The world, once again, is looking at Venezuela in shock and awe. For the past two weekends we have witnessed how desperate Venezuelans masses cross the border to Colombia to buy food, medicine, and supplies. The border, by the way, was closed by Venezuelan president Nicolás Maduro himself in August 2015. Now he has allowed the border to be opened twice so people can survive.
Venezuela was not always like this, though. The Caribbean country used to be the most stable democracy in Latin America. Because of this it was also a safe haven for its neighbors. When countries like Argentina or Brazil had political problems and military dictatorships, many of the persecuted found refuge in Venezuela. Economically, Venezuela was the “Key to Latin America.” For its geographical position and economic development it was the most important Latin country and the home of many multinationals.
To fully understand how high oil prices have moved, we could compare them with the price of one the most popular gadgets in the history of mankind – the iPhone. When Apple launched the revolutionary smart phone in 2007, its price was between 399 and 599 US Dollars. Today the price is more or less the same.
Oil, on the contrary, was close to 10 Dollars in 1999 and went all the way up to almost 140 Dollars in 2008. With the beginning of the 2008 financial crisis it declined sharply for a short time only a short time and went back to 120 US Dollars, maintaining the same level for four years. It is true that today the price has moved down, nonetheless it is approximately five times what it was in 1999.
Ask yourself how you’d be if in eighteen years your income or your family’s income multiplies by five. I can hardly think of anybody who’d say: “If that’s the case, I will be in a terminal crisis.”
Oil prices should have been a blessing for Venezuela… only if it weren’t for Socialism.
Hugo Chávez claimed that he was starting a new economic and social revolution embodied in what he labelled “21st Century Socialism.” In reality it was quite similar to 19th and 20th century Socialism and the results were identical to the ones of its predecessors.
Chávez launched a full-blown assault on private property. Thus, he nationalized fifty thousand properties, and without even offering some kind of fair compensation. Such instability and lack of rule of law directly affected the Venezuelan business environment. No one in their right mind would invest a cent in such a country. The consequences were local capital flight and total disappearance of foreign direct investment.
Chávez also exacerbated the dependency on oil to completely new levels. Venezuela’s economy historically was linked to the oil cycle but with Chávez the country became an absolute “petrostate.” Now the only product the country exports is oil (unrefined mostly).
And as if this were not bad enough, the Venezuelan economist Ricardo Hausmann explains in a recent article that in 2012 President Chávez spent as if the price of oil were 197 US Dollars. How did he managed to do that? Because he used the oil windfall as collateral to expand the debt to astronomical levels.
Financial repression is also one of the economic tools the government has made use of. Venezuela has currently four different exchange rates between the Bolivar –the local currency– and the US Dollar. These different rates vary dramatically and between the lowest official rate and the black market rate there is an astonishing 159 times difference (from 6.3 to 1005).
In case you’re wondering who gets the cheap Dollars the answer is the obvious one – The politically connected. Consequently, corruption is one of the few activities that is booming in the country.
The Stalinist cherry-on-top of this Socialist cake is price controls. For the regime an oil price boom, widespread nationalizations, debt, and financial repression weren’t enough. So they also had to print money to cover for spending. Naturally, this generated price inflation. When the first symptoms started to be felt Nicolás Maduro –Chávez successor in power– reacted in the most populist-socialist way possible. He cried that the oligarchy and dark foreign interests were waging an “economic war” against Venezuela. The fault always lies with somebody else. To fight back Nicolás Maduro established price controls and maximum margins of earnings. These kind of measures are always effective… if you want to create shortages and black market. And that’s precisely what they created.
You will know them by their fruits
Socialist redistribution is very similar to drug addiction. And I’m not thinking of smoking something dubious from time to time. I have in mind a total heroin addiction. The first stages of the habit are euphoric. But then, with time, you end up utterly destroyed and very close to dying.
Venezuelan Socialist redistribution had a few good years. Some people even benefited from it. These good times helped to create the myth. There is a government that finally takes care of its the people. Some positive results can be seen. But this couldn’t last. And cracks and fails appeared everywhere. This was when the regime took action denouncing somebody or something. The setbacks are due to some “dark forces.” The oligarchs, the United States, global capitalism, market fundamentalists, and the list goes on.
Of course, this conspiracy narrative is misleading.
Ludwig von Mises, an Austrian economist, always talked of Socialism in close relationship with another term – Destructionism. Mises believed that Socialism produces nothing, creates nothing. It only consumes capital and stocks accumulated by previous generations. And in the case of Venezuela, they not only could make use of the accumulated stocks but also of extraordinary international prices.
As if there’s no tomorrow
The Socialist economy isn’t collapsing because of a universal conspiracy against “popular” governments. It collapses because that is the only logical result of its government’s policies.
Imagine that one day you or your family decided to sell absolutely everything you own. You also emptied your bank accounts and stopped paying your debts. Then, with all that money, you decided to live big. And I mean parties, gambling, five stars hotels, dating supermodels… the whole nine yards. For some time, it could be months or even years, you’ll definitely have a blast. But eventually you’ll find yourself sick, homeless, and broke. This is how Socialist redistribution works.
The party is over for Chavismo. Now the Venezuelan people have to clean up the mess and are stuck with a huge bill.
* Federico N. Fernández is senior fellow of the Austrian Economics Center (Vienna, Austria), and vice president of Fundación Bases (Rosario, Argentina).
** This article is a summarized version from the talk I gave in Reykjavic (Iceland) on 9 July 2016 hosted by the Association of Free Students.
The AEC’s fundamental goal is to promote a free, responsible and prosperous society. Through education and improving public understanding of key economic questions, the AEC promotes the idea of a free market economy and the ideal of a free society.