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.
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.
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.
The tipping point came in 1958, when these leftist activists, working in tandem with a sympathetic military, successfully overthrew Pérez Jiménez in a coup.
Following the 1958 coup, naval officer Wolfgang Larrázabal occupied the presidency briefly until general elections were held later that year. 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.
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:
1. Devaluation of the Venezuelan currency, the Bolívar.
2. Failed land reform that encouraged squatting and undermined the property rights of landowners.
3. 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.
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.
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 in the present day.
Jose Nino is a Venezuelan-American graduate student based in Fort Collins, Colorado. He has lived in Chile, Venezuela, and the United States.
https://mises.org/blog/venezuela-chavez-prelude-socialist-failure
