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This is Part One of a two-part series. Part Two is here.

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:

Devaluation of the Venezuelan currency, the Bolívar. Failed land reform that encouraged squatting and undermined the property rights of landowners. 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.