Venezuela Chokes on Failed 20th Century Policies

Jesus Rodriguez

Hugo Chavez mural in Caracas.

Hugo Chavez mural in Caracas.

Venezuela has sunk into chaos owing to the recent drop in oil prices, which constitutes 93% of its exports (combining crude and refined petroleum), leading to ludicrous inflation rates, electricity shortages, food shortages, and looting. On top of this Venezuela also has one of the world’s highest homicide rates and is infamous for corruption, which may have exacerbated its current position as it is estimated that government officials misappropriated $300 million in oil revenue. How could this happen?

It goes back to Hugo Chávez’s election in 1998, where shortly after there was a substantial overhaul of the country’s political system, affording more power to the executive and the dominance of PSUV, Chávez’s socialist party. Fortunately for Chávez the price of oil during his election was at a low and set to rise to record levels in the coming years. The combination of both these factors gave the government an immense amount of power, so long as the revenue kept coming in the government could pursue whatever they wanted. With this the Venezuelan government pursued development through import substitution industrialisation (ISI), a set of policy decisions that had been tried in Venezuela and the rest of Latin America in the past.

ISI focuses on attempting to make a country more self-sufficient, sheltering businesses while they grow and develop using exports to fund internal growth. The Venezuelan government attempted to follow this model, seen more commonly in the earlier part of the 20th century. Yet, they failed to evade any of the pitfalls of previous failed ISI endeavours, leading to a crippling of the economy. Though poverty rates improved over the PSUV’s time in the 2000s these were largely owing to Venezuela’s huge oil revenues. Having such large funds meant they could essentially throw money at the problem until it began to subside. The welfare programs provided, though successful in driving down poverty were largely inefficient, eventually becoming non-viable once revenues dried up.

Venezuela’s problems were furthered by nepotism encouraged by the nature of the ISI model, in this case a combination of large government power and corruption led to a degree of clientelism. This was exacerbated by the protectionist nature of ISI methods. Sheltering businesses and socialising agricultural production to a large degree eradicated market mechanisms for effective production. Socialisation of agriculture added to current food shortages owing to the lack of expertise and capital present in local communities. This further increased reliance on imports and contributed to Venezuela’s position in a commodity trap, relying on oil to sustain themselves. Greatly relying on exports and heavily importing goods while not adequately equipping the economy to deal with a drop in oil prices is a common story in the developing world, and Venezuela failed to account for this.

Such an isolationist approach is what helped render Venezuelan economy unable to compete. This with the nepotism and corruption already present being mixed with great executive power is what ultimately led Venezuela to the situation it finds itself today.

We see this in Latin America throughout the early 20th Century. A lack of market mechanisms, competition, and isolation render economies unable to compete with the outside world.

One would think that, after Latin America’s failed experiments with ISI throughout the 20th century, countries would have learned from their mistakes – but by choosing this approach the government almost assured the economy’s downfall. That is not to say the current government could not have succeeded using oil revenues, quite the contrary. Venezuela could have been the world’s envy had they properly diversified the economy, established more efficient social programs, worked with businesses instead of excluding them, and integrated themselves with the world, creating a more dynamic economy. Instead we see chaos.

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