By Raghav Chawla
Venezuela was once Latin America’s exemplar: home to Simón Bolívar, who freed much of the continent from Spanish rule. Now, after years of political mismanagement and months of economic free fall, it is the region’s cautionary tale. Although it’s home to the world’s largest oil reserves, it is plagued by problems of political instability, widespread corruption, and massive foreign debt leading to an ongoing humanitarian and economic crisis. This column will analyze the petrostate’s sudden economic growth by looking into its political and economic factors.
Venezuela’s descent into economic and political chaos in recent years serves as a warning about the catastrophic consequences mineral wealth may have on developing economies. The country’s economy is a classic example of what economists refer to as the “Dutch Disease”. The ‘Dutch disease’ is a term in the late 1990s that refers to when the Netherlands discovered natural gas. Unexpectedly, this positive development had serious repercussions on important segments of the country’s economy as the Dutch guilder became stronger, making Dutch non-oil exports more expensive and, therefore, less competitive. Similarly, in Venezuela, resources attracted large inflows of foreign direct investment however, since governance was concentrated in the petrol industry, it ended up sucking labor and capital away from other sectors of the economy, such as agriculture and manufacturing, which economists say are more important for growth and competitiveness resulting in a rise in unemployment.
“Petrostate economies are strongly affected by unpredictably fluctuating global energy prices and capital outflows, leaving them highly vulnerable to political chaos eventually leading to a humanitarian crisis”.
The pattern of political instability follows a case of two presidents engaged in a high-stakes game to control the country’s future. The country has also had two “national assemblies” and many questions about how the constitution should be applied. Let’s look at Venezuela’s past to gain a better understanding.
Hugo Chávez, Nicolás Maduro’s socialist mentor and immediate past president, passed away in April 2013, shortly after his first election. He only prevailed at the time by 1.6 percentage points. Many Venezuelans attribute the country’s demise to him and his socialist government because the economy collapsed during his first term. In incredibly contentious elections that most opposition parties boycotted in May 2018, Mr Maduro was re-elected for a second six-year term. In light of the fact that some contenders were disqualified from competing, while others were either jailed or fled the country for fear of being convicted, the opposition parties claimed that the election was fraudulent.
The National Assembly, which runs by the opposition, refused to recognize Maduro’s victory, calling him a “tyrant” and rejecting the presidency. Juan Guaidó declared himself to be the acting president, citing the constitution’s requirements that, in such cases, the President of the National Assembly takes over.
Whatever may be the tussle for the control of the presidency, it is still the common citizens who bear the brunt of such political chaos, with Maduro using his security forces for extrajudicial executions and disappearances of opponents, prosecution of civilians in military courts, tortured detainees and cracked down on protesters. The lack of judicial independence contributed to impunity for these crimes.
“A United Nations Fact-Finding Mission (FFM) identified patterns of violations and crimes that were part of a widespread and systematic course of conduct that it concluded amounted to crimes against humanity”
Macro and Micro Realities
The bolivar, the currency named after the Liberator himself, is now carried in backpacks instead of wallets; one bolivar is worth less than a penny. While production plummets, crime soars. Fights frequently break out in food lines. Venezuela is in the midst of a severe humanitarian emergency, with millions unable to access basic healthcare and adequate nutrition. Limited access to safe water in homes and healthcare centers and a vaccination plan marred by opacity may have contributed to the spread of Covid-19. To comprehend these problems let’s have a look at several indicators causing this economic spiral.
- Oil Dependence: The Venezuelan economy is highly dependent on oil exports since it makes one-quarter of its GDP and due to adequate maintenance and investment its production has depreciated. Akin to covid 19 pandemic the demand for oil exports depreciated
- Hyperinflation: Annual inflation is running at 1,946%. An inflation rate this high doubles prices nearly every two weeks. Venezuela’s high inflation levels are due to the sum effect of relying too heavily on imports for basic goods, depending on oil as its main export, inefficient government industries, and governmental corruption.
- Soaring debt: Venezuela had an estimated DEBT to GDP at a very high 320 %, to put things into perspective DEBT to GDP is a macroeconomic indicator that measures a country’s ability to pay its debt by growing a comparison to its GDP.
- International Sanctions: The economic crisis has been made worse by the unprecedented imposition of sanctions by the United States, the European Union, and other nations. Due to the Western governments’ sanctions, which are against international law, the Venezuelan government lost 99% of its revenues.
Tracking the sudden economic growth
After years of severe recession and hyperinflation, the Venezuelan economy is expected to grow by 20% in 2022, although this claim was first predicted by its central bank governor. However this economic news was also ratified and forecasted by the prominent Swiss bank – Credit Suisse.
Although a variety of reasons are responsible for this economic expansion, “ it would be outright wrong not to consider the Russia-Ukraine crisis since it has sent a soaring message to the global oil supply chain. The stage is set for Nicolas Maduro, president of Venezuela, to “reach a compromise” with the United States and maybe reconsider his government’s relations with the “extensively isolated” Russia. There is a possible route to decreasing sanctions to stabilize the Oil supply chains and prevent the winter energy crisis in Europe. Moreover, the U.S. had already allowed two European energy companies to import Venezuelan oil to Europe in July 2022, to replace Russian crude.
The mainstream global market has increasingly focused on high oil production, rise in energy prices, and increasing remittances from the western labor markets. If we have a closer look, the Venezuelan government’s exchange rate policy has been an anti-inflationary pillar since it has called for stabilizing the nominal exchange rate to lower inflation and ‘de-dollarize’ the economy. The abolition of foreign exchange controls and a de facto easing of pricing controls, as well as improved business conditions and the creation of short-term opportunities, were the primary growth drivers. In recent times the increase in tax revenues and banking credits has allowed the economy to flourish. Meanwhile, as an additional sign of economic opening, the largest state-owned bank announced that it would start offering shares in the local stock market in late May.
Venezuela’s economy is a fraction of the size it used to be. According to one study, the economy would have to grow 10% a year for 18 straight years to get back to its size in 1997, a year before Hugo Chavez, won the presidency for the first time. For the economy to stabilize and facilitate growth with positive development, Nicholas Maduro needs to take a back seat. Even if Venezuela needs any kind of relaxation regarding sanctions and foreign investment from the west the Maduro government needs to stop human rights violations and remove curbs at the least. The upcoming 2024 will set the stage for development if democracy prevails over autocracy.
About the Author
Raghav Chawla is a third-year student at the Jindal School of International Affairs, pursuing international relations with a specialization in economics and foreign policy. His research interests include development economics, political risk management, and global south studies.
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