Why Did Venezuela’s Economy Collapse?
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Loading... - Mandy Kappel
- 06 Nov 2024
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Venezuela's economic collapse is a complex phenomenon resulting from decades of poor economic policies, mismanagement, and external factors such as sanctions. Once the richest country in Latin America, Venezuela has experienced a staggering decline in living standards, with a 74% drop between 2013 and 2023, marking one of the largest economic declines in modern history outside of war or state collapse.
The roots of the collapse can be traced back to the period from 1999 to 2013, during which Presidents Hugo Chávez and Nicolás Maduro implemented pro-cyclical fiscal policies. Instead of saving during a time of economic boom driven by high global oil prices, the government ran double-digit fiscal deficits, leading to a sixfold increase in external debt, exceeding $100 billion. The government also undermined the independence of the central bank, resulting in excessive money printing to finance deficits, which eroded savings and wages, disproportionately affecting the poor.
During this time, the government implemented extensive subsidies, including for gasoline, which was often sold at nearly zero cost. This led to massive smuggling operations and significant losses in revenue. The oil sector, crucial for Venezuela's economy, suffered from mismanagement and lack of investment, with political appointments replacing technical experts. Consequently, oil production fell from around 3 million barrels per day at the turn of the century to 2.3 million barrels per day before the crisis began in 2014.
Chávez and Maduro's administrations also imposed strict controls over the economy, expropriating thousands of businesses without compensation, which created a hostile environment for private investment and led to the closure of many firms. The introduction of capital controls and a convoluted foreign currency system resulted in a black market for dollars, creating inefficiencies and encouraging corruption. Legitimate businesses struggled to access foreign currency, while ghost companies profited from subsidized dollar allocations. Price controls on essential goods led to shortages and smuggling, as producers could not cover costs, resulting in bankruptcies and a reliance on imports for basic necessities. An estimated $300 billion was lost to corruption through the foreign currency system and other schemes, further exacerbating the economic crisis.
The collapse accelerated from 2014 onward when oil prices plummeted from $100 to $40 per barrel. Venezuela was unprepared due to its high debt and lack of savings. The government cut foreign exchange allocations for imports, leading to a severe recession. Instead of addressing the crisis, Maduro's government doubled down on interventionist policies, maintaining currency and price controls. The economy became increasingly reliant on imports, which plummeted from over $80 billion in 2012 to around $10 billion in 2017. As the economy contracted, hyperinflation set in, with inflation rates reaching 50% per month by November 2017. This hyperinflationary spiral devastated the economy, forcing countless businesses to close and prompting millions of Venezuelans to flee the country, with estimates suggesting over 7.7 million people have left since the crisis began.
In 2019, the U.S. initiated a "maximum pressure" campaign against Maduro, recognizing opposition leader Juan Guaidó as the legitimate president and imposing sanctions on Venezuela and its national oil company, PDVSA. These sanctions froze Venezuelan assets in the U.S. and cut the country off from the oil market. Secondary sanctions further isolated Venezuela from global oil markets, forcing PDVSA to sell oil on the black market at reduced prices. By 2020, Venezuela's GDP per capita had contracted by 73% since the start of the crisis, marking one of the largest economic declines in modern history.
Ultimately, Venezuela's economic collapse is a result of a self-destructive framework characterized by poor governance, lack of checks and balances, and a failure to adapt to changing economic realities. The policies that led to the collapse remain largely in place, making meaningful recovery unlikely in the near future.
