The Ongoing Political And Economic Crisis In Venezuela

Main idea of the Paper: This paper mostly reflects on the analysis of how the economy of Venezuela has changed throughout the years, and how its oil dependency became a curse for itself. The political shifts in Venezuela, the irrational economic policies adopted by the government from time to time and their influence on the country’s economy, all of it has been discussed here. Rationale of Choosing the Topic: The main motive behind choosing this topic is to discuss the fact that no matter how resourceful a country might be, bad economic policies can easily collapse the entire system within a short period of time.

Introduction: Economy is the heart that pumps the blood to keep the entire system functional, if we compare the well-being of a country with a human body. Starting from how much an average citizen earns, how much they spend, their standard of living, to how much the government itself spends and earns, all are dependent on the economy of that country. This all important element which keeps a country to its feet is however, dependent on multiple factors. Some economies rely on agriculture, some on its labor force, some on tourism, and some on its natural resources and so on. Among the countries which rely on natural resources to fuel their economy, Venezuela is one the most prominent.

According to the Organization of Petroleum Exporting Countries (OPEC), Venezuela has almost 25% of the total proven oil reserves in the world, which accounts to a stunning 302,81 billion barrels. Yet, due to inappropriate economic policies and poor administration, a country which once seemed to be flourishing has now become unlivable. Millions of its residents are now fleeing to other countries. The ones that are residing there are suffering from food shortages and lack of other basic supplies. Venezuela is in fact an example that no matter how resourceful a country may be, its system might still collapse without proper administration and economic policies.

Analysis: Not long ago, Venezuela was the richest country in the entire South America. But within a few years, it is now suffering from one of the worst economic crisis in the history. Almost half of its population now lives under the poverty line. In order to analyze how all of this happened, first we take a look at this country’s recent history.

The Short History: The current catastrophe of the Venezuelan economy is highly linked to its recent history. In fact, according to the experts, it is the result of the misconducts and bad policies adopted by the political leaders over the last 20 years. These events are discussed are being discussed in the following points:

1. The Bolivarian Revolution One of the most noteworthy politicians in the recent history of Venezuela is Hugo Chávez, the father of modern day Venezuela. He became the country’s president in 1999, after a landslide victory. His campaign policies were based on equality and poverty reduction, which he called the ‘21st Century Socialism’. He promised to establish equal rights for all of the mass people of Venezuela and reduce poverty in the process. These policies caught the attention of the general people, which lead his way to presidency. One of his major policies was called ‘the system for job democratization’. It was meant to be implemented in the PDVSA, the state company for Venezuela’s oil extraction. This was a way to ensure job for the unemployed Venezuelans.

As a result, despite producing the same number of gallons of oil per year, their payroll doubled to 115,000 since Chevez took office in 1999 (USA Today). The critics charged the administration of destroying the company by filling it with loyalists, rather than qualified personals. And since Venezuela kept producing the same amount of oil per year, it was clear that the stuff increase was for political reasons, rather than corporate. Similar policies were adopted in the Government, which lead the government spending to increase a lot. All of these events are collectively known in Venezuela as the Bolivarian Revolution.

2. The Gradual Increase in Public Spending and Poverty Reduction Various policies adopted by the government lead the public spending to triple under the rule of Chevez. But none of it mattered, since the barrels of oil kept paying the bills. In fact, despite the 3 increased government spending, Chevez managed to cut the poverty down to almost half. Even though Venezuela was an oil rich country, 60% of its population lived under poverty before his presidency. 10 years after he started ruling, the number came down to 30%. Thus, the short term effects of the increased public spending seemed almost invisible.
3. The Golden Days: As poverty gradually decreased, Venezuela started seeing some of the best days in its history. People had stable jobs and a higher standard of living, which made Chevez very popular among them, as all of these were a result of his oil based policies. And despite Chevez’s rhetoric against the capitalists, almost no one rejected Venezuela’s oil. Thus, they started to earn a huge amount of foreign currency through oil exports. This oil money would go on to finance all kinds of developmental activities of the government, and therefore, Venezuela was going through a stage of rapid development. D. Nationalization of Private Businesses and Extreme Oil Dependency: Hugo Chevez was not a fan of private businesses and it was even common for him to go around different cities, ordering the local authorities to nationalize different kinds of businesses. This even included small thing such as local shops. As a result, both private and foreign investments in Venezuela were largely harmed and came close to almost nothing. All of this ended up with Venezuela having an economy that was fully dependent on its oil. But as money kept coming from the barrels, all of these were ignored by the politicians and the policy makers. By 2012, Oil covered 95% of Venezuela’s total exports.

• The Fall of Oil Price in 2014 and its Aftermath: Having more oil reserves than the likes of Saudi Arabia, Qatar, and due to the lack of creativity in their policies, the economy of Venezuela was almost fully dependent on its oil exports. About 45% of Venezuela’s budgeted revenues and 12% of its Gross Domestic Product (GDP) relied solely on their oil reserves. As a result, when the global oil price fell to a four-year low of $70 per barrel, Venezuela was the first country to feel the consequences. The profit per barrel of oil kept reducing every single day and Venezuela was suffering from a huge loss in revenue. And since Venezuela had almost no private companies, raising tax was invalid as there was no one left to pay them. Thus, the Venezuelan economy was facing an inevitable collapse.
• Devaluation of the Currency and Hyperinflation: By the time the oil crisis started in 2014, Hugo Chevez had already passed away and was succeeded by Nicolas Maduro, who served under President Chevez as the Minister of Foreign Affairs. He took office at a time when the country that wasn’t making enough money, and he had wages to pay. But instead of trying to diversify the economy or taking any positive approach, Venezuela adopted the worst economic policy they could: printing more money. Due to this irresponsible decision taken by the government, the Venezuelan currency, ‘Bolivar’ started to devaluate. This was because that currencies work under the same principals as any other good or commodity: Supply and Demand. A good starts devaluating as its supply increases. The more the supply exceeds or gets close to its net demand, the more it loses its value. Since the same is applicable for currencies, it also starts devaluating when it is printed more. Thus, the Bolivar started to lose its worth when the government started printing it more. And because of all of this, inflation in Venezuela started to skyrocket. They had the highest rate of inflation in 2016 and as a result, the price of all kinds of products started to increase by a huge margin, despite the income remaining the same.
• How the ‘Maximum Sales Price’ made things even worse: Due to the increased price level caused by the hyperinflation, the situation in Venezuela was already very bad. Just as when it looked as if things couldn’t get worse, Nicolas Maduro and his government adopted another harmful policy known as the ‘Maximum Sales Price’. According to this policy, the government fixed a maximum selling price for all commodities in order to control the growing price level. But producing every product required some element which had to be brought from some other countries. And since the Bolivar had largely devaluated, buying these raw materials had become very expensive for the Venezuelans. As a result, the cost of production of every good had increased largely. But, since the government had already fixed a maximum selling price (which was below their increased cost of production), it became impossible for the Venezuelans to sell their products in the normal markets and make profit out of it. Thus, a huge portion of the Venezuelan economy shifted to the Black market.
• The Impact: Hyperinflation is the worst thing that can happen to an economy. No matter how rich in resources a country might be, hyperinflation can collapse its entire system within a very short period of time. Like every other country, Venezuela also had to export many products from foreign markets to keep their system running. But as their currency lost its value in foreign markets, it became impossible for shops and other businesses to import basic products. On the other hand, production cost of every goods produced within Venezuela had also risen by a huge margin, as it required some raw materials to be imported from abroad. Due to all of these, violence started to spread out through the entire country. The lack of food supply even made people stab one another for a small piece of bread (Reuters). From an economic crisis, the situation of Venezuela soon turned into a humanitarian crisis. This disaster has caused about 3 to 4 million Venezuelans to flee the country, which is more than 10% of their population. Latest statistics show that almost 87% of the population is poor and about 60% are under extreme poverty.

Policy Suggestions: Bad economic policies are what destroyed the economy of Venezuela in the first place. I would like to suggest the following policies in an attempt to return their economic growth:

• Diversification of the Economy: The economy of Venezuela has always been largely dependent on its oil reserves. Due to this, when the oil price fell in 2014, their economy stared to go downhill. Since the price of oil is not a stable factor to rely the entire economy on, the government of Venezuela should look to diversify their economy through fields such as tourism, labor, agriculture, etc.
• Proper Utilization of the Workforce: Venezuela has a population of about 31. 57 million. Most of its workforce is employed in PDVSA, the state oil company. They should establish new industries and try to utilize their workforce in a better manner. The government should also encourage entrepreneurship.
• Encouraging Private Businesses: To reduce government spending, the administration should encourage private businesses. This would help the economy to gain stability.
• Establishing a Corruption Free and Sensible Administration: The Venezuelan government has time to time taken various policies which only made the economy even worse. They should establish a more sensible administration which is free from corruption, in order to adopt policies for the betterment of the country, in time of need.

Conclusion: Natural resources can play a huge role in the economy of a country. But Venezuela is the perfect example, which shows us that despite being abundantly resourceful, the system of a country can still fall apart in a short period of time due to improper policies and weak administration. An economy should never be solely dependent on unstable factors such as oil, as a slight change in its price may have a huge influence over its wellbeing. All the oil based countries including Qatar, UAE, Kuwait and even Saudi Arabia, are trying to diversify their economy by investing in fields such as tourism, science and technology, agriculture and others. In order to succeed, Venezuela should also try to reduce the oil dependency of their economy and follow the footsteps of these countries.