Venezuela: How the Hell Did We Get Here?

 

 

Earlier this week Peru’s President, Pablo Kuczynski, warned that the civil and economic unrest in Venezuela could create a refugee crisis in South America.  He also expressed concern that the unrest was destined end in civil war.  

 

The news isn’t that shocking.  For years Venezuela has been on the verge of collapse; recently it’s gotten so bad that the Washington Post is even having trouble defending the country.  Gone are the days where we’ll see Bernie Sanders praising the Venezuelan economy; while Sean Penn,  Oliver Stone, and Michael Moore hardly make a peep.

 

The thing is, Venezuela shouldn’t be poor. They should have Latin America’s best economy. Instead, the citizens are killing each other over toilet paper.  So how the hell did the country with the world’s largest proven oil reserves get this way?oil-reserves-by-country.jpg

 

A Brief History

 

The name “Venezuela” was given to the nations north coast by spanish explorer Alonso de Ojeda, and means “Little Venice,” and the name stuck. Venezuela remained under Spanish control until July 5th, 1811.  That July, the majority of Venezuelan provinces declared independence from Spain.  

Over the next ten years, the Venezuelans fought the Spanish for control of the country. On June 4, 1821 Simon Bolivar, commander of the revolutionary forces, broke a ceasefire, defeating the Spanish at the Battle of Carabobo and securing Venezuelan independence. 

Modern Venezuela was founded in October 1958 after the three major parties; Accion Democratica (AD), Comite de Organizacion Politica Electoral Independiente (COPEI), Union Republicana Democratica (URD) signed the “Punto Fijo Pact” . The pact established the fact that the military worked for the people, not the other way around. The pact formally protected the right to vote.

In the mid-1990’s Venezuela was in economic turmoil; inflation and corruption ran wild, and people were starting to question the pact.  Seeing an opportunity, Hugo Chavez, who had led a failed rebellion in 1992, seized control of the country in 1998 (with military backing), officially becoming president in 1999.

What the Hell Happened?

Simply put, oil prices bottomed out in the mid 2000’s.  But that’s a bit simplistic, Venezuela’s real problem began much earlier in the 1960’s. In the 60’s, the Venezuelan government started to use protective tariffs to increase manufacturing at home, when some industries started struggling to keep pace, the government leaned on subsidizing those industries.  As Thomas Sowell points out in “Basic Economics”, subsidies hurt the economy by encouraging inefficient business practices.  It’s better, long-term, to let those businesses fail, or else you’re just kicking the can down the road.

The protective tariffs led-way to nationalizing iron ore and natural gas in the 1970’s.  During the 1970’s Venezuela was the wealthiest country in Latin America; they had the region’s highest growth rates, some of the lowest levels of inequality, they were the best educated nation in the region,  and they had a stable democracy. The 1980’s, however, saw 3 coup attempts and an impeachment.  

So what happened? One of the conclusions drawn by experts is that  weak government institutions caused inflation and stagnation. Normally higher education levels lead to a better economy and higher wages. Experts, however, experts were surprised to discover that that wasn’t the case in Venezuela.

“One of the more surprising findings is related to the role of human capital. The chapter written by Corporación Andina de Fomento (Andean Development Corporation—CAF) economist Daniel Ortega and Harvard Kennedy School professor Lant Pritchett notes that Venezuela not only had a relatively well-educated population in the 1980s, but that education increased throughout the period in which growth decreased. As they point out, “If the wage-returns relationship had been stable over time, then the additional levels of education of workers should have raised wages by 58 percent.” Instead, wages declined by 70 percent in the 1980s and 1990s. The notion that education—a key component of human capital—has either no relationship or a negative relationship to real wages is counterintuitive.”

Ortega and Pritchett had determined that large-scale nationalization efforts undertaken by Hugo Chavez, had decreased the incentive to work.

After Hugo Chavez took office in 1999, he started implementing wide-scale nationalization policies culminating in 2002, after he fired 18,000 oil workers, seizing complete control over the oil industry.

At the same time Chavez dramatically increased government spending. Touting welfare programs for the poor, making him exceptionally popular. For the first few years, it worked.  Malnutrition rates, for example,  dropped from 21% in 1998 to 6% in 2007. The government attributed it to Chavez’s food initiatives. Implementing these initiatives meant government took over food production, centrally planning the entire thing. They re-distributed land, established price controls and quotas, all in the name of the collective good.

With so much of their economy under control of the government, it went to hell during the oil crisis of the mid-2000’s.  It doesn’t seem as though they’ve learned from their past. Today,Venezuela doesn’t release any economic statistics, but it’s estimated that inflation sits around 440%.

 

Venezuela’s tax revenue has decreased, even though it’s expenditures have risen.

Although Hugo Chavez died in 2013, the country is still run by his sycophant, Nicolas Maduro. Under Maduro’s leadership, the co

untry faces a shortage of everything. Venezuelans are describing hellish situations; Pittsbur

 

gh Pirates catcher Francisco Cervelli wrote of his homeland:

“There were IVs and bags of liquid medicine on the ground. Babies were screaming. Some of the older children, the toddlers, were moaning in pain. Doctors and hospital workers were stepping over little kids like it was nothing, like they were pieces of garbage.

It was human suffering on a scale that you hardly ever witness in person.”

Venezuela is the long-term effect of socialism. Anti-government protests have waged on for months, and are becoming increasingly more violent, maybe President Kucyznski was right. Maybe Venezuela is destined for civil war.  

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