Publish in Perspectives - Monday, July 18, 2016
Hugo Chavez (left) and Nicolas Maduro built an economy based on the assumption that they would be able to generate enough revenues from oil, but once that income dried up, the model fell apart. (Photo: Venezuela Government)
A typical scene in Venezuela today, as people stand in long lines to get basic products. (Photo: Wharton)
The collapse of Venezuela's once-rich economy and public order.
In 1950, when the global economy was struggling to recover from World War II, oil-rich Venezuela was the world’s fourth-wealthiest country, boasting a per capita GDP of $7,424 exceeded only by the United States, Switzerland and New Zealand.
Indeed, Venezuela’s per capita income was nearly four times higher than that of Japan (at $1,873), nearly twice that of Germany ($4,281) and more than 12 times that of China ($614), according to NationMaster.com, an economics statistics site.
By 2012, Venezuela’s per capita GDP ranked 68th in the world, according to the World Economic Forum. But it has continued to shrink since then, dropping 5.7 percent in 2015 and by a projected 7.1 percent rate in 2016, according to the country’s central bank. Inflation in Venezuela, the highest in the world, reached 159 percent in 2015 and is expected to grow to 204 percent this year, according to the International Monetary Fund.
Those statistics only hint at the depth of the country’s humanitarian crisis, marked by dramatic shortages of essential foods and consumer products. Today’s Venezuela is not an attractive locale for investment, but a landscape where armed guards fend off consumers desperate to purchase essential foodstuffs and household goods in short supply. According to the Pan Am Post, an online regional publication, the Venezuelan government recently identified at least 15 food items and 26 personal care items in short supply or unavailable in Venezuelan grocery stores.
“In Venezuela we have the kinds of scenes that you don’t expect to see in a relatively developed, modern economy and one of the largest oil producers in the world,” Penn Law professor William Burke-White says in an interview on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111.“The experience of the everyday citizen in Venezuela on the ground today is one of hunger and starvation.”
Burke-White adds that former Venezuelan President Hugo Chavez, who was in office from 1999 until his death in 2013, and his successor, current President Nicolas Maduro, built an economy based on the assumption that they would be able to generate enough revenues from oil to finance a comprehensive system of social welfare benefits. But once that income dried up as oil prices collapsed, the model fell apart, Burke-White explains. After oil prices fell, and the country was hit by a serious drought, “there wasn’t just economic hardship, but mass starvation on the streets.”
With the collapse of its economy, the government has been printing and borrowing money to meet expenses. Adds Burke-White, “Inflation has skyrocketed and the currency is essentially worthless. So not only can Venezuela not produce food, it can’t buy it. And it doesn’t have the oil revenues to support major food purchases from overseas.”
A BROAD-BASED IMPLOSION
According to Kevin Casas-Zamora, senior fellow and program director of the Inter-American Dialogue’s Peter D. Bell Rule of Law Program, “We haven’t seen anywhere in Latin America an implosion across the board, the way we are seeing it in Venezuela,” at least not in the past few decades. Casas-Zamora says Chile at the end of former President Salvador Allende’s tenure in the early 1970s comes closest, but it was never nearly as bad as the situation in Venezuela now. “We are seeing in Venezuela the convergence of the trends of economic deterioration, political deterioration, the collapse of public order, and energy shortages; so it is really across the board,” he notes, adding that the country’s normal challenges have been “exacerbated by 10 years of horrific economic mismanagement done to prop up a political system that depended essentially on hand-outs and a kind of state socialism.”
Economic imbalances accumulated in the past 17 years are a big part of the story, but the trigger for the current meltdown is oil, says Charles Shapiro, who served as U.S. Ambassador to Venezuela from 2002 to 2004. “The fact that oil prices have collapsed is not the root of the crisis, but definitely the trigger — at least, on the economic front,” Shapiro notes. “On the political front, over the past 17 years, we’ve seen an authoritarian slide which was very obvious — but in a very peculiar way.”
There was a very clear authoritarian tendency during the Hugo Chavez years, but he never quite shut down democratic spaces: “Elections were held and, for the most part, the votes were counted fairly, and very, very rarely would the government lose,” Shapiro says. Independent media never ceased to exist under Chavez. While their outlets were harassed and the government “bought off” a lot of media outlets, they were always part of the landscape, he notes. “So while it was an authoritarian leaning system, it was never a dictatorship. Chavez was no Abe Lincoln but he was no [Fidel] Castro. But what we are seeing now is something entirely different.”
The timing of President Maduro’s ascent to power exacerbated the situation, according to Shapiro. “In many ways, Hugo Chavez was the luckiest guy in the world,” he says. “When Chavez became president, Venezuelan oil sold for $8 dollars a barrel. … It reached $140 at one point, and was around $115 or so [when he died]” and when Maduro began his tenure.
But last August the price per barrel plunged below $40 for the first time since 2009; the price is now hovering around $50 and is expected to fall again. “[Venezuela] made long-term commitments that it could not meet with oil [prices so low],” Shapiro says. “Right now, prices would probably need to be at $150 [a barrel] to cover their commitments.” During the Chavez-Maduro era, Venezuela’s dependence on oil products grew from 70 percent of the country’s export basket in 1998 to 98 percent in 2013, according to researchers Dany Bahar of the Brookings Institution and Miguel Angel Santos of Harvard’s Center for International Development in a recent study.
Shapiro, currently executive director of the World Affairs Council of Atlanta, adds, “They spent money on all kinds of things: They de-funded the public health system and set up a parallel system with Cuban doctors. They built railroads across the country that were never finished; [they spent money] to extend subways that were never extended; to rebuild ports; to give away houses; [to build] a factory for assembling Iranian tractors [that has since been shut down.] They re-nationalized the electricity and phone systems; and turned PDVSA [the Venezuelan national oil company] from a fairly efficient company into an oil company that is hugely inefficient, [a company] where employment has tripled although production has dropped.”
THE COLLAPSE OF PUBLIC ORDER
According to Casas-Zamora, the other big element in this crisis, which is often overlooked, is the collapse of public order. “No country — not even the highly violent countries of northern Central America, which have always done poorly when it comes to personal safety — has experienced over the past decade or decade and a half, the deterioration of public security and personal safety that Venezuela has undergone,” he says. “The place was never Denmark; but at this point, Caracas is, in all likelihood, one of the most violent capitals in the world.” Though the government stopped publishing security information years ago, non-governmental organizations in Caracas estimated the homicide rate recently as “approaching 200 murders per 100,000 people, worse than for any other year,” he adds. “The WHO [World Health Organization] deems that a homicide rate of 10 per 100,000 people is tantamount to having an epidemic.”
Casas-Zamora says this is particularly distressing because Venezuela did once maintain a functioning — if somewhat imperfect — political system and social order. “The place was never Switzerland, but it was a working democracy,” he notes. “Particularly in the bleak political landscape of Latin America, it was held up as an example of political tolerance. That is no longer the case, by any stretch.”
There was once “kind of a light-hearted attitude among Venezuelans; you could lose but no one would ever get upset,” Casas-Zamora says. “Ever since [Chavez’s] passing, and particularly after the ruling party lost big in the legislative elections last December — for the first time in 17 years — the slide toward authoritarianism became unstoppable.” At this point, Venezuela “has become a dictatorship, pure and simple…. There are no checks and balances whatsoever,” Casas-Zamora adds. “The most visible case is the Supreme Court, which has the critical task of interpreting the constitution. The same can be said about the Electoral Authority, the Human Rights Ombudsman — and all other institutions that are meant to keep executive power in check.”
The most visible example of the abusive use of power has been the Supreme Court, Casas-Zamora says. “A couple of academics did a very meticulous study checking rulings of the Venezuelan judiciary in cases where the government was party to the case. In a period of about 10 to 12 years, they found that out of about 14,000 rulings that were made by the Venezuelan judiciary, not a single ruling went against the Venezuelan government. That tells you something.”
Shapiro adds, “On the political side — technically, there are five independent branches of government with a system of checks and balances. In reality, there is no system of checks and balances.” Can the situation get much worse? “If you control the interior ministry, the intelligence service, and the police and the armed forces, you can always make things worse and you can hold on for a very long time,” Shapiro notes. “That’s what’s going on in Venezuela. They don’t care enough [that things are getting worse] to change policy.”
In May, President Maduro adopted an emergency decree that declared a “state of exception” in the country for 60 days, granting his government the power to potentially restrict human rights, ostensibly in response to concerns about a foreign-led plot to destabilize his government. The decree authorizes Maduro to “adopt measures and execute special security plans that guarantee the sustainability of the public order when faced with destabilizing actions” and “any other social, environmental, economic, political and legal measures he deems convenient.”
A LONG-TERM SOLUTION
What are the critical first steps toward finding a solution? “Step one is, ‘You’ve to stop printing money because the inflation rates are out of control and that’s how the government is surviving,” says Burke-White. Step two, “they have to strike a new economic bargain with the Venezuelan people that doesn’t involve the kind of subsidies that create huge distortions in the economy. Simultaneously with that, you have to provide humanitarian assistance because when those subsidies are removed, and suddenly a pound of flour becomes even more expensive, people will suffer.” As an additional step, there should be a revaluation of the Venezuelan currency and significant economic support. “That’s worked elsewhere. When you look at the Asian economic crisis or the Mexican economic crisis from 10 and 20 years ago, there are programs that worked,” he notes. “The problem is that there is not really a political will and political connection with the Venezuelan government to do that.”
Venezuela needs to undertake massive economic reforms, it must wean itself off oil revenues and in the short-term, it needs significant foreign assistance, Burke-White adds. “They have spent the last eight or 10 years making enemies of their neighbors and the United States, so no one really wants to come to their aid,” he notes. “So the question becomes — does the Venezuelan government have the ability and willingness to make the reforms necessary and can they get enough assistance in the short term to survive that populist uprising?”
In “the most optimistic scenario,” according to Shapiro, “Maduro says, ‘I’m wrong; we’re following the wrong policies.’ And then he slams himself in the forehead with the palm of his hand, and says, ‘I resign — we’re going to have a technocratic government. A new government is coming in.’” Even in such an unlikely event, continues Shapiro, “if [Maduro] turns the policy around 180 degrees, it is going to take, I would argue, 10 to 15 years for Venezuela to reinvent itself as a modern, democratic society.” Even in this best-case scenario, however, there is a major risk that Venezuela’s brain drain will continue, Shapiro adds. “Panama, Colombia, Atlanta, Miami, Spain, Portugal are already full of Venezuelans who have emigrated permanently. Right next door, Colombia is booming while Venezuela is collapsing.”
If he did leave, who would succeed Maduro as president? “It is not obvious what the alternative will be, partly because Chavez and Maduro have frozen out political opposition to the degree they have,” Burke-White says. “It’s not like there’s a recall election and suddenly the good guys come to power.” According to Shapiro, if “Maduro is smart enough and clever,” he will understand that “letting the recall referendum proceed is like having an escape valve on the radiator…. If he wins the recall referendum — and he is not recalled [from office]– or if he loses the referendum, it lets all this pressure building up in the political system escape.” But achieving a consensus even among new leaders would be no mean task, Shapiro notes. “Venezuela is the most polarized country I’ve ever lived in. The people on each side [of the political spectrum] not only disagree with each other, they don’t believe the other person has the right to believe the way they do.”
Can a full-fledged humanitarian disaster be avoided? It doesn’t help that the country’s plight has received little attention until recent dramatic events. “What is changing now, is the visibility of the problem,” says Burke-White. “Once the world starts to see what is happening, I do think you’ll see greater humanitarian assistance. And then the question will be: Will there be the kind of political leadership and political change needed to solve the underlying problem or even to see that, if there is humanitarian assistance, it gets to the people in need, rather than getting hijacked by the rich?’”
Regretfully, notes Burke-White, “Venezuela prided itself on essentially snubbing its nose at the West and fomenting socialist revolution in its neighbors. So it doesn’t have a lot of friends at the moment who are willing to do very much.” There may be some assistance from Argentina, Chile and from within the region, Burke-White says, but it will take either a greater humanitarian crisis, or a real political outreach from Venezuela before “the countries Venezuela has been thumbing its nose at – like the United States – do too much more.”
Getting food to the country is only one part of the challenge, Burke-White notes. The other part is getting food properly priced and making sure that the income inequality and disparities that exist are addressed. “So you may see some real pressure from potential donors to get some of the Venezuelan house of cards in order before real assistance starts to flow.”
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.