Venezuela’s economy is collapsing. Hyperinflation is causing widespread chaos and uncertainty, leaving millions of Venezuelans destitute. More than 10% of the population has fled the country in the past year alone. The unemployment rate has reached a staggering 35%, and 90% of the population is living in poverty. Crime is pervasive, and Venezuela’s murder rate is now the highest in the world. The country’s economy is now less than half the size it was just a few years ago. The ongoing economic meltdown in Venezuela is significantly worse than the Great Depression was in the United States, or the depression that occurred in Russia after the collapse of the Soviet Union.
Meanwhile, Venezuela’s president Nicolás Maduro has been sworn in for another six-year term. Last year’s presidential election was widely regarded as illegitimate by the international community because the main opposition coalition, the MUD, was banned from participating. It was largely boycotted by opposition groups, and featured a record-low voter turnout. In response to Maduro’s inauguration, the opposition-controlled National Assembly declared the centrist legislator Juan Guaidó to be interim president of Venezuela, citing a clause in the constitution which allows the President of the Assembly to be declared acting president when the office is “vacant.” The United States and its Western allies have recognized Guaidó to be the one true president of Venezuela, while China, Russia, and many left-wing commentators consider Guaidó’s attempt to take power from Maduro to be a “coup.” This political uncertainty is only exacerbating the ongoing economic crisis, by further undermining confidence in the Venezuelan government.
Maduro is the hand-picked successor of former president Hugo Chávez, who initiated Venezuela’s left-wing drift when he was first elected in 1999. Maduro wants to keep the country’s current economic model essentially intact in the hope that oil prices will rise, which would give a boost the economy since oil is Venezuela’s #1 export. But things have now spiraled so completely out of control that even a significant rise in oil prices could not save Venezuela’s economy. Confidence in Venezuela’s currency, the bolívar, and its government has been completely destroyed by recent events. To make matters worse, the United States has recently imposed tough sanctions on Venezuelan oil, and is considering a full oil embargo. This is sure to further devastate Venezuela’s economy, making the current political crisis even more severe.
But things didn’t have to turn out this way. The first several years of Hugo Chávez’s presidency led to widespread prosperity and poverty relief for millions of Venezuelan citizens. Oil prices were high in the 2000s, and this allowed the government to fund generous social welfare programs from the proceeds of its state-owned oil company, PDVSA. The poverty rate was slashed from 55% in 1995 to 26% in 2009. Unemployment fell from 15% to 7.8%. The government was overwhelmingly popular, with Chávez winning re-election by a wide margin four times in elections that were certified as free and fair by international monitors.
How Chávez could have prevented this
The problem, however, is that these years of prosperity were built on very shaky ground. The entire system was built on high oil prices, and when the price of oil collapsed in 2014, so did the economy. While Chávez pledged to make the Venezuelan economy less dependent on oil exports through investment in other industries, the country actually got more dependent on oil during his presidency, not less so. Oil now makes up over 95% of Venezuela’s export income, up from 67% in 1999. As long as Venezuela’s economy remains so completely dependent on oil revenues for its survival, left-wing policies will be seriously threatened every time the price of oil declines significantly. This is the fundamental problem facing Venezuela today, and it is a problem that Chávez did nothing to address.
But Chávez could have made progress in diversifying the Venezuelan economy, if he had made different choices during the 2000’s. The key would be to invest in the manufacturing sector, encouraging the growth of a Venezuelan industrial base that could outcompete Chinese industries on the world market. Using export subsidies, state owned enterprises, and other “protectionist” measures, Venezuela would be able to take advantage of its natural resources and proximity to the United States to develop its manufacturing base and its economy rapidly. South Korea, Taiwan, Japan, and more recently China have demonstrated that this strategy can succeed. But these policies require long-term planning and discipline, something that the Chávez government apparently did not have.
Chávez’s failure to diversify the Venezuelan economy set the stage for today’s hyperinflation. Here’s how it got started.
The road to hyperinflation
Like most developing nations, Venezuela needs to import a lot of the goods it needs from other countries. And since Venezuela is a small, relatively poor country with a history of political instability and a chronically high inflation rate, virtually no one outside of Venezuela is willing to accept Venezuelan bolivars as payment for anything. This means that Venezuela needs to pay for its imports in US dollars. But in order to acquire US dollars, Venezuela needs to export goods to foreigners in exchange for dollars. And around 95% of Venezuela’s US dollar revenue comes from its oil exports.
This means that when oil prices fall, Venezuela’s supply of US dollars shrinks dramatically, leading to a variety of economic problems. Venezuelan citizens in need of dollars try to sell their bolivars in the black market, but few people want to give up their safe, stable, internationally accepted US dollars in favor of the volatile, rapidly inflating bolivar. Those who do decide to sell their dollars demand a very high price, which pushes the value of the bolivar downward. And when the exchange rate falls, imports get more expensive, which tends to raise the price of everything else. This is why the inflation rate rises dramatically in Venezuela whenever the price of oil falls.
But while inflation has been a problem in Venezuela for a long time, the country had never before experienced the horrors of hyperinflation until recently. Hyperinflation is essentially a vicious feedback loop wherein high inflation rates cause people to try to exchange the domestic currency for a safe foreign currency, which pushes down the exchange rate, which in turn accelerates the inflation, in a downward spiral. During a period of hyperinflation, prices can sometimes double within just a few days or weeks. It’s a highly destabilizing phenomenon that hits the poor and the working class the hardest.
The main reason why inflation turned into hyperinflation this time around is that the Venezuelan government started running very large budget deficits. Accurate statistics on Venezuela’s economy are hard to come by, but multiple sources indicate that by 2018 the government was running a budget deficit at around 40 percent of GDP. Maduro is trying to maintain a generous level of social spending even as the economy is contracting, and the country’s US dollar supply is drying up. There is clearly something admirable about this from a left-wing perspective— Maduro is wants to avoid cutting social programs at all costs. But arguably the negative consequences of this policy are much worse for Venezuela’s poor and working class than austerity would be. The government is financing its deficits by taking out massive loans directly from the central bank— effectively “printing money”— which greatly exacerbates the inflation problem. And the inflation, in turn, erodes the real value of wages and leads to higher unemployment.
No easy answers
None of the options that are available to Venezuela at the moment are very attractive. Maduro’s preferred strategy, which is to change nothing and simply wait for oil prices to rise, is reckless and irresponsible. There is no reason to expect a major increase in oil prices in the near future, and even if one were to occur, it would not be enough to resolve the crisis at this point. On the other hand, while a US-backed Guaidó government would go a long way toward restoring confidence in the Venezuelan economy, this confidence boost would come at a steep price: deep cuts to social services, which would hurt the poor the most.
Fundamentally, the most pressing short-term task for Venezuela is to transition to a different currency, one that workers and businesses alike can have confidence in. The Venezuelan economy simply cannot hope to recover while the hyperinflation continues. Many commentators have called for “dollarization“— that is, the adoption of the US dollar as Venezuela’s currency. Several countries, including Ecuador and Panama, have dollarized their economies in an effort to curb the same kind of chronic inflation problems that Venezuela has been experiencing for decades. The main problem with dollarization is that it would require a tremendous amount of austerity, since the Venezuelan government would no longer be able to simply print money in order to finance its social spending.
The Chinese option
In theory, Venezuela could try to adopt the currency of a foreign country other than the United States— say, China. Adopting the Chinese yuan would have a similar economic effect to dollarization, since the yuan is a much more stable currency than the bolivar, and its value is backed up by the trillions in US dollar reserves held by the People’s Bank of China. Since China wants to make allies with Latin American countries in order to undermine US hegemony, it might be willing to offer Venezuela much better terms on a currency deal than the United States, allowing Maduro to maintain most of the country’s social spending. In exchange, Maduro could offer to allow China to build military bases in Venezuela, which would increase Chinese power in the region and would protect Venezuela from potential US aggression.
Unfortunately for Venezuela, however, this “Chinese option” is likely to remain purely theoretical. While China would love to have a client state in Latin America, similar to Cuba’s relationship with the Soviet Union during the Cold War, in reality China would not want to make such a bold move against the United States at this time. Unlike the Soviet Union, modern China is heavily reliant on trade with the US for its economic growth, so antagonizing the US by building military bases in Venezuela would likely end up hurting Chinese power more than it would enhance it. In the future, when China is much more powerful than it is today, aligning with China may become a serious and attractive option for developing countries in the Western Hemisphere. But today, this option is not really on the cards.
The Cuba option
The final option is what I like to call the “Cuba option.” Some socialists argue that Venezuela needs to move toward an overwhelmingly state-dominated economic model, along the lines of Cuba or the Soviet Union. It’s argued that by confiscating private property and implementing a planned economy, Venezuela could overcome its current problems with hyperinflation and unemployment:
“The control and direct administration of the means of production by the working class is vital to end both capitalist sabotage and the corruption of the bourgeoisie and the bureaucracy. As long as the big companies are not expropriated, the sabotage of production will continue.”
— Izquierda Revolucionaria, a small Venezuelan Trotskyist group
But this idea fundamentally misdiagnoses the cause of Venezuela’s current woes. The problem is not simply that Venezuela’s economy is dominated by privately owned, profit-seeking firms. Rather, the current crisis is due to Venezuela’s over-reliance on oil exports to finance its imports from the rest of the world, as well as the dominance of the US dollar in world trade, which makes it an imperative for Venezuela to acquire dollars in order to pay for its imports. If Maduro attempted to convert Venezuela into a planned economy, the crisis would be made even worse. The United States and other Western countries would almost certainly place a full oil embargo on Venezuela, thereby starving it of almost all its oil income. Venezuela would then have to undergo a painful process of becoming economically self-reliant, which would inevitably make Venezuela a much poorer country than it currently is.
The future of Venezuela
In reality, the question is not if, but when a US-backed regime takes power in Venezuela. At this point, it is unclear whether Maduro will be able to maintain his control over the country for the rest of his six-year term, or whether the military will place Guaidó in power. If Maduro does remain in power, the economic situation will continue to get worse. Eventually, Maduro will either be voted out in another election, or the military will force him out once the crisis becomes severe enough. At that point, a US-backed government will come to power. It will make major cuts to public services, and will likely change the official currency to the US dollar.
These events will bring stability, but they will also cause major suffering for the poor and working people of Venezuela. The hope is that, after these things come to pass, the Left will again be able to come to power, this time equipped with the hard-won experience of the past 20 years. This new Left government would not make the same mistakes as Chávez or Maduro. It would understand the vital importance of diversifying Venezuela’s economy, so that it is no longer dependent on the whims of international oil markets to stay afloat. And it would usher in an era of rapid economic growth and shared prosperity for all Venezuelans.
While my short-term predictions are pessimistic, this does not mean that there is nothing we can do to help the Venezuelan people. The Left should argue forcefully against US sanctions and military intervention into Venezuela, which will only make the current dire situation even worse. We should advocate for democratic norms and the rule of law, which have been greatly eroded under Maduro’s administration. The people of Venezuela must be able to choose their own leaders in free and fair elections, where all political parties are allowed to participate. And most importantly, the Left must work harder than ever to elect socialist candidates to Congress who can change US foreign policy toward developing countries like Venezuela. The United States could use its economic might to help poor countries through the process of diversifying and developing their economies, rather than simply leaving them on their own. Without a more compassionate US foreign policy, our international comrades will be severely constrained in their ability to pursue a left-wing agenda in their own countries. It’s time that the American Left took this responsibility seriously.