Apr 6th 2017, The Economist, Print Edition
IT IS hard to convey the severity of Venezuela’s unfolding crisis. Its extent is astounding: the economy shrank by 10% last year, and will be 23% smaller than in 2013 by the end of this year, according to IMF forecasts. Inflation may exceed 1,600% this year. The human details are more poignant: over the past year around three-quarters of Venezuelans have lost weight, averaging 8.7kg per person, because of a scarcity of food. No war, foreign or civil, is to blame for this catastrophe. Venezuela did this to itself. And its woes are deepening, as the regime of President Nicolás Maduro lurches towards dictatorship. Fifty years ago, Venezuela was an example to the rest of Latin America, a relatively stable democracy and not much poorer than Britain. How did this tragedy occur?
Venezuela’s economy is built on oil—its leaders boast it has the world’s largest proven reserves—and it is tempting to blame fickle crude prices for its woes. Oil accounts for more than 90% of Venezuelan exports. It helps to fund the government budget and provides the foreign exchange that the country needs to import consumer goods. Nearly everything of consequence in the economy, from toilet paper to trousers, is imported from abroad.
As oil prices soared in the 2000s, Venezuela found itself awash in cash. In 2014 the boom ended. The volume of dollars flowing into the country tumbled, presenting the new government of Nicolás Maduro, who had taken over after Hugo Chávez’s death, with an unappetising menu of options. He could have allowed the currency, the bolívar, to tumble in value. Yet prices for imported goods would have soared as a result, the market’s way of curtailing Venezuelan demand for products it no longer had the dollars to afford. Soaring prices would have violated the egalitarian spirit of Venezuela’s Bolivarian government.
More important, it would have made the new president unpopular. Instead, Mr Maduro kept the wildly overvalued official exchange rate and rationed imports by tightening the government’s control over access to hard currency. From early in the Chávez era, the government controlled the flow of dollars earned by the oil industry; importers had to prove they were trying to bring in something of value before being allowed to swap bolívars for greenbacks. Mr Maduro tightened the screws.
The effect was not as intended. As the flow of imports dried up, prices rose. Mr Maduro tried price controls; supply either evaporated or moved to the black market in response. The government’s fiscal troubles added to the mess. With oil revenues slashed by half and the government deficit soaring, Mr Maduro might have opted to cut spending and broaden the tax base. But such measures must have looked like political poison to a freshly anointed president. Instead, Venezuela turned to the printing press to cover its bills. Devastatingly high inflation is further undermining the workings of the economy.
So oil is merely a scapegoat in Venezuela’s tragedy. Economic dependence on oil is always fraught. Soaring oil prices place upward pressure on the exchange rate, leaving other, non-oil industries at a competitive disadvantage. That deepens an oil-exporting economy’s dependence on crude, worsening the pain when prices eventually fall. Governments of oil-exporting countries know this, and often try to mitigate the risk. When times are good, some use inflows of hard currency to build up foreign-exchange reserves, which can be drawn down later to cover foreign-currency obligations and import bills; Saudi Arabia holds reserves worth more than $500bn, for example. Others use oil profits to fill sovereign-wealth funds, which invest in a diversified portfolio in order to reduce the economy’s long-run exposure to petroleum. Norway’s fund, which is intended to help pay for state pensions, is worth nearly $900bn.
Chávez had the good fortune to take office at the tail end of a two-decade swoon in oil prices, and to preside over a price surge. The money that came to Chávez, he spent. From 2000 to 2013, spending as a share of GDP rose from 28% to 40%: a much bigger rise than in Latin America’s other large economies. Spending crowded out growth in foreign-exchange reserves. In 2000 Venezuela had enough reserves to cover more than seven months of imports; that dropped to under three months by 2013 (over the same period Russia’s reserves grew from five months of import cover to ten, and Saudi Arabia’s from four months to 37).
Why did Chávez not leave Venezuela better prepared for the inevitable crash? In his version of events, Venezuelans fared poorly during the long oil bust from 1979 to his ascent in 1999 not because crude was cheap but because capitalists robbed the people of their due. During his rule, Chávez increased public spending on social programmes and expanded subsidies for food and energy. Venezuelans felt the results, in higher incomes and improved standards of living. Chávez delivered, for a time.
Yet this narrative was always false. Those in power always have a greater incentive to buy off political threats than to invest in projects that will only bear fruit over time, possibly after they have gone. In oil-rich economies, they also have the means. Chávez expropriated and redistributed wealth to weaken enemies and woo allies. In his careless economic management, he undercut the oil wealth that funded Venezuelan socialism. His assaults on private firms left the country short of the expertise and capital needed to develop its resources. In recent years it has produced less oil than China and a quarter of the output of Saudi Arabia. Venezuela ate its seed corn despite record harvests.
Darkness drops again
Venezuela was once the envy of Latin America, until a long stagnation in living standards brought a populist strongman to power. But popularity is hard to maintain. The greater the desperation of the populist, the greater the willingness to accept long-run risks in exchange for short-run pay-offs. Whether or not the populist survives to see it, the day of reckoning eventually arrives. And it is always the people that suffer most.