Venezuela, a Latin American country, situated on the northern coast of Southern America has been under a socioeconomic and political crisis which has led to almost 7.3 million people leaving the country since 2014 in search of a better life. What led to the downfall of this oil-rich country?
The Venezuelan economic crisis has plagued the country for over a decade. Numerous factors including hyperinflation, dependency on oil, widespread poverty and political instability have led to this current situation known as the Venezuelan Economic Crisis.
Let's start our analysis by examining the political history of Venezuela. In 1998, Hugo Chavez, a political outsider won the elections and was elected as president. He ran the country for almost 14 years till his death in 2013. After the elections Chavez launched what he called the 'Bolivarian Revolution' in which he decided to utilize Venezuela's vast oil reserves to reduce poverty and inequality. While the revolution cut the poverty rate by 20%, Chavez also took some decisions that led to an overall decline in the Venezuelan Oil output. As Chavez heavily relied on oil, this decline in output left Venezuela vulnerable to oil price shocks. When oil prices dropped during his presidency, they led to a budget deficit. Not only this, Corruption also increased under Chavez's rule. There was no check and balance and billions of dollars were embezzled. Chavez also manipulated the exchange rate creating an unsustainable economic environment. There was little to no access to dollars for imports leading to shortage of essential goods. The conditions got so worse that in 2010, Chavez declared an economic war due to increasing shortages of food and basic necessities in the country. By the early 2010s and the end of Chavez era, the economic policies taken by Chavez such as price controls and overspending became unsustainable and poverty, chaos and shortages increased in Venezuela.
Chavez was preceded in 2013 by Nicolas Maduro, a member of the same party. Maduro continued most of the existing policies of Chavez. Maduro faced issues such as inflation and shortages most of which were the consequence of Chavez's previous policies. In mid 2014, global oil prices plummeted and the country's economy went into free fall. By the end, Venezuela had entered an economic recession. The country had an inflation rate of 800%. This hyperinflation resulted in strife and chaos. As a result Venezuelans took the matter to the street in order to express their frustration. The matter went to the International Level and various countries imposed sanctions leading to International Isolation and restricting the country's access to global financial markets and foreign investments.
Now that we have discussed the political scenarios we can now discuss the various factors involved and their consequences on the crisis in detail. The first and the most important factor relating to the country's downfall is its dependence on oil exports. Oil is a major part of Venezuela's economy as it comprises 95% of its exports and 25% of its GDP so an increase in prices benefit their economy and vice versa. During Chavez era it wasn't much of a concern, Venezuela used its oil revenue to gain political power. It even provided subsidized oil to countries like Cuba in order to gain their favor. However, this didn't last long as oil prices declined in 2014. Venezuela was initially giving away 200,000 barrels of oil per day. When the prices were high, the country made profit with a great margin such that the given barrels didn't have any effect. However, when the price level went down, the situation got so bad that the country started to go into deficit. In order to cover this deficit, the country started to print more money resulting in hyperinflation the other cause of the crisis which we will discuss next.
The country got into a budget deficit as they spent more which wasn't covered by the revenue generated, the government resorted to printing more currency which wasn't backed up by tangible assets such as gold, etc. The rapid printing led to an increase in the money supply leading to a fall in value of the bolivar. The unchecked growth of the money supply lead to hyperinflation. The hyperinflation lead to currency devaluation which made imports really expensive and increased the shortages of food and basic necessities. Not only did this result in shortages but it also caused economic uncertainty reducing foreign investment and the existing businesses started to struggle. All of this made it increasingly difficult for the Venezuelans to meet their basic needs and a lot of them left the country in search for better opportunities. As a result, Venezuela also lost a huge amount of its man power which will take decades to rebuild.
Among the various causes behind the recession, the corruption and inefficiency of the State Owned Enterprises in Venezuela are also included. Under the leadership of both presidents, Venezuelan government expanded its control over a lot of industries including the national oil company PDVSA. State control led to corruption in these industries. Government officials were involved in various activities such as embezzlement. As a result, the revenue generated by these enterprises wasn't used for the general public but only benefitted a few individuals. There was a decline in productivity as these SOEs weren't held accountable leading to inefficiency. These SOEs were supposed to contribute to the governments revenue but instead they led to substantial revenue losses. This mismanagement didn't only have an economic impact but also a social one. As there was deterioration in public services leading to increased poverty and suffering among the ordinary citizens. According to a study in 2019, 8 million Venezuelans didn't have enough to eat.
Now that we have discussed the the causes and consequences of the crisis, we can now look for potential solutions which might help in reforming the country's severely damaged economy. The basic reason behind all this is the country's reliance on oil. In order to tackle this, Venezuela should reduce its over-reliance and should also focus on other industries such as manufacturing, agriculture and tourism. Venezuela has a lot of agricultural land which is under-utilized. In the reforms, Venezuela can focus on increasing its agricultural output which can also decrease the food shortage that has led to the humanitarian crisis in the country. Similarly, Venezuela has a lot of natural beauty which can be used to promote tourism in the country. Increased tourism will also bring foreign exchange which will increase the value of their currency.
Another way to increase the value of the Venezuelan Bolivar is to attract foreign investments. Reforms should result in a business friendly environment by simplifying regulations. Stable economic policies will attract foreign investors. Proper legal framework will result in reduced bureaucracy and corruption making it easier for foreign companies to operate. Venezuela also needs to increase its transparency and anti-corruption measures in order to increase investors confidence.
But none of these economic reforms will be able to work until the political situation of the country improves. Venezuela has been under dictatorship for the last two decades. This dictatorship needs to end by holding free and fair elections which establish a legitimate government that represents the will of the people. Currently the socialist PSUV party has over the past two decades gained control of key institutions, including much of the judiciary, the electoral council and the supreme court. This must end and there should be separation of powers between executive, legislative and judicial branches. The judiciary should be independent and makes sure that there is law and order.
An independent central bank should be established whose main goal is to maintain the value of currency. Similarly, fiscal policy laws should be established so that the country's spending is sustainable and the deficits are in check. In order to tackle the previous debt which is almost $150 Billion, there should be constructive negotiations with international creditors in order to restructure the country's debt and reduce the financial burden.
All of these reforms require a long term commitment in order to rebuild the nation's institutions and economy. Continued support is crucial to alleviate the suffering of the Venezuelan people and stabilize the country. While the path to recovery may be long and arduous, there is a hope that the country can emerge from its current crisis and build a better future.
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