Venezuela as a Cautionary Tale on #SahodItaasPresyoIbaba, Nationalistic Pride, Welfare State Economics
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| The Sunday Guardian |
Years ago, I wrote about Venezuela's pride and protectionism, under a more "formal" style of writing compared to my latest posts. I decided to use an even "less formal" and "less academic" tone since I'm not writing a term paper. Instead, it's like how a professor and a student discuss the thesis using first person over third person, using contractions, etc., while the thesis doesn't use such tones. Back on track, I thought about the arrest of Venezuelan President Maduro can spark debate. Was it a violation of sovereignty? I'm no expert on international law. However, Venezuelans can be seen celebrating Maduro's arrest. Right now, I'm using Gemini AI and Google search to help me find some sources for this blog. It's because I don't want my blog to become another gossip central, but a place to discuss facts with my own personal opinions (making sure they don't derail the facts).
I used Venezuela as an example to counter several pages that oppose economic liberalization or open FDI. Several of these pages have the bad habit of blaming American imperialism or American neocolonialism, or American economic sanctions for Venezuela's lack of progress. Recently, it has been amazing how oil prices have now fallen thanks to the current arrest of Maduro, which I heard had cooperation with the Venezuelan government.
How #SahodItaasPresyoIbaba (raise wages, lower prices) ruined Venezuela
However, if we go way back before the 2017 sanctions, it would be important to know that the late Hugo Chavez himself set policies that ruined Venezuela. According to the Economics Observatory, an article by Frank Mucci (who is, by the way, a graduate of the London School of Economics, I'm looking at you, Jose Enrique "Sonny" Africa of the IBON Foundation), we can read how Chavez ruined a once-promising nation that held the richest oil reserves.
Before the collapse (1999 to 2013): bad macroeconomic policy
Presidents Hugo Chavez (1999-2013) and Nicolas Maduro (2013-present) implemented exactly the wrong kind of macroeconomic policy during the 2000s and early 2010s when Venezuela’s economy was booming due to the global commodity ‘supercycle’ – a prolonged period of high and rising prices of grain, metal, oil and gas.
Government spending was deeply pro-cyclical. Instead of saving at least some money for bad times during the good times – as Norway, Saudi Arabia and virtually all other oil exporters have done – the Venezuelan government ran double-digit fiscal deficits as the economy boomed. Government spending far outpaced income from taxes and other revenues.
To finance these unnecessary shortfalls, they raised the external debt sixfold by saddling the state-owned oil company and government with over $100 billion in obligations.
The country also became increasingly reliant on the central bank printing money after gutting its independence, a dangerous monetary policy. A central bank printing money to finance government deficits is highly inflationary. It works as a tax on savings and wages via higher consumer prices, disproportionately affecting the poor.
Government spending during the oil boom was extremely inefficient. Subsidised gasoline in Venezuela was not just the cheapest in the world but often virtually free. This led to an estimated 100,000 barrels of petrol worth over $10 billion per year being smuggled across the border to Brazil and Colombia each day, where it could be resold at a profit.
Electricity subsidies were also vast, leading to losses and underinvestment in the sector. In total, subsidies are estimated to have cost over 10% of GDP in some years, accounting for over half of the fiscal deficits.
At the same time, the all-important oil industry was starved of investment funds and badly mismanaged as technical experts were replaced with political allies. Oil production in fields with high-quality crudes operated by the national oil company, Petróleos de Venezuela, S.A. (PDVSA), fell rapidly.
These losses were masked by production gains in lower-quality fields operated by joint ventures with foreign oil companies. As such, the profits and sustainability of the country’s largest export were undermined, with overall production falling from around three million barrels per day (mbpd) at the turn of the century to 2.3 mbpd before the crisis began in 2014.
Before the collapse (1999 to 2013): bad microeconomic policy
Presidents Chavez and Maduro also championed extremely destructive microeconomic policies. Their governments asserted heavy-handed control over the economy and were overtly hostile to private markets and private property. Government intervention was meant to spread prosperity and lower living costs, but instead it crippled the domestic non-oil economy.
From 1999 onwards, the government expropriated broad swathes of the economy, often without compensation and on national TV broadcasts, crushing business confidence and investment.
Over a thousand firms and several million hectares of land were nationalised in the agriculture, banking, cement, iron, oil, manufacturing, retail and telecommunications sectors. Most of these businesses have closed and those that haven’t closed operate at fractions of their peak output.
In 2003, Venezuela also imposed capital controls and a byzantine system for foreign currency purchases. There were one or more official exchange rates where the government subsidised dollar purchases and demand vastly outstripped supply, as well as a black market with its own free-floating exchange rate determined by market forces.
The system was deeply distortionary. An entire industry of non-productive ghost companies cropped up to lobby the government for subsidised dollars (to resell them on the black market for an immediate profit).
At the same time, legitimate value-adding businesses were unable to get reliable access to the foreign currency needed to operate. Many genuine businesses also specialised away from productive activities towards securing cheap dollars.
Worse yet, the government set prices for thousands of retail goods by decree: from rice and chicken to soap and toilet paper. Price caps were often too low, so producers could not cover their costs, leading to shortages, smuggling and bankruptcies.
The government also capped profits in 2011 and enforced the caps with draconian inventory seizures and jail time for workers and executives. Punitive labour regulations also made firing employees extremely risky, costly and time consuming.
Taken together, this web of anti-market measures hamstrung domestic production, making the country extremely reliant on imports, even for products that Venezuela had previously exported, such as rice. The country also lost an estimated $300 billion to corruption through its foreign currency system and other schemes, which it could have instead saved for periods of lower oil prices.
If you think #SahodItaasPresyoIbaba economics work, well, think again. Venezuela was already in decline before the US economic sanctions, one way or another. Just think of the reality when Chavez and later Maduro kept enforcing the rule of #SahodItaasPresyoIbaba. In simple terms that a child can understand, "When incentives are lost, we all bear the costs." How can you expect incentives not to be lost when the price caps set by the government were often too low, so the producers couldn't cover the costs? That's why fighting for #SahodItaasPresyoIbaba will ultimately hurt the working class. It's plain common sense, really, that if your business isn't profitable, the business closes down eventually.
After all, how can you expect sustainability when one tries to defy the law of supply and demand? Sure, insults might infuriate me or get me to throw a rage. However, nothing changes the fact that the laws of business and economics can't be defied without serious consequences. My anger or my silence never invalidates the fixed laws of business and economics.
What was even crazier was that Maduro tried that half-brained approach in 2017, when he declared a 50% increase. This should be considered another attempt at #SahodItaasPresyoIbaba economics. To give an idea of how stupid it is, here's an excerpt from BBC News:
Mr Maduro said he was raising the monthly minimum wage to 40,000 bolivars, about $60 (£49) at the official exchange rate, or $12 on the black market.
It is the fifth increase in one year. The measure would benefit public workers, the armed forces and pensioners, he said.
"In times of economic war and mafia attacks... we must protect employment and workers' income," he said on his weekly television and radio programme.
Venezuela's inflation rate, the highest in the world, has gutted the value of the bolivar.
The country has been hit by low oil prices, its key export. It has also faced severe shortages of food, medicine and basic goods.
Opponents say the president's incompetence and 17 years of failed socialist policies are behind the crisis. They call for the removal of Mr Maduro, who was elected in 2013 for a six-year term after his predecessor Hugo Chavez's death.
But the president accuses the country's elite of sabotaging the economy for political ends.
The main business association in Venezuela said the wage increase was announced without consultation and could result in layoffs and force small businesses to close.
It can be seen that Maduro himself has mishandled his stewardship. Instead of fixing economic policies, Maduro chose the blame game. This is a blame game on a much bigger scale than Filipino politicians, who blame their predecessors. Maduro's policies had caused the country to even slip down even worse than Chavez already started.
How nationalistic pride and welfare state economics even worsened the situation for Venezuela
Chavez’s economic model intended to have community enterprises working alongside the private sector, but government overreach meant national agencies, co-ops, and state industries comprised the bulk of the economy. Starting in 2007, the government used oil revenue to buy the largest electricity and telecommunications companies. It also seized the largest agricultural supplies company, steel producer, glass producer, and three largest cement industries.These produced little return, and co-ops, in particular, often “wound up in the hands of incompetent and corrupt political cronies.” Additionally, private enterprises suffered several state-imposed regulations and high taxes. International airlines stopped servicing flights to Venezuela, and businesses, including General Motors, Clorox, and Kellogg’s, fled the inhospitable economic conditions due to the risk of having their assets taken by the state. The World Bank’s Doing Business 2020 report listed Venezuela as one of the worst countries in which to do business, ranking it 188th out of 190 countries. It will update its Venezuela data in 2026.
In contrast to Vietnam, which has a healthy balance of state-owned enterprises (SOEs) and private enterprises, the same can't be said about Venezuela. If people wonder why the correct taxes can be a burden, look no further than Venezuela. The high tax rates had caused the private companies to lose their incentives. What's the use of making that much money if the government will just punish you for earning, instead of having a fair tax contribution? That's basically the Laffer Curve.
THE OIL CURSE
How did the nation home to the world’s largest oil reserves find itself in its current situation, so different from that of Saudi Arabia, which has the second largest oil reserves? According to political scientist Michael Ross, part of Venezuela’s crisis stems from becoming dependent on its most abundant resource: oil.Using oil revenues for social change continuously deepened the dependence on the resource. There was little concern when oil prices were high in the mid-2000s, but prices fell in 2014, and Venezuela no longer has the funds to import what it does not produce at home. Chavez “did little to improve how Venezuela actually makes money. He paid no attention to diversifying the economy in domestic production outside of the oil sector.” Instead of relying on an entrepreneurial economy to produce various goods and services to generate wealth, Chavez’s policies, continued by Maduro, made citizens dependent on one commodity.PRODUCTION
Many Venezuelans were initially excited when Chavez rose to power. But not all has gone according to plan; the country’s GDP (Gross Domestic Product) has plummeted since 2012, and the International Monetary Fund estimates Venezuela’s GDP is around $50 billion (neighboring Colombia’s GDP is over $350 billion, and the United State’s is over $24 trillion). Domestic production plunged, and food imports soared; according to the director of Venezuela’s Confederation of Associations of Agricultural Producers, Venezuela went from producing 70% of its food to importing 70%. All materials, from seeds to fertilizer, are provided by the government, but farmers report they often do not receive supplies. Additionally, the government-controlled steel industry does not produce enough machinery, and inflation has made it almost impossible to afford to import new equipment. Production hit an all-time low in 2019.INFLATION AND HUNGER
Oil revenues allowed Venezuela to import goods from abroad, but when oil revenues declined, Venezuela could no longer import the goods it did not produce. The scarcity of goods drove prices up, resulting in massive inflation. The price controls under President Chavez made necessities more affordable, but it was no longer profitable for businesses to make them. As a result, people were forced to turn to the government for handouts or the black market.In 2016, Maduro started a government food handout program called CLAP Boxes. By 2018, the government had made cuts to various welfare programs, including the CLAP program. One researcher at the University of Venezuela claimed the boxes supplied about half of Venezuelans’ food requirements and noted that the boxes dropped from 16 kilograms in January to 11 kilograms in May. In 2019, evidence of corruption by those seeking to profit from the poverty program was widespread, bringing little help to Venezuelans in need.President Maduro repeatedly increased the minimum wage in an attempt to combat inflation. In August of 2018, a 3000% increase equated to about $20 a month. This had almost no effect; nearly 90% of Venezuela’s population lived in poverty, and prices were doubling every 19 days, on average, by the end of 2018.Over the summer of 2019, the Maduro regime scaled back on price controls, printing money, minimum wage increases, and regulating importers and businesses. Inflation has fallen from over 1 million percent in mid-2018 to 2,500% in late 2021 to about 500% in mid-2022. The massive emigration of Venezuelans has also boosted the economy since those who fled send remittances back home in the form of dollars, which retailers in large cities like Caracas are now accepting. By one estimate, two-thirds of all transactions in Venezuela occur in foreign currencies, mainly the U.S. dollar. Despite the drop, inflation is still sky-high (see the $15 cereals), most Venezuelans still depend on nearly worthless bolivars, and the national minimum wage equates to less than $2 per month. The COVID-19 pandemic has only exacerbated the situation, as the number of Venezuelans living in extreme poverty spiked by 10%.Hyperinflation in Venezuela has continued to worsen since the pandemic. In July 2023, annualized inflation was 439%, the highest in the world. Although the average monthly income in Venezuela rose to $161 (U.S. Dollar) in 2023, that only covers 32% of the cost of the basic food basket.“The cost of a basic food basket—an indicator which tracks staple food prices over time to measure inflation—increased by nearly 350 percent between October 2022 and October 2023.” (USAID, March 6, 2024).EDUCATION
As the economy crumbled, education became a luxury. Students attended school primarily to receive state-sponsored meals, but the buildings lacked water and electricity. At the start of the school year, thousands of teachers did not show up to classes, having opted for different jobs that earn slightly more money or trying their luck abroad. Similar to brain drain during war, long-term economic hardship drives educated workers to more prosperous areas with more opportunities. This video from the Washington Post illustrates the enrollment and staffing troubles in the country that were prevalent before COVID-19. UNICEF reported 6.9 million students in Venezuela missed almost all classroom instruction between March 2020 and February 2021.Post-secondary education is also suffering. Simon Bolivar University, dubbed Venezuela’s “University of the Future,” has been government-funded since it opened in 1970. Still, alumni living abroad have been financing the university with private donations and teaching classes via Skype. Professors can only expect to earn the equivalent of $25 per month, prompting many to flee the country. Over 430 faculty and staff members left the university between 2015 and 2017.A news report in July 2023 details the continued decline, calling Venezuela’s education system “on the brink of collapse.”More students and teachers drop out of the system each year, and those who continue to attend school only go two or three days a week.HEALTHCARE
Education is not the only sector experiencing brain drain; over 20,000 doctors have fled Venezuela’s inhospitable conditions since 2014. Medical professionals have been attacked by patients’ relatives, frustrated by the supply shortage and machine and infrastructure failures ranging from power outages to water shortages. Across the country, hospitals face shortages of essential medicines such as those to control hypertension or diabetes, and high-cost drugs for cancer, Parkinson’s, and multiple sclerosis are no longer imported. Organ donations and transplants stopped in 2017.The 1996 Constitution guaranteed the right to health as “an obligation of the State,” However, the State has reduced funding, silenced practitioners, and censored health system publications. The government spends about 1.5% of GDP on healthcare, 75% lower than the world standard.In 2015, Venezuela’s Health Ministry “stopped publishing weekly updates on relevant health indicators.” When health minister Antonieta Caporale briefly resumed updates in 2017, she was immediately fired. The statistics revealed that between 2016 and 2017, maternal mortality rose 65%, and infant mortality rose 30%. Tuberculosis, diphtheria, measles, and malaria are also creating emergency situations, and disease is accompanied by widespread malnutrition. According to WHO standards, malnutrition among children under the age of 5 in Venezuela has reached a “crisis level.” A university study found that, on average, almost two-thirds of Venezuelans surveyed lost about 25 pounds in 2017. (Human Rights Watch, CEPAZ). Venezuelans called this the “Maduro Diet.”The situation did not improve during the COVID-19 pandemic; Monitor Salud, an NGO, reported that 83% of hospitals have insufficient or no access to personal protective equipment, and 95% lack sufficient cleaning supplies. Estimates indicate only about a quarter of the population is fully vaccinated.Access to healthcare has only worsened since the pandemic. In August 2023, over 72% of Venezuelans were unable to access public health services when needed, compared to 65.5% in July 2021.
Venezuela tried to rely on its own, thinking that its natural resources would "just back it up"
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| PH Antifa needs to show this to Singapore's government |
This article, written by Maxwell Rudin from Mongabay News last 2021, shows the problem of Venezuela's overreliance on natural resources:
While trying to put together a review of what happened to Venezuela’s environment in 2021, conservationists ran into a problem. The government publishes virtually no statistics on things like deforestation, infrastructure or mining, and it often actively blocks researchers from investigating threats to local ecosystems.
Last year, the government appeared to lean more heavily on the country’s natural resources, expanding mining activity and increasing oil production in hopes of creating some economic stability.
The result was another year of significant environmental devastation. Although there are few reliable statistics to show whether it was better or worse than past years, 2021 was marked by widespread tree cover loss, pollution, water shortages, and violations of Indigenous groups’ rights, according to a new report by the Political Ecology Observatory of Venezuela (OEP).
The organization compiled news reports, social media posts and research from local conservation organizations to fill the gap in data.
“There is a lack of official information on the environmental and social consequences of most issues,” said Elsa RodrÃguez, a member of the observatory. “There are no statistics that allow us to know the dimensions and scope for many things.”
In reality, the idea that a country can progress without free markets if it's got an abundance of natural resources was proven wrong by Venezuela's environmental degradation. Vietnam, despite still having the labels of Communism or Socialism, chose the opposite road with the creation of Doi Moi. Vietnam chose not to rely on its abundant natural resources when it went from the Vietnam War mindset (post-unification suffering) to Doi Moi (restoration). Vietnam may still remain under a dictatorship (by default) due to the one-party state, it has simply ceased to rely on traditional socialism, in favor of pragmatism.
The sad fact is that Venezuela had potential, but it's wasted potential. If Maduro chose to learn from the economic policies of Vietnam, maybe Venezuela would've recovered from the blunder of (and burden caused by) Chavez's incredibly stupid policies! Instead, Maduro still chose the path of pride and protectionism.