As a country with more proven oil reserves than Saudia Arabia, Venezuela was formerly known as one of most formidable oil producers in the world. However, Venezuela is now better known for its economic struggles, as the nation struggles with one of the most severe recessions it has ever seen. This fate isn’t altogether unusual: all of the world’s oil-based economies have declined since oil prices began to fall in June 2014. But unlike its fellow OPEC members, Venezuela is currently being ravaged by inflation, shrinking foreign reserves, debt, shortages and more, a situation made worse by growing social unrest. As the government tries to blame its problems on a number of enemies, from the United States to its own “parasitic bourgeoisie”, it becomes increasingly clear that the country’s economic woes are the result of years of mismanagement and a problematic regime.
In recent months, President Nicolás Maduro has repeatedly directed blame for the country’s troubles away from his government and himself, pointing fingers instead at Saudi Arabia’s refusal to cut oil production, reckless oil production and changing usage in the United States, speculation and persistent rumors on Wall Street, and of course, product hoarding among his own people. These claims may have some basis in fact: after all, falling oil prices, increased fracking in the U.S. and a growing number of hybrid cars, which save owners money on fuel costs, have taken their toll on a number of petroleum producers. However, experts agree that Venezuela’s severe recession and other problems are largely due to a longstanding pattern in the country’s government, which has disincentivized its leaders from properly managing the oil boom and is now preventing the regime from effectively responding to the downturn.
According to the magazine Foreign Policy, the problem first began when Hugo Chávez took power in the early 2000s, turning the government into a semi-authoritarian and hyper-populist regime. Like many similar governments, the success of this ruling body was dependent on Chávez remaining electorally competitive, a fact that caused his regime to develop a chronic spending problem. While this spending was often secretive, it was nothing if not diverse, ranging from direct cash transfers to low income groups and subsidized consumer goods to multi-million dollar contracts for national firms and low tariffs. As a result, Venezuela’s fiscal deficit had reached 15% of its GDP by the end of the Chávez administration in 2013, a sharp contrast to other OPEC nations, who had used the oil boom to build up their surpluses. Likewise, Maduro did nothing to cut costs, even giving a new apartment to a woman who threw a mango at him at a press conference, until the price of oil began to decline.
Meanwhile, as this lavish spending continued, Venezuela also became one of the few petro-states in the world to experience decreasing production and rising debt even as it registered increasingly levels of proven oil reserves. Foreign Policy traces this back to two pivotal, political choices: the decision to deprive the state-owned oil company, PDVSA, of needed capital, and the choice to replace trained personnel with “revolutionaries” willing to comply with Maduro’s wishes. As a result, production declined significantly even as PDVSA’s employment expanded by 256%, rendering the country’s most valuable resource unable to support the nation.
The natural result of this excessive regulation and overspending, Venezuela has developed an unusually high inflation rate: between 2007 and 2013, the country’s annual inflation rate averaged 27.4%, at least five times the rate for all of Latin America. Some experts speculate that this level could be the highest in the world. However, because Chávez and Maduro have long relied on complex systems of price controls and rationing to contain this inflation and capital flight, this has also lead to severe shortages of food and consumer goods. These problems have in turn lead to an increased reliance on the black market and capital flight: Venezuelans are now reportedly paying fortunes in bolívares for dollars, which they then move out of the country, causing the bolívar to trade at around 285 per dollar in an informal market. And as the demand for dollars grows, the country’s international reserves shrink, bringing its total resources down to the troubling lows it last saw before the oil boom in 2003.
Unfortunately, experts say the situation will likely only worsen with time: Venezuela is currently unable to effectively deliver social services, with the country’s hospitals already facing serious handicaps and medication shortages. Even worse, the options available to the government to fix the problem are either extremely expensive and damaging to its society, making any choice ideologically embarrassing and politically dangerous. As a result, the government has begun secretly adjusting its operations by reducing the number of transactions eligible for the cheapest exchange rate, gradually reducing imports by restricting access to foreign exchange and refusing to pay domestic debts to private corporations. Moreover, the Venezuelan government has also increased its dependence on the military, giving loyal military figures more cabinet posts, more benefits and more discretion. As a result, these officials have now increased their efforts to repress dissidents, and engage in illicit activities, including the drug trade. But as public support plummets and the government responds with increased austerity and militarization, experts predict that the situation will only grow much worse.