Venezuela has the highest proven oil reserves in the world—some 300 billion barrels, greater even than Saudi Arabia. Notwithstanding its wealth, Venezuela has oscillated between periods of boom and adjustment and coups which track periods of austerity. Today, however, Venezuelans are suffering the impact of a man-made economic and humanitarian crisis. The economy shrunk by half between 2014 and 2018. The IMF predicts that inflation will hit 1.37 million per cent in 2019 and that real GDP will decrease by 18 per cent. Oil production, the lifeblood of the economy, has declined from 3.3 million barrels per day two decades ago to an estimated 800,000 today.
As recently as 2017, the United Nations' Human Development Program ranked Venezuela's Human Development Index at .761 (with 1.0 being the highest score), higher than neighbouring Colombia and Brazil. This figure is an indicator used by economists to measure the improvement in the quality of life. Venezuela's HDI climbed under Chavez and peaked during Maduro's administration at .778 in 2014.
When the oil prices were high—between 2005 and 2014—oil revenues were recycled into welfare programmes and house building for the poor. Sounds familiar? The results were spectacular. Unemployment and poverty rates halved, and infant mortality sank winning plaudits from many around the world.
Since then, the decline has been catastrophic and is mirrored in its social statistics. Venezuela is ranked in the first three countries with the highest murder rates in the world. Statistics measuring poverty, nutrition, healthcare, basic measures of well-being have all declined. One study showed that in 2018 only one in ten Venezuelans could afford daily food, while another survey found that 80 per cent of households are food insecure. Children die from preventable health issues such as malnutrition, acute diarrhoea, and acute respiratory infections.
A recent report by Human Rights Watch and the Johns Hopkins University School of Public Health documents a surge in cases of measles, diphtheria, malaria, and tuberculosis as vaccination programmes collapsed. HIV patients are unable to get treatment and maternal and infant mortality rates rose 65 per cent and 30 per cent respectively in just one year. Over two million Venezuelans have left the country, and the United Nations predicts that as many as one million more may flee in 2019.
How did all this happen?
Despite Venezuela's oil wealth, it is argued that the political parties did not do enough to enhance the lives of less privileged citizens at the bottom by improving the income distribution or by reducing the level of corruption. This created a political and economic crisis in response to which, General Hugo Chavez led a coup attempt in 1992. Pardoned in 1994, he won the 1998 presidential elections by appealing to the poor and the struggling middle classes.
In his early years of power, Chavez established his “Bolivarian Revolution” which included populist social welfare policies characterised by extensive social spending that initially boosted the economy and reduced economic inequality and poverty. After the unsuccessful attempt to unseat Chavez in the 2002 coup, he took more direct control of the economy delegating key areas to the direct control of the military. Additionally, price controls and the threat of expropriation were introduced which affected the investment climate leading to an exodus and decreasing private sector investment. The Government seized assets in many industries, from coffee processing to banking. This has destroyed any investment incentive thereby leading to further shortages.
After Chavez's death in 2013, the situation worsened as government spending exceeded its earnings leading to an increase in its foreign debt and dependence on China and Russia. The sharp decline in energy prices coupled with continuing declines in oil production resulted in a decline in foreign exchange reserves which has impacted every area of life. Confidence is the Government's capacity to manage the situation is low and hyperinflation in the fashion of Zimbabwe and the Weimar Republic is the norm.
The lesson is that populist policies do not work in the long run. Overdependence on one export staple is an inherently risky strategy. If that is the only option, then that sector must function on an internationally competitive basis. Indeed, PDVSA declining performance level and over employment is similar to that of Petrotrin. Further, economic redistribution does not necessarily lead to long-term economic growth. To afford populist policies, the economy must be strong, dynamic with policies to facilitate its growth since Government income comes from taxing the income that is generated by that growth.
Growth depends mainly on factors such as population growth and workforce participation, the skills and aptitudes of the workforce, the tools at their disposal, and the pace of technological advance. Fiscal and regulatory policies have to be designed to support and develop these factors by making the business environment-friendly and facilitating productive improvements.
The lessons are clear, and T&T needs to learn from them, especially in an election season when promises are not matched to the economy's performance capacity. The only place where success comes before work is in the dictionary.