Venezuela’s Crude Socialism

At the root of its woes is a nationalized oil company and the havoc and corruption that it wrought.

As someone who still has friends and family living Venezuela, it’s often difficult for me to communicate to outsiders just how absurd the Venezuelan economy has become. It might be easier instead to rattle off a list of the country’s economic ills—hyperinflation, unemployment, scarcity, and so on; the figures are certainly startling. But to truly understand how much damage 20 years of socialism have wreaked on Venezuela it is necessary to read firsthand (and first-class) accounts.

In Crude Nation: How Oil Riches Ruined Venezuela, Raul Gallegos more than accomplishes the task of depicting Venezuela’s plight. His book is a superb effort, mixing reporting with history and the occasional touch of anti-chavista polemic. Particularly noteworthy is Gallegos’ coverage of corruption and inflation—two of the gravest evils Venezuela has endured since Hugo Chavez launched the socialist Bolivarian Revolution in 1998.

The whole fabric of Venezuelan society is tainted by corruption. A culture of kickbacks and bribery reigns in the nation’s top governmental and business institutions. No opportunity for graft ever goes untaken. Indeed, in 2016, Hector Navarro and Jorge Giordani, two unreconstructed socialists who’d held cabinet-level posts in Chavez’s governments, suggested that as much as $350 billion may have been stolen from Venezuela over the preceding decade. Of course, nobody can know with certainty how much money the socialist rulers of Venezuela have plundered: it isn’t as though there are any ethics investigations forthcoming.

Gallegos puts it succinctly. “The World Economic Forum’s 2015-16 Global Competitiveness Report,” he writes, “[places] Venezuela at number 140, or dead last, in its rankings of government wastefulness, which means that—by that measure—Venezuela has the most wasteful government on the planet, far worse than African oil producing nations run by dictators and kleptocrats such as Angola.”

As elsewhere in Latin America, the issue of corruption long precedes the tenures of Chavez and Nicolás Maduro. But corruption has gotten infinitely worse under chavista rule, largely because of two crucial changes in government policy.

First, the executive branch under Chavez took direct control of PDVSA, the country’s oil company. Venezuelan oil has been nationalized since 1976, but up until Chavez PDVSA had for the most part run its operations autonomously and technocratically. Chavez, however, turned PDVSA into an extension of the Venezuelan welfare state. He dove into the company’s coffers (previously reserved for investments in machinery and other equipment) and used the money to fund massive social programs for the poor, from public housing to education to health care. This newfound source of revenue allowed him to temporarily decrease poverty rates in Venezuela, much to the delight of radical intellectuals in the West. But it also turned PDVSA into a piggy bank from which corrupt politicians could steal money with total abandon.

Political scientists Javier Corrales and Michael Penfold write that before Chavez, PDVSA was ranked among the best and most efficient national oil companies in the world. Today, PDVSA is a disaster. “By some estimates,” writes Gallegos, “PDVSA gives up $12.5 billion in earnings every year,” subsidizing preposterously low gasoline prices in Venezuela. Moreover, PDVSA’s expenses far outstrip its earnings; it is therefore compelled to borrow money from the Venezuelan Central Bank. So it is that, as Gallegos notes, “By the end of 2015 PDVSA had run up a tab with the central bank of $145 billion, equal to far more than a year’s worth of the company’s annual oil sales.”

The second factor that enabled systemic chavista corruption was the foreign exchange regime. In Venezuela, the government controls the supply of dollars—who gets them, and at what rate. The effective consequence of this policy is that the price people pay to exchange bolivares for USD depends on who they are and on whom they know. Those with connections in the higher echelons of the state can acquire cheap dollars at preferential exchange rates. Those without such high connections can acquire them at a slightly more expensive rate. Nearly everybody else who gets dollars acquires them at the much higher black market price.

The Venezuelan opposition refers to the exchange regime as a “corruption machine,” and it is. Bureaucrats and businessmen with access to cheap dollars can simply resell those dollars illegally and make 1,000 percent profits without exerting any effort. How many people would resist such an incentive?

Economic mismanagement, easy oil money, and a government that prints currency at will have created monumental inflation in Venezuela. Among other things, inflation has eradicated price mechanisms in the country. It has become nearly impossible for businesses to invest in machinery and job training given that they have no idea how much it will cost them in real terms.

Among the few who have benefitted from the inflationary craze are those who hold long-term car or mortgage loans. In Crude Nation, Gallegos tells the story of Castor, an intellectual property lawyer:

[Castor] purchased a Caracas apartment in 2008 for 340,000 bolivars in one of the city’s most prized neighborhoods. Seven years later, the apartment’s original purchase price is roughly enough money to buy Apple’s IPhone 6…. The inflationary distortion gets even worse. Castor took out a bank loan to pay for half the apartment’s purchase price. He still made payments of roughly 1,200 bolivars a month for his mortgage—about the cost of a cab ride to the airport…. He continued to pay ridiculously low monthly payments because the longer he takes to pay off the loan where the bolivar is increasingly worthless, the less money he’ll ultimately pay the bank.

Such distortions destroy the incentives for banks and investors to loan money in long-term projects, which leads to a downturn in countrywide production, which sends more people into poverty, which forces the government commit to more social spending…you see my point. Venezuela’s economy is an utter catastrophe.

Anecdotes like the one about Castor are what make Gallegos’ Crude Nation so compelling. In his book one finds accounts of people standing for hours in lines to get basic groceries, of business owners rendered useless by their inability to procure capital for investments. Workers see wage raises rapidly erased by the pressures of inflation. Necessities such as toilet paper are scarce to the point of being unattainable for broad swaths of the population. Baby diapers, too, are difficult to find: there are now online forums where mothers seek to exchange diapers for ones that fit their child’s size. Ordinary people fear their food supply might suddenly be disrupted and so they are forced to stock up on canned goods.

The history of Venezuelan socialism in power, then, cannot be comprehended merely as a tale of political scandal and crime and incompetence. It must be understood as a story of vast human suffering, of a country’s institutions devastated, and of a people’s livelihoods destroyed. It is to Gallegos’ credit that he managed to so powerfully convey this reality. Those of us who are fortunate enough to live elsewhere would do well to remember our luck when we hear reports of the next Venezuelan disgrace.

Christian Gonzalez is originally from Venezuela, but was raised in Miami, Florida. He now studies political science at Columbia University. He can be reached at [email protected]

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15 Responses to Venezuela’s Crude Socialism

  1. James Lessels says:

    The incredible thing is that before Hugo Chavez, the country was a model of good governance, prosperity for all and no corruption anywhere.

    It’s all the fault of the socialists. Where are the right wing dictators when you need them!

    Warning Irony alert!

  2. TJ Martin says:

    Correction – THE root of the problem lies within the leadership of the country which is and has been blatant Dictatorship for decades not so much as resembling never mind being Socialist

    Suffice it to say this article is fallacious at best with the author being in dire need of getting her terms and definitions along with history , FACTs and reality in order before attempting to comment on a situation she obviously on all counts is utterly clueless about

  3. TJ Martin says:

    Correction . Christian is a HE not a she . My error and mea culpa

  4. Johann says:

    According to some articles, bitcoin is being used as a solution to avoid the devastating effects of hyperinflation in Venezuela. But realistically, I can’t see how any but a small fraction of the population could effectively use the crypto-currency given the need for internet connectivity. And the techi nature of the currency makes it hard for many to understand it and to how to use it. Not just in Venezuela, but anywhere.

  5. Johann says:

    Who to believe, James and TJ, or the Venezuelan? I’m gonna go with the Venezuelan on this one.

    I’m pretty sure it was bad before Chavez, but the country took a huge swan dive after Chavez took over.

  6. Kevin says:

    “$350 billion”, hah! Peanuts! The UK governments of Thatcher and her successors blew £400bn of North Sea Oil and Gas revenue on, amongst other things, tax cuts for the rich (taxes went up for the poorest, BTW).
    They also sold off large swathes of the UK’s public assets at knock-down prices and used the proceeds similarly. See, for example, https://www.telegraph.co.uk/news/earth/energy/10103345/We-wasted-North-Sea-oil-lets-not-do-the-same-with-shale-gas.html
    Crude capitalism anyone?

  7. Jon says:

    And pressure is mounting along the border as masses of people are clambering to leave their beloved country the birthplace of one Simón Bolívar. How long will this charade, this theft of the people’s money and hard-earned income continue?

    Socialism might prove to be a bugaboo, the bugbear for capitalist leaning conservatives. But then again we see countries that have had socialistic governments and policy thrive. Socialism in this particular case has become the ideological justification for brute force, absolute power. It matters not the cause for autocracy but its excrescence which permeates one society such that its people are no brought onto the brink of starvation. How much longer can this last? When will the ruling elite of this particular state be brought to account that this debauchery robbing the people of their earnings and possessions end?

  8. Salaam says:

    As is always the case, the alternative elite should ask itself what it did to force a lot of the poor and middle class to turn to Chavez/socialism/etc. Without such soul searching the rupture will never be healed.

  9. b. says:

    Wanna try this with Saudi Arabia?

    Maybe socialism is not the problem here.

    Maybe the book mentions “Resource Curse”, maybe not. The reviewer certainly does not, not even with TAC adding a link to a related article right there.

    This has been a barely edifying moment.

  10. Anthony M says:

    It must be pretty bewildering for outsiders viewing Venezuelan politics through these sorts of pieces. Why, Venezuela was so great in 1997! Then things just took an awful turn and now everyone is suffering thanks to the Socialists, and yet… Venezuelans continue to be completely unimpressed by the right-wing opposition.

  11. grin without a cat says:

    @Johann:

    I’m pretty sure it was bad before Chavez, but the country took a huge swan dive after Chavez took over.

    Poverty rates improved when Chavez look over. It was under Maduro that they took a swan dive. There’s a reason why Chavez was popular but not Maduro.

    https://en.wikipedia.org/wiki/Economy_of_Venezuela

    There’s a chart near the bottom of the linked page labeled, “Percentage of people and households with income below national poverty line” When Chavez took power in 1999, 42% of households were in poverty. When he died in 2013, when he died, the rate was down to 27.3%.

    The very next year, under Maduro, the poverty rate was 48.4%, then 73.0%, then 81.8%, then 87%.

  12. Johann says:

    Grin, a swan dive can start with an initial jump up. But the nation had no support after the oil company and other pillagable assets were gone. It was Chavez that started the plummet into oblivion.

  13. Hector_St_Clare says:

    There’s a chart near the bottom of the linked page labeled, “Percentage of people and households with income below national poverty line” When Chavez took power in 1999, 42% of households were in poverty. When he died in 2013, when he died, the rate was down to 27.3%.

    The very next year, under Maduro, the poverty rate was 48.4%, then 73.0%, then 81.8%, then 87%.

    I’m as hard-left on economic issues as they come, and I wrote in defence of the Chavez government for a long time, starting almost immediately after his election and continuing up until 2011 or so. I certainly agree that he was smarter than Maduro and the country wouldn’t be in quite this state if he were still running things. Nevertheless, it must be said that the roots of this disaster were sown under Chavez. That is to say: systematic underinvestment in PDVSA capital goods, treating the company like a cash cow, lack of interest in controlling inflation, buying popular support with giveaways of free goods, and (perhaps most importantly) failure to properly manage and invest in all the new industrial and agricultural enterprises that he set up in a (failed) effort to diversify the economy. And let’s not forget his heavy reliance on rhetoric at the expense of action.

    Again, all this has more to do with Left-populism than with socialism or communism, per se.

  14. Thrice A Viking says:

    Salaam, I think you’re right. Believe I read an article somewhere that Venezuela had long been of the most unequal countries in Latin America. Of course, given that it’s been almost 20 years since a non-Bolivarian socialist has been in power, today’s oppositional elite may not have had a great deal to do with the past.

  15. Youknowho says:

    Alas, it is called the curse of easy riches.

    Basically it means that since the money keeps flowing, there is no incentive to diversify the economy or to make the long term investments.

    And eventually the crash comes….

    Yes, the current government is inept But the pre-Chavez government was no shining example of how to do things right. They were also willing to go on the gravy train, and to let things go on.

    And now it is come to a head.

    Easy riches are ALWAYS a curse, unless you can think outside the box.

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