Venezuela’s Financial Crisis

Consider a country rich in oil. Yes, the black tar liquid gold that fuels our cars, planes and trains. Think the price of an oil barrel today (~ roughly $55/barrel) and then think of all the money a country can make.

Sound like a prosperous country right?

Well, now think Venezuela!

Venezuela has been experiencing a political and socioeconomic crisis since 2010. The crisis started under the reign of former president Hugo Chavez and continues under the reign of Nicolas Maduro.

Hugo Chavez of Venezuela
Hugo Chávez

The crisis has gone down in history as the worst economic situation in the history of Venezuela and among the worst economic crises ever experienced in the Americas.

The unprecedented Venezuelan economic crisis is marked by severe medicine and food shortages, spiraling inflation while the existing political crisis is marked by authoritarian rule. The crime rates have increased exponentially over the past couple of years, leaving the country in chaos. The policies of the Bolivarian Revolution that were commenced under the rule of Chaves are responsible for the crisis.

The Bolivarian Revolution

Although he had unsuccessfully led a coup in 1992, Hugo Chavez was elected president of the Federal Republic of Venezuela on a populist platform and propaganda in 1998. His presidency lasted up until his death in 2013. As a presidential candidate, he pledged to fight social disparity and poverty. He campaigned against the country’s elites for the extensive corruption that plagued the country at the time. Chavez also promised to use the country’s large oil resources to fight inequality and poverty.

As president, Hugo expropriated extensive pieces of land and nationalized several private businesses. He also nationalized assets owned by foreign companies such as the oil projects that were managed by ConocoPhillips and ExxonMobil. Chavez was a radical leader whose intention was to unite Latin America countries and create a force against the United States. The efforts he put into achieving this goal resulted in the creation of the socialist bloc known as ALBA – Bolivarian Alliance for the People of Our Americas. Hugo Chavez also created Petrocaribe, an alliance between Venezuela and the Caribbean countries. Through the alliance, Venezuela would export oil at discounted prices to the members. Eighteen states, both in the Caribbean and Central America benefited from this deal.

Venezuela newspaper headline after Chavez lost referendum 2007
Headline from the day after Chávez lost the constitutional reform referendum, on Dec. 2, 2007.

While ardently expressing radicalism, Hugo also took measures to solidify his hold on the presidency. He began by altering the constitution to extend his presidential term after acquiring a majority of the votes. He also curbed easy access and control of the military by the civilians. His radical actions resulted in a military coup that temporarily evited him for two years, before reassuming power in 2004. He then assumed control of the Supreme Court and ended the presidential term limit through a referendum. He was especially popular with the poor due to his efforts to support them with housing, subsidized food, education and sustainable healthcare programs. By 2013, poverty rates had dropped by 20% from the 50% when he assumed office.

Economic Crisis

Economists have blamed the strict price controls for the economic crisis in the country. In a bid to keep basic items affordable, the administration set authoritarian price control measures on a variety of products. This has led to several manufacturers in the country cutting down on the production of certain products given the limits that are set on what they can charge for them.

Venezuela oil crisis
Shortages of gasoline in Venezuela in March 2017

The heavy drop in prices of crude oil is considered the major cause of the economic crisis in Venezuela. After a boost in the unconventional hydrocarbon extraction in the United States, a steady rise in the production of oil has been observed in the region. This resulted in a surplus of oil, which consequently reduced the cost of oil. In the year 2014, the cost of a barrel dropped from the initial $100 to $50. The colossal drop in the prices of oil was a serious hit to the country’s economy since it had poor policies on private property and the remittance levels were pretty low. Most of the country’s revenue was earned from oil and its derivatives. The government has also been slow on implementing policies to adapt to the low oil prices.

The currency control policies have also contributed to the country’s economic crisis. The policies that were introduced by Chavez in 2003 were aimed at fighting capital flight. The selling of U.S. dollars at different rates has opened up a platform for black market and corruption opportunities. This has resulted in a fall in the imports and a shortage in supply of numerous basic commodities. Against its reserves of approximately US$ 10 billion, Venezuela’s debt is estimated at US$ 105 billion.

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