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The Legacy of Hugo Chavez and a Failing Venezuela

February 09, 2017
Hugo Chavez was a prominent Venezuelan leader whose reign, which ended in 2001, left the previously prosperous country in declining health. Venezuela’s economic dependence on oil set the scene for Chavez’s rise to power, and fueled his policies at home and abroad. However, Chavez’s strong steps to accrue government revenue through Venezuela’s oil production placed deleterious pressure on oil prices, which began the country’s downward economic spiral.

Chavez’s Early Years & the Rise of Venezuela’s Oil Dependency

After his failed military uprising in 1992, Hugo Chavez, a dissatisfied and impassioned military officer, was thrown into prison. Soon after his release in 1994, Chavez capitalized on the economically distraught and politically charged Venezuela, and was soon elected to the Presidency in 1998 as the de facto head of the United Socialist Party. Chavez’s anti-corruption and pro-employment rhetoric resonated particularly well with the poor; he implemented several programs to provide necessities and build infrastructure, as well as create employment opportunities. Although these programs aimed to combat the deeply rooted social and economic issues Venezuela faced, they were inherently dependent upon the country’s oil wealth.

Venezuela’s oil industry was in the midst of an economic boom, which was fueled by high international oil prices. Although the oil boom provided Chavez with the short-term resources needed to fund his programs at home, his strategy was unsustainable, and the Venezuelan economy tanked as soon as oil prices plummeted. Chavez’s regime left no hope for an independent recovery of the resource-rich nation, provided that Chavez’s rampant nationalization of the private sector crippled industrial competition. The growing gap between government expenditures and revenue pushed the country deeper and deeper into a pit of debt.

Below is an analysis of three of Chavez’s central economic and social policies and examine whether the growth in Venezuela’s economy during Chavez’s presidency can be attributed to the success of his policies, or rather to underlying global economic trends. Then, an analysis of the subsequent downfall of the Venezuelan economy and trace its roots to the Chavez’s regime.

The Impact of Chavez’s Policies On Oil Prices

The single most influential factor behind Chavez’s reign and his ability to rule was oil prices. Venezuela’s economy is almost entirely dependent on oil – profits from exporting oil compose 40% of governmental revenue, more than 50% of the country’s GDP, and roughly 90% of all exports.[1] When Chavez took office in 1999, the Asian economic crisis caused a considerable drop in the price per barrel of oil, debilitating the Venezuelan economy. The subsequent rise of prices aided Chavez’s consolidation of power as Venezuela’s economy strengthened. Chavez then took a radical step in nationalizing privately owned oil fields into a state-owned oil and natural gas company, PDVSA. The nationalization gave the Venezuelan government direct access to oil profits, which, according to the Harvard Political Review, increased from just under $10 in 1999 to a $126 in 2008.[3] This increase in revenue, however, cannot be directly attributed to any specific action on Chavez’s part, but rather to a systematic increase in global oil prices caused by a decline in petroleum reserves, an increase in demand from developing countries such as China and India, and higher investment demand from institutional investors. In 2002, PDVSA went on strike, primarily due to Chavez’s tight control on oil production and his corruption, including the enlistment of his loyalists to the PDVSA’s board. This strike forced Chavez out of office; he retaliated with organizational “changes” to top management, which involved firing 18,000 workers and consolidating control. Chavez continued to choke the private oil industry under his iron fist through 2006 and 2007, fully nationalizing oil exploration and production by forcibly seizing the assets of oil companies such as Exxon Mobil and ConocoPhilips.[4] Chavez eventually succeeded in expelling all foreign oil companies, which limited the capacity of Venezuela to expand in the oil industry.

Venezuela was left deprived of technological advances in oil mining adopted by foreign companies, and therefore, oil-rich areas such as the Orinoco belt, were left untapped. Venezuela’s declining oil production took a considerable toll on its economic development. Additionally, Chavez’s efforts to cooperate with other Latin American countries such as Cuba, to which it historically sold a large amount of subsidized oil, decreased governmental revenue. Recently, oil prices have fallen as low as $28.36, their lowest point in 12 years. Although oil once helped this malaria-infested Caribbean nation rise from poverty, it has also led to the recent economic calamity under Chavez’s controlling regime. Analysts say that a lack of investment in basic infrastructure by the nationalized PDVSA and an inability to pay contractors lie at the essence of Venezuela’s economic collapse.[5]

The Impact of the Bolivarian Missions

The next step in the analysis is to look at Chavez’s Bolivarian missions, which were heavily funded by the aforementioned rising oil prices. It is important to keep in mind that although Chavez’s mission to alleviate the suffering of the poor was well intentioned, Chavez went about constructing and funding these programs in an unsustainable fashion. The programs covered a variety of topics: adult literacy programs, free community health care, low-income housing construction, and subsidizing food and other consumer goods. Statistics released by a Venezuelan news report indicate considerable drops in malnutrition, from 21% in 1998 to 6% in 2007, and an increase in average daily consumption from 2,200 calories in 1998 to more than 2,700 calories in 2008.[6] The first graph below indicates that unemployment fell over the years of Chavez’s regime as a result of individuals finding more opportunity to find stable work in the public sector following the government acquisition of private sector companies.

Chart tracing Venezuela's unemployment rate. <strong>Source: </strong><a href="http://www.tradingeconomics.com/venezuela/unemployment-rate">Trading Economics</a> <a href="#_edn7">[7]</a>Chart tracing Venezuela's unemployment rate. Source: Trading Economics [7]

 

Despite their positive influences in the social field, Chavez’s programs were fueled by unsustainable funding, which negatively impacted their long-term impact. As discussed in a recent Bloomberg article, the disparity between revenue and expenditures of the Venezuelan government started before the global oil collapse during the summer of 2015.[8] Even at the peak of international oil prices, in July of 2008, Venezuela’s governmental revenue was already falling. This can be attributed to the fall in oil production from 3.3 million barrels a day in 2006 to 2.7 million barrels a day in 2011. Chavez directly caused this decline in oil production when he seized control of PDVSA and its joint ventures with foreign oil companies; Chavez reduced the oil company’s access to resources that were necessary to harvest the plethora of heavy crude oil surrounding the country. This tactical mistake has left Venezuela, now under the rule of Maduro, incapable of paying its bills without falling into severe debt.

Graph showing the divergence between Venezuela's revenue and expenditures. <strong>Source: </strong><a href="https://www.bloomberg.com/view/articles/2015-08-27/how-hugo-chavez-trashed-latin-america-s-richest-economy">Bloomberg</a> <a href="#_edn8">[8]</a>

Summary

The Venezuelan crisis has many internal and external drivers, but many of its roots can be found in Hugo Chavez’s misguided economic policies, especially regarding oil. Currently, the government’s actions and inactions, as well as rampant corruption in the public and private sectors, have worsened the economic crisis. According to World Bank, inflation rates have been at 370% for the past 12 months and the International Monetary Fund predicts that it will reach 700%.[9] The 1.3% economic growth experienced in 2013 has decreased to -10.1% in 2016.[9] Venezuela has also experienced a 40% drop in both imports and profits from oil exports. The opposition in Venezuela is unhappy with the destitute living conditions, and is pushing for regime changes by any means necessary, including violent insurrection. The opposition refuses to accept Nicolas Maduro’s April 2013 victory, and as a result, there has been violence at health clinics and other government-funded institutions. Political change is clearly necessary in order to bring about economic stabilization and drastic economic reforms to reset the country’s trajectory, and how and when this change happens will be key to any lasting reform to the country’s economic crisis.

References

   [1] https://iso.org.nz/2013/05/21/the-legacy-of-hugo-chavez-venezuela-and-the-bolivarian-revolution/ )

  [2]http://www.opec.org/opec_web/en/about_us/171.htm

  [3] http://harvardpolitics.com/world/the-legacy-of-hugo-chavez/

  [4]http://news.nationalgeographic.com/news/energy/2013/03/130306-hugo-chavez-venezuela-oil/

  [5]http://money.cnn.com/2016/10/18/news/economy/venezuela-pdvsa-default/

  [6]https://venezuelanalysis.com/analysis/213

  [7]http://www.tradingeconomics.com/venezuela/unemployment-rate

  [8]https://www.bloomberg.com/news/articles/2016-06-27/venezuela-s-oil-output-decline-accelerates-as-drillers-go-unpaid

  [9]http://data.worldbank.org/country/venezuela-rb

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