimed to tackle poverty and inequality and included clinics and other organisations to provide free health care; free educational opportunities; and training for individuals to become teachers. 

Chávez imported several thousand Cuban doctors to come and work in these clinics in the countryside. Thus, oil money was being used to support those nations that were either sympathetic to his ideology or who he could trade with for things that Venezuela did not have. 

Indigenous people of the Way ethnic group learn to read and write at one of Venezuela’s Misiones. Credit: Franklin Reyes / Commons

But then, just like in the 1970s and 80s, petroleum prices significantly decreased and Venezuela didn’t have the income to meet its spending commitments. In the 2000s, as petroleum prices were bouncing back and forth, the government was spending an exorbitant amount of money on things like the Misiones. Meanwhile, it had committed to selling Venezuela’s petroleum to allies at extremely reduced rates. 

And so, not only was the revenue that should have theoretically been generated by the volume of petroleum that Venezuela was exporting not coming in, but what was coming in was simply being spent away. In other words, it wasn’t being put back into the nation in terms of infrastructure.

The result of all of this – and what more or less led up to the current economic crisis – was that the petroleum industry couldn’t increase its capacity.

The refineries and other aspects of the industry’s infrastructure were old and  designed for a particular type of crude petroleum that was heavy.

Therefore, when the money available to the Venezuelan government dried up and and it needed to increase petroleum production to get some revenue coming in, it wasn’t a possibility. In fact, today, Venezuela is only producing about half of what it was producing on a daily basis just 15 years ago.

A Venezuelan petrol station displays a sign to say that it has run out of petrol. March 2017.

Printing more money and switching currencies

Venezuela has responded to this need for revenue by simply printing more money – and that has led to spiralling inflation, with the currency becoming increasingly weak in terms of its purchasing power. Chávez and his successor, Nicolás Maduro have each responded to this spiralling inflation in turn with major currency changes.

The first change occurred in 2008 when Venezuela switched from the standard bolívar to the bolívar fuerte (strong), the latter being worth 1,000 units of the old currency.

Then, in August 2018, Venezuela switched currencies again, this time replacing the strong bolívar with the bolívar soberano (sovereign). This currency is worth more than 1 million of the original bolívars which were still in circulation little more than a decade ago.

But these changes haven’t helped. Some reports are now talking about Venezuela having 1 million per cent inflation by the end of 2018. That in itself is significant. But what makes it even more significant is that it was only in June that this figure was being predicted as about 25,000 per cent.

Even within the last several months, the value of the Venezuelan currency has become so weak that inflation is just running away and the typical Venezuelan worker can’t afford even basic goods.

This is why the state is subsidising food and why there are these state-run stores where people are standing in line for hours on end just to buy necessities like flour, oil and baby formula. Without the government subsidies, the Venezuelan people would not be able to afford to eat.

Empty shelves in a Venezuelan shop in November 2013. Credit: ZiaLater / Commons

The country is also having trouble buying anything from abroad, particularly because the government hasn’t been paying its bills to international lenders.

When it comes to the World Health Organisation’s list of important medicines, more than 80 per cent cannot currently be found in Venezuela. And it’s because the country simply does not have the financial resources to purchase these medicines and bring them back into the country.

What does the future hold?

The economic crisis may very well result in a combination of a number of possible outcomes: the emergence of another strongman, the re-emergence of some kind of functional democracy, or even a civil uprising, civil war or military coup.

Whether it’s going to be the military that finally says, “Enough”, or whether a political action will spark change – perhaps demonstrations or an uprising that gets significantly large enough that the number of deaths occurring is significant enough for the international community to step in more forcefully – is not yet clear, but something is going to have to happen. 

It is unlikely to be as simple as a change in leadership.

Venezuela’s problems go deeper than Maduro or First Lady Cilia Flores or Vice-President Delcy Rodríguez, or any of those who are in the president’s inner circle.

Indeed, it is doubtful that the current socialist model and the governance institutions as they are now can survive much longer.

Maduro pictured with his wife, the politician Cilia Flores, in 2013. Credit: Cancillería del Ecuador / Commons

A completely new system is needed to restore economic stability to Venezuela; it’s not going to happen in the system that’s there at the moment. And until the country gets economic stability, it’s not going to get political stability. 

A wake up call?

This 1 million per cent inflation figure that’s been estimated will hopefully be a wake up call to the outside world that it’s going to have to start taking additional steps. What those additional steps are, of course, will likely vary from country to country.

But even with nations like Russia and China that have friendly relations with Venezuela, at some point they are going to have to act because the political and economic instability of Venezuela is going to affect them as well.

Right now, there is a rapid exodus of Venezuelans out of the country. Within the last four years or so, it is estimated that at least two million Venezuelans have fled the country. 

The Venezuelan government’s in flux, with competing legislative bodies each claiming to have authority.  The National Assembly, which was established in the 1999 constitution, was taken over last year – in terms of gaining a majority – by the opposition.

As soon as that happened, Maduro created a new constituent assembly that was supposed to be writing a new constitution to solve all of the ills going on. But that assembly still hasn’t worked towards a new constitution, and now both assemblies are claiming to be the country’s legitimate legislative body. 

A slum in the Venezuelan capital of Caracas, as seen from the main gate of El Paraíso tunnel.

And then there’s the new cryptocurrency that Venezuela has launched: the Petro. The government is requiring banks to use this cryptocurrency and for government employees to be paid in it but, as of yet, there aren’t many places that are accepting it.

It’s a closed sort of cryptocurrency in that no one in the outside world really knows what’s going on with it. It’s supposed to be based on the price of a barrel of petroleum, but the only investor seems to be the Venezuelan government. So, even there, the foundations that are supposedly propping up the cryptocurrency are shaky.

Adding to the country’s woes, the office of the UN High Commissioner for Human Rights has charged that Venezuela has failed to uphold the standards of the UN Human Rights International Covenant. So the outside world is increasingly starting to bring attention to the problems going on inside Venezuela.