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]
Venezuela’s Crude Socialism
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.