Shannon K. O'Neil

Latin America's Moment

O'Neil analyzes developments in Latin America and U.S. relations in the region.

Print Print Cite Cite
Style: MLA APA Chicago Close

loading...

How Venezuela Got Into This Mess

by Matthew Taylor
October 28, 2016

People line up to try to buy toilet paper and diapers outside a pharmacy in Caracas May 16, 2016 (Reuters/Carlos Garcia Rawlins).

Share

[This post was co-authored with John Polga-Hecimovich*]

By the end of 2017, the Venezuelan economy will likely be less than three-quarters of its 2013 size. Inflation is set to increase from 700 percent in 2016 to a hyperinflationary 1,500 percent next year. Despite the government’s best efforts to continue payments, a crippling debt default seems increasingly inevitable. The human costs of the crisis are readily apparent, with food and medicine shortages, rising infant mortality, and increasing violence. Fully three-quarters of Venezuelans polled claim to want President Nicolás Maduro out. But last week, a series of judicial decisions appear to have quashed one of the most promising routes out of the political crisis, the presidential recall referendum. This string of suspect decisions confirms the Maduro administration’s descent into blatant authoritarianism and cuts off one of the last avenues for the peaceful restoration of a democratic system. Incongruously, all of this is in a country with the richest reserves of oil in the world, where the government has long proclaimed a commitment to social progress, inequality reductions, and popular legitimation.

How did Venezuela reach this crisis point, and what could turn it around?

The short answer to the first question is a combination of the resource curse, populist spending, and bad policymaking. We briefly unpack these elements in this post. As for the second question of what might be done to overcome the crisis, we discuss what domestic and foreign actors could do to help the country to find a way out from the current debacle in subsequent posts here and here.

An Anatomy of Chavista Power

The ascendance, popularity, and consolidation of power of the late President Hugo Chávez (1999-2013) was premised on twenty-first century socialism, anti-elite mobilization, and the gradual accumulation of the levers of state power by electoral means. Helped by oil prices, which surged from $10 a barrel in the late 1990s to a peak of $140 in 2008, Chávez was able to build a series of social programs, the so-called misiones sociales, to provide unprecedented services to the popular sectors. Simultaneously, Chávez moved to slowly accumulate power and eliminate checks on his socialist project: he packed the courts, gradually filled the ranks of the military with loyalists (and the ranks of political underlings with these military officials), staffed the state oil company PDVSA with supporters, and systematically dismantled independent media. By the time of his death in 2013, the Chavista state was a hybrid regime—neither a liberal democracy nor an outright dictatorship. As one of its leading critics noted, “if the ‘physiology’ of the regime is doubtfully democratic, its ‘anatomy’ is formally democratic.”

This formal adherence to democracy provided symbolic cover that permitted other Latin American nations sympathetic to the Chavista project to work with Venezuela, despite creeping authoritarian practices such as the imprisonment of opposition leaders, and troubling economic policies such as expropriation. The “Bolivarian” project—founded on Chávez’s devotion to South American liberator Simón Bolívar—gained adherents among other left-of-center governments in the region, and institutional presence through the Bolivarian Alliance for the Americas (ALBA), the Union of South American Nations (UNASUR), and even the transnational media company TeleSur. Left-leaning governments in Argentina, Uruguay, and Brazil worked closely with Chávez, bringing Venezuela into the Mercosur trade bloc out of a mix of ideological affinity and realist calculation that this might enable them to temper his grander plans for the region. And Chávez was masterful in using Venezuelan oil to buy enduring influence with Cuba and the seventeen Caribbean members of PetroCaribe, which enjoy preferential terms on oil purchases from PDVSA.

Chávez also benefitted from a ham-handed and internally divided political opposition. The opposition has engaged in bold actions, but often at a net loss to its objective of curbing Chavismo. The short-lived coup of 2002, in particular, backfired spectacularly by providing Chávez an opportunity to question the democratic values of the opposition, while simultaneously allowing him to restructure the armed forces and remake it into a far more ideological and regime-loyal institution. Revelations that the Bush administration had prior knowledge of the coup plans also helped feed Chávez’s anti-Americanism. The oil strike of 2002-2003 likewise provided a justification to remove opponents from strategic sectors, while subsequent boycotts and demonstrations have frequently served to strengthen the regime and demonstrate its superior force. It is also vital to recognize that whatever his faults as a democrat, Chávez had electoral support that frequently exceeded half of the electorate and allowed him to repeatedly outpoll the opposition, which was tarred as excessively elitist.

Beginning in 2011, Chávez’s health deteriorated, leading him to tap long-time foreign minister and (later) vice president Nicolás Maduro as his successor. After Chávez’s death from cancer, Maduro narrowly defeated Henrique Capriles of the opposition Democratic Unity Roundtable (MUD) coalition in the April 2013 presidential election.

From Bad to Worse

Maduro’s time in office has been marked by declining economic and political fortunes. The economy has been devastated by a combination of bad policies, especially currency and price controls; a monoproduct export economy dependent on an especially volatile product whose price has plummeted; and populist spending.

Chávez and Maduro share the blame for the country’s bad macroeconomic policy. To deal with loss of revenue from the PDVSA strike in 2003, Chávez fixed the exchange rate between the local bolívar and the U.S. dollar, and gave the government the authority to approve or reject any purchase or sale of dollars. While this was a short-term fix, the measure also became a ticking time bomb. With a decline in dollars under government control after the fall in oil prices in 2009, black market demand skyrocketed (causing some Venezuelans to engage in the so-called raspao and other forms of arbitrage). Instead of lifting currency controls and normalizing the exchange rate, the Maduro government continues to print more money, further raising inflation. Price controls on basic goods, a constant in Venezuela since World War II, have also disincentivized domestic production.

What is more, far from heeding Arturo Uslar Pietri’s famous advice that Venezuela should “sow the oil” (sembrar el petróleo), Fifth Republic governments have depended on oil proceeds more than ever to fuel their spending. This has had disastrous consequences as crude prices and production have simultaneously dropped. Oil, which expanded from 80 percent of all exports in 1999 to 95 percent today, is at just over $50 a barrel today. As a consequence of low oil prices and declining PDVSA production, the country is facing a critical shortage of foreign currency, even after a devaluation in February. A ballooning set of payments on the country’s $138 billion debt is approaching, and the government’s efforts at a bond swap have been only partially successful.

The government quietly loosened price controls last week in six states, which is allowing stores in those places to import food and sell it at whatever price they please. This is a major development, insofar as queuing for food may decrease in those states, removing a key source of public discontent. However, inflation will still make most products unobtainable to the average citizen, so long-term, the political impact may not be very significant. Meanwhile, despite having borrowed some $65 billion from China since 2005, the country is reportedly running out of the ability to import goods.

On the political front, the picture is no better. Clashes with protesters in 2014 left at least 40 dead, and more than 870 wounded. These tumultuous events resurrected fears that the military might once again be dragged into the type of repression against the public that scarred it deeply in the Caracazo protests of 1989. But the government also used the protests as an excuse to arrest opposition leader Leopoldo López, who was sentenced to fourteen years in prison for allegedly inciting the protests.

In December 2015, the MUD won a supermajority in the National Assembly for the first time under Chavismo, and by April 2016 it had approved a recall referendum against Maduro (the Venezuelan Constitution of 1999 does not provide for presidential impeachment).

Over the past two weeks, a number of developments have deepened the political crisis. The National Electoral Council (CNE) postponed December’s elections for governors and mayors, in which the PSUV seemed certain to suffer. Maduro stripped powers away from National Assembly, most notably by giving the Supreme Court (TSJ) power to approve the budget law. Most recently, as noted above, several criminal courts ruled on 20 October 2016 that signers committed fraud during the first signature collection in June, in what is clearly an unusual act.

This last news is particularly disheartening for the MUD and for anyone else holding out hope for a recall referendum in 2016. It all but ensures that any referendum will only take place after 10 January 2017, which would ensure the continuity of Chavismo in office until the 2018 presidential elections, even if it removes Maduro. Pending a final decision from the TSJ, furthermore, it is likely that the referendum will be cancelled altogether, blocking a constitutional path out of crisis.

In sum, Venezuela’s descent into an unprecedented political and economic crisis has accelerated. The potential impact could be significant: the continued worsening of humanitarian conditions, increasing political violence, and the likelihood of rising emigration (more than 1.8 million have fled Venezuela since 1999) are all potential consequences.

In our next post, we look at the political economy of support for Maduro, and what it means for the possibility of change from within the regime. The third and final post will look at how external actors might alter the conditions that sustain the Chavista regime.

*John Polga-Hecimovich is an Assistant Professor of Political Science at the U.S. Naval Academy. His research interests include comparative institutions of Latin America, especially the executive and the bureaucracy, as well as presidential instability. He has published peer-reviewed articles in The Journal of PoliticsPolitical Research QuarterlyElectoral StudiesParty PoliticsLatin American Politics and Society, and others, and conducted fieldwork in Venezuela, Ecuador, and Brazil. His Twitter handle is @jpolga.

Disclaimer: The views expressed in this blog post are solely those of the authors and do not represent the views of or endorsement by the United States Naval Academy, the Department of the Navy, the Department of Defense, or the United States government.

Post a Comment 3 Comments

  • Posted by Juan Sequera

    Regarding the question, “How did Venezuela reach this crisis point, and what could turn it around?” I may add that during the Chavez years in power, the level of of government corruption skyrocketed to an all time high in the history of Venezuela.

  • Posted by Chris Schons

    Good piece. Thank you.

  • Posted by John Polga-Hecimovich

    Juan:

    Thanks for your comment! Two caveats: 1) there seems to have been plenty of corruption prior to Chávez, as the experiences of Lusinchi, CAP, Caldera, and others can attest; and 2) the nature of corruption makes it difficult to pinpoint exactly how pervasive and deep it actually is.

    Those things being said, I agree that all informal accounts point to unprecedented levels of corruption during the ‘Quinta República’.

    John

Post a Comment

CFR seeks to foster civil and informed discussion of foreign policy issues. Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions. All comments must abide by CFR's guidelines and will be moderated prior to posting.

* Required

Pingbacks