Venezuela: Forty Years Of Economic Decline, Part 1

Tyler Durden's picture

Authored by Jose Nino via The Mises Institute,

Venezuela Before Chavez: A Prelude To Soclialist Failure

Venezuela’s current economic catastrophe is well documented. Conventional narratives point to Hugo Chávez’s regime as the primary architect behind Venezuela’s economic tragedy. While Chávez and his successor Nicolás Maduro deserve the brunt of the blame for Venezuela’s current economic calamity, the underlying flaws of Venezuela’s political economy point to much more systemic problems.

Observers must look beyond stage one, and understand Venezuela’s overall history over the past 50 years in order to get a more thorough understanding of how the country has currently fallen to such lows.

Socialism Before Chávez

Analysts like to point to rosier pictures of Pre-Chávez Venezuela, but what these “experts” conveniently ignore is that the seeds of Venezuela’s destruction were sowed during those “glory years.” Years of gradual economic interventionism took what was once a country bound to join the ranks of the First World to a middle-tier developing country. This steady decline eventually created an environment where a demagogue like Chávez would completely exploit for his political gain.

The Once-Prosperous Venezuela

To comprehend Venezuela’s long-term decline, one must look back at what made it so prosperous in the first place. Before the completion of its first oil field on April 15, 1914, Venezuela was essentially a Banana Republic marked by political instability. This was largely a consequence of its colonial past and the period following its independence from Spain. Despite gaining independence from Spain, Venezuela maintained many of its primitive political and economic practices, above all, its exclusionary mercantilist and regulatory policies that kept it in an impoverished state.

However, the discovery of oil in the early twentieth century completely changed the entire ballgame. The powerful agricultural aristocracy would be supplanted by an industrialist class that sought to open its oil markets to multinational exploitation and foreign investment. For the first time in its history, Venezuela had a relatively liberal, free market economy and it would reap countless benefits in the decades to come.

From the 1910s to the 1930s, the much-maligned dictator Juan Vicente Gómez helped consolidate the Venezuelan state and modernized an otherwise neocolonial backwater by allowing market actors, domestic and foreign, to freely exploit newly discovered oil deposits. Venezuela would experience substantial economic growth and quickly establish itself as one of Latin America’s most prosperous countries by the 1950s.

In the 1950s, General Marcos Pérez Jiménez would continue Gómez’s legacy. At this juncture, Venezuela was at its peak, with a fourth place ranking in terms of per capita GDP worldwide.

More Than Just Oil

While oil exploitation did play a considerable role in Venezuela’s meteoric ascent from the 1920s to 1970s, this only scratches the surface in explaining how Venezuela became so prosperous during this period. A combination of a relatively free economy, an immigration system that attracted and assimilated laborers from Italy, Portugal, and Spain, and a system of strong property rights, allowed Venezuela to experience unprecedented levels of economic development from the 1940s up until the 1970s.

As mentioned earlier, Venezuela was at the height of its prosperity during the military dictator Marcos Pérez Jiménez’s regime. Like Juan Vicente Gómez’s regime, Pérez Jiménez’s stewardship of Venezuela was characterized by heavy political repression.

Venezuela’s capitalist structure remained largely intact during Pérez Jiménez’s tenure, albeit with creeping degrees of state involvement. Pérez Jiménez did introduce some elements of crony capitalism, pharaonic public works projects, and increased state involvement in “strategic industries” like the steel industry. Nevertheless, the Pérez Jiménez regime was open to foreign investment, let the price system function normally in most sectors of the economy, and did not embark on creating a profligate welfare state.

The Road to Social Democracy

Despite the prosperity brought about by Venezuela’s booming economy in the 1950s, Marcos Pérez Jiménez’s government drew the ire of many left-leaning activists due its heavy-handed measures. The tipping point came in 1958, when these leftist activists, working in tandem with a sympathetic military, successfully overthrew Pérez Jiménez in a coup. Pérez Jiménez would live the rest of his life in exile and would be a figure of derision among Venezuelan intellectual and political elites, despite the unprecedented economic and social development under his watch.

Following the 1958 coup, naval officer Wolfgang Larrázabal occupied the presidency briefly until general elections were held later that year. Notable social democrat political leader Rómulo Betancourt would come out on top in these elections and assume the presidency from 1959 to 1964. The Fourth Republic of Venezuela — Venezuela’s longest lasting period of democratic rule, was established under Betancourt’s administration. In 1961, a constitution was introduced, dividing the government into 3 branches — executive, legislative, and judicial — and establishing an activist role for the Venezuelan state in economic affairs.

This political order was further consolidated by the establishment of the Punto Fijo Pact. The Punto Fijo Pact consisted of a bipartisan agreement between two political parties — Acción Democratica (Democratic Action) and COPEI (Christian Democrats) — that laid the foundation for a social democratic political order and alternation of power between the two parties.

What seemed like a genuine move toward democratic stability, Venezuela’s Fourth Republic marked the beginning of a process of creeping socialism that gradually whittled away at Venezuela’s economic and institutional foundations.

The Socialist Origins of Venezuela’s Pro-Democracy Advocates

Venezuela’s current collapse did not happen overnight. It was part of a drawn out process of economic and institutional decay that began decades before.

When Venezuela returned to democracy in 1958, it looked like it was poised to begin an era of unprecedented prosperity and political stability.

However, Venezuela’s democratic experiment was doomed from the start, and one needn’t look any further at the political background of its very own founder, Rómulo Betancourt, to understand why it’s entire political system was built on a house of cards.

Rómulo Betancourt was an ex-communist who renounced his Marxist ways in favor of a more gradualist approach of establishing socialism. Despite evolving into more of a social democrat, Betancourt still believed in a very activist role for the State in economic matters.

Betancourt was part of a generation of intellectuals and student activists that aimed to fully nationalize Venezuela’s petroleum sector and use petroleum rents to establish a welfare state of sorts. These political figures firmly believed that for Venezuela to become a truly independent country and free itself from the influence of foreign interests, the government must have complete dominion over the oil sector.

Under this premise, a nationalized oil industry would finance cheap gasoline, “free” education at all levels, healthcare, and a wide array of other public services.

This rhetoric strongly resonated among the lower and middle classes, which would form the bulwark of Betancourt’s party, Acción Democrática, voter base for years to come.

At its core, this vision of economic organization assumed that the government must manage the economy through central planning. Oil would be produced, managed, and administered by the state, while the government would try to phase out the private sector.

Interventionism from the Start

Betancourt’s administration, while not as interventionist as succeeding 4th Republic governments, capped off several worrisome policies, which included:

  1. Devaluation of the Venezuelan currency, the Bolívar.
  2. Failed land reform that encouraged squatting and undermined the property rights of landowners.
  3. The establishment of a Constitutional order based on positive rights and an active role for the Venezuelan state in economic affairs

Betancourt’s government followed-up with considerable tax hikes that saw income tax rates triple to 36%. In typical fashion, spending increases would be accompanied with these increases, as the Venezuelan government started to generate fiscal deficits because of its out of control social programs. These growing deficits would become a fixture in Venezuelan public finance during the pre-Chávez era.

The Nationalization of the Oil Industry

While Betancourt did not achieve his end goal of nationalizing the Venezuelan oil industry, his government laid the foundation for subsequent interventions in that sector.

Thanks to the large oil boom of the 1970s, the government of Carlos Andrés Pérez capitalized on the unprecedented flow of petroleum rents brought about by the 1970s energy crisis where oil-producing countries like Venezuela benefited handsomely from high oil prices.

Betancourt’s vision was finally achieved in 1975, when Carlos Andrés Pérez’s government nationalized the petroleum sector. The nationalization of Venezuela’s oil industry fundamentally altered the nature of the Venezuelan state. Venezuela morphed into a petrostate, in which the concept of the consent of the governed was effectively turned on its head.

Instead of Venezuelans paying taxes to the government in exchange for the protection of property and similar freedoms, the Venezuelan state would play a patrimonial role by bribing its citizens with all sorts of handouts to maintain its dominion over them. 

On the other hand, countries based on more liberal frameworks of governance have citizens paying taxes, and in return, these governments provide services that nominally protect the life, liberty, and property of its citizens. The state is not the owner, thus giving the citizens a strong check against the Leviathan should the government overstep its boundaries.

Oil Nationalization: A Pig Trough for Politicians

Pérez would take advantage of this state power-grab to finance a profligate welfare state and a cornucopia of social welfare programs that resonated strongly with the populace. As a result, deficit spending became embraced by the political class and increasing levels of foreign and public debt would become the norm in Venezuelan fiscal affairs.

At this juncture, Venezuela’s economy became overwhelmingly politicized. Oil boom periods were characterized by an inflow of petrodollars that the state used for pharaonic public works and social projects as a means to pacify the populace.

In reality, no real wealth creation took place during these boom periods, as the state redistributed the rents according to political whims and usurped functions traditionally held by civil society and private economic actors. When politicians and bureaucrats oversee businesses, decision-making is based on partisan and state interests rather than efficiency and consumer preferences.

Although the nationalization of the petroleum industry did not result in an immediate economic downturn, it laid the groundwork for institutional decay that would clearly manifest itself during the 80s and 90s.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Aristofani's picture

little joe has obviously still got a long way to go, before growing up.

Can always count on kiddie's fairytale economic analysis from the mises institute. Let us know when they ever start talking about the real world.

samjam7's picture

Mises doesn't hold the answers to today's problems, since it propagates an economic system that led us to where we are today.

However, he is right in highlighting how Venezuela slowly but steadily became more socialist, getting people accustomed to oil handouts and making them dependent on it and when oil prices crashed in the 1980s applying neo-liberal shock therapies and Washington Consensus leading to mass riots and protests that eventually saw Chavez rise to power.

The problem is, how do you distribute oil wealth fairly to all citizens if not by the state? Which oil exporting country doesn't use some form or mechanism that would be considered socialist by mises to distribute oil wealth to its citizen?

 

 

AltRight Girl's picture

Maybe they should find out who are crypto jews and hang them high.

Probably that would ease their situation.

We, in the western world should follow suit.

The Crypto Jews: Deceit and Double-Think in Britain’s Hostile Elite


tuetenueggel's picture

If they had known it 80 years ago, there wouldn´t have been WW2 with Hitler.

They all would have joined Hitler´s war against joo and Stalin. Now it´s to late.

meta-trader's picture

you can add an extra 1500/USD week after week in your income just working on the internet for a couple of hours each day... check this link... http://bit.ly/2jdTzrM

tuetenueggel's picture

Maggy Thatcher once told:

Socialism ends, when other people´s money is up.

Aristofani's picture

exactly.

fundamentalists whether they believe in jesus, allah or the equally mythical "free market" are a bunch of emotionally retarded adolescents who when things get tough will kiss the arse of the rulers that should not be with pathetic glee. Actual and closet whores, who will show their sycophantic colors soon enough. tRump and the deep state are both giving it to them up the arse in different ways, and they still play with their little penises like idiot children. Gutless, cowardly cunts, the lot of them!

Chris88's picture

"since it propagates an economic system that led us to where we are today."

It proprogates minimal-to-no government depending on the particular individual you're talking about.  Given the government controls the economy and steals over half of peoples' money, I don't see how your statement makes sense in the slightest.

tr123's picture

To the contrary, his view of an economic system was deliberately buried to be supplanted by the Keynesian camp that enchanted the "academic" class and thus enabled their Western statist leaders of the 1930s to bring us down the road we are on today. 

Anteater's picture

40 years of brutal economic decline for the USA, the most carnivourously capitalist country on earth, one about to revert back to a dynasty of God-Emperors with Bad Combovers and No Clothes. Since even the ghost of Mises knows the USA's decline has been 10x more severe than the Venezuelan crisis, clearly, Mises Istitute is just an agitprop vox omni for the New Royals.

Chris88's picture

"the most carnivourously capitalist country on earth"

Where you need a license to braid hair, where the federal government believes it has a right to over 1/3 of your income and you likely pay half of it all-in, income tax, sales tax, property tax, dividends tax, cap gains tax, FICA tax, unempoyment tax, diasability tax, estate tax, not to mention double and triple taxation.  You never analyzed, created, or worked in business.  What a retarded comment.

Chris88's picture

Fairy tale: let's let people with no skin in the game continually vote for more free shit to the point net tax consuemrs exceed net tax payers, then let's keep the system going Weekend At Bernie's style, then let's create a document that states these freedoms we have that the govenrmernt doesn't adhere to but claim we are free, then let's tell ourselves the government will check its own power.  How's that for a fairy tale?

Love to know what the 15 week leftist does for a living.

Ms No's picture

That sounds like us.  Just give it a few years.

Magooo's picture

OIL PRODUCERS NEED $100+ OIL

 

Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

Ms No's picture

I agree but I stopped talking about it a long time ago.  It's a highly trolled subject.  Almost nobody sees what is coming there.  The miracle isn't making money and nobody can seem to wrap their mind around that and all the implications.  It's generous of you to bother.  Usually you'll just get slapped in the face for it.

Robinson's picture

The article is well made, and I add.

Marcos Perez Jimenez, was the best president of Venezuela in all its history, was accused of being a dictator and gave a coup. After declaring at a meeting of Latin American countries in Panama, that Venezuela had a plan to pay the debt of all Latin American countries, Marcos Perez Jimenez, in his auto biography, tells the same story. The coup was organized by the CIA.

The system of subsidies and the lottery of gifts to the population, is the mechanism of the politicians to gain substantial commissions for being the intermediaries of the subsidies and gifts.

The solution to the problem of what to do with the oil income, is to give that money directly to each citizen, accompanied by a media campaign, to teach them to spend that money to improve their education.

http://bienestarmutuo.org.ve/

Benjamin123's picture

There is no solution. Oil is a big pile of money that fell from the sky and you have to fight for it. Economic theory dissapears once you have manna raining from heaven.

You have to be quick and siphon as much as you can to Switzerland before they cut you off.

Once in a lifetime opportunity!

DaveA's picture

Our Federal Reserve is also a fountain of free money. In either case, it leads to Dutch Disease, where the workforce switches from producing tradeable goods to providing "services" in finance, real estate, health care, education, and whatever other sectors the government showers with free money.

The come-down is nasty because you suddenly have millions of very hungry people who have no idea how to make anything except Molotov cocktails.

tuetenueggel's picture

aka 40 years of war against Venezuelan people by US-criminal estabishment.

World will pray 365 days when USA will be destroeyed. By whome ever.

Benjamin123's picture

Best part of the article is the recognition that venezuelan oil was nationalized in the 70s and not by Chavez. Ignorant zerohedgers keep parroting the fairy tale that Chavez became an enemy of the USSA because he nationalized oil, while that was already done in the 70s. They teach that to every kid in elementary school in Venezuela.

In all fairness Venezuela in the 80s and 90s had the same problems it has today, albeit nothing was nearly as bad. For instance cronyism: There used to be a program called RECADI with two exchange rates for dollars, one for general users and one for privileged users. The privileged users had to ask for a license, a permit of sorts to buy dollars at a lower rate, supposedly for purposes of national interest. It was a meant as a subsidy for "industrialists" but nothing prevented anyone from reselling the dollars at the higher market rate and pocketing the difference.

You got the permits if you had friends in the government, thus the cronyism. I never noticed it as a kid because at least we could buy dollars at market rates, which is not even legal today, and the exchange rate difference was rather small instead of 500:1. 

There was also less people and there were more whites, the population doubled since i was a kid and everybody moved to Caracas. I also dont remember anyone paying any taxes except for local property taxes, the government had plenty of oil money. 

Most of the middle class was funded indirectly by the government, you had millions of government workers plus thousand of state owned companies with their own payrolls. Steel companies, airlines, universities, hospitals, aluminum, cement, ocean freighters, chemicals, plus private companies with government contracts, and at the core of it all there was the oil (owned by the government since the 70s).

BritBob's picture

Venezuela appears for the first time as "not free" country report of Freedom House organization attributed the new category to "the combination of extreme economic mismanagement and heavy-handed Government" of President Nicolas Maduro.

Maduro is a keen supporter of Argentina's mythical Malvinas claim even speaking at regional conference on behalf of Argentina (CELAC).

How can Argentina claim the Falklands when she has never legally owned them?

Falklands- Never Belonged to Argentina:

https://www.academia.edu/31111843/Falklands_Never_Belonged_to_Argentina

 

Still, why let a good old socialist distraction get in the way of the truth.

Last of the Middle Class's picture

And it all started with the discovery of oil and gas then the subsequent massive "infrastructure improvements" for all. What a crock of shit.

Benjamin123's picture

It started with building roads and a semi modern army. A roman idea, roads and armies.

Before Juan Vicente Gomez Venezuela was a patchwork of competing warlords akin to Somalia.

randombraindead's picture

When I read about diapers being such a valuable commodity in Venezuela it makes me think there is much more to the story than socialism.  Seems like US corporate consumer culture led to a  near complete disintegration of cultural, agricultural, and social systems.

What kind of moron would buy disposable diapers when they are struggling to survive?  Much smarter to get or make washable diapers and spend five minutes at the sink versus getting shot while shopping.

Ajax-1's picture

If you like your Socialist Overlords, you can keep your Socialist Overlords.

ThanksIwillHaveAnother's picture

Where is Sean Penn to save the day???

Umh's picture

Governments never admit to being wrong. In the following link a local government complains of being taken advantage of while neglecting to mention that the rate of interest they must pay in Virginia is the same rate they charge people who are late paying their taxes. of course we need to consider who is running this city.

http://wric.com/2017/05/18/tax-gambit-costs-city-of-richmond-nearly-500000/

ThanksIwillHaveAnother's picture

When USSR imploded that was the end of Cuber and Penn land.

Old Hippie Patriot's picture

The basic problem of Socialism is it's glaring inefficiency. Too much capital is wasted on administration, leaving too little left over to accomplish anything. Socialism also ignores the problem with any sort of administration, that is, corruption is inevitable when government is involved. Capitalism is more efficient, since the involvement of unproductive people is eliminated. The founders were correct when they said; "that which governs least, governs best."