SOCIALISM: What the media still doesn’t understand about Venezuela

By: Jose Nino

International analysts are not giving us the full story on Venezuela.

Political commentators have given their spin on the topic of Venezuela’s economic crisis. To their credit, some of them get the surface level details correct on the contributing factors to Venezuela’s collapse — destruction of civil liberties and property rights.

However, the mentions of Hugo Chávez’s nationalizations of oil fields while correct, miss a key historical component — Venezuela had a nationalized oil industry before Chávez came into power. Venezuela’s oil industry was nationalized during 1976 under the auspices of then President Carlos Andrés Pérez.

Chávez only expanded upon the previous interventionist projects that were laid out well before coming into power.

And this is not just nitpicking. To understand Venezuela’s current collapse, we must have a clear picture of the past 60 years of Venezuela’s political history.

There is no denying that Venezuela was more stable in the past decades, but the seeds of its very undoing were planted during those glory years. Ultimately, creation of the petro-state helped facilitate this decline.

From Free Market Oil to State-Owned Oil

Contrary to popular belief, Venezuela’s previous prosperity was not just based on its oil endowments. From the early 1900s up until the 1960s, Venezuela enjoyed high degrees of economic freedom — low regulations, low taxes, sound property rights, and a stable monetary policy. These factors played a major role in cementing Venezuela’s status as one of the richest countries in the 1950s on a per capita basis.

But several troubling trends emerged after 1958, when Venezuela returned to democracy. First, the Venezuela government established a new constitution which granted the State considerable powers over economic affairs. This political order would be cemented through the Punto Fijo Pact — a bipartisan agreement between the two political parties Acción Democrática (Democratic Action) and COPEI (Christian Democrats).

Both parties believed that the State could take petroleum revenues and channel them into generous welfare programs. For them, Venezuela would not be a truly independent country until the government had complete control over its oil reserves.

Oil Nationalization: The Beginning of the End

The oil nationalists finally got their wish in the 1970s.

Carlos Andrés Pérez’s government took advantage of the massive influx of petroleum rents brought about by the 1970s energy crisis and took concrete steps to nationalize the oil industry.

This was finally achieved in 1975, when Pérez’s government signed a law nationalizing the petroleum sector. The creation of a petro-state was complete and Venezuela’s institutional underpinnings would never be the same.

Instead of relying on citizens to pay taxes in exchange for the protection of their property rights and civil liberties, the Venezuelan government would bribe its citizens with government handouts derived from petroleum revenue to maintain its power.

Pérez wasted no time using this power-grab to go on a spending spree. While politically popular, Pérez’s extravagant spending program resulted in the extreme centralization of political power and runaway bureaucratic influence.

Another salient feature of the petro-state was crony capitalism. The State would frequently dole out petroleum rents to politically-connected corporations. When the State actively picks winners and losers, businesses spend more time lobbying the government instead of actually producing goods the market desires.

The Dominos Begin to Fall

Although oil nationalization did not result in an immediate collapse, it opened the door for Venezuela’s economic decline.

By the start of the 1980s, the party was over. With a stagnant economy and increased public debt caused by the previous decade’s spending binge, the Venezuela government felt it needed to take action to jumpstart the economy.

On February 18, 1983 (notoriously known as Black Friday in Venezuela), the Venezuelan government implemented the largest devaluation of its national currency the Bolívar to date. This marked the beginning of Venezuela’s so-called “lost decade” of economic malaise.

Sensible, Yet Insufficient Reforms

By the end of the 1980s, Carlos Andrés Pérez came back into office, campaigning to revive Venezuela’s spending bonanza of the 1970s. But his campaign rhetoric abruptly changed once he took office in 1989. Pérez recognized that Venezuela was both debt-burdened and economically shackled by its government.

Pérez initially turned to the IMF for help — recommending several sensible reforms such as privatization, spending cuts, and tariff reductions. Sadly, these reforms were not fully implemented thanks to massive opposition coming Pérez’s own party, Democratic Action. As Pérez’s second administration progressed, political tension mounted as seen in upstart Lieutenant Colonel Hugo Chávez’s failed coup attempts in 1992.

Pérez would eventually be impeached for corruption charges in 1993, leaving Venezuela’s political order in shambles.

Did Hugo Chávez Have it Right?

Hugo Chávez’s political coalition had every right to complain in the 1990s. Venezuela’s bipartisan political order from 1958 to 1988 delivered lackluster results. In this time period, Venezuela’s per capita GDP grew at a paltry -0.13%, meaning that Venezuelan population grew faster than the wealth created during this period.

Charles Jones of Introduction to Economic Growth classified Venezuela as a “growth disaster”. Only a handful of Sub-Saharan countries and Nicaragua, a country under socialist rule and a victim of a bloody civil war, joined this economic hall of shame.

Sadly, Chávez used the same petro-state structure for his own tyrannical ends. He doubled down on the errors of the previous decades and brought the country to its knees through easy money, economic controls, land confiscation, and vote-buying.

Although Chávez rapidly expanded upon what the Pérez government in the 1970s had instituted, this historical event reminds us that well-intentioned interventions can be used by the next round of political operatives for nefarious purposes.

Bureaucracies aren’t flawed because they are unelected or lack qualified people. The problem lies in the institutions themselves, which destroy the profit motive and lack any meaningful system where proper economic calculation can be made.

All genuine reforms should start and end with plans to reduce and ultimately remove government involvement out of all sectors of the economy.

The cancerous tumor of state intervention does not require a Band-Aid; it needs a full removal.

This was originally posted on Mises.org.