Venezuela was once the single-largest exporter of petroleum in the world; a well-oiled natural resource machine that was integrated in global energy markets. Now, their economy is in turmoil and their political establishments are unstable, to say the least.
The United States and more than 60 other countries are publicly recognizing parliamentary leader Juan Guaidó as the interim president over the current socialist leader Nicolás Maduro, who recently began his second term in what many have called an illegitimate election.
The worsening economic condition of the country has led to mass protests and widespread famine. Currently, 90% of Venezuelans live below the poverty line. On average, prices were doubling every 19 days near the end of 2018, leaving many Venezuelans struggling to afford basic items such as food. According to United Nations estimates, nearly 3 million Venezuelans have fled since 2014. But how did Venezuela get to this point?
It is important to note that because of its geographic location, Venezuela is rich in natural resources. It is the third-largest producer of coal in Latin America, the sixth-largest member of OPEC by oil production, and a major player in the natural gas market as well. Among the three, petroleum is easily their most important natural resource, as it accounts for 95 percent of their exports, which comprise 16 percent of the country’s gross domestic product.
Venezuela faced devaluation of their currency, the bolívar soberano, in the late 1980s when oil prices plummeted. But more recently, the country has faced hyperinflation, reaching 4,000% at its highest point in 2017. At the same time, the poverty rate was somewhere around 80 percent. Renowned Arizona economist Alan Maguire explains that this hyperinflation and consequent economic collapse has largely been due to the socialist agenda of the government.
“Over the last 20 years or so, under Chávez and Maduro, they have moved towards a socialist economy, which has moved them to a nationalized natural resource industry,” Maguire said. “When you have appointed government employees making decisions about what you should make, when you should make it, and who you should sell it to, these are not the same decisions that buyers and sellers are going to make. You end up with a lot of economic inefficiency because you have decisions that aren’t demand-driven or market-driven.”
Maguire notes that this socialist structure has also created many of the problems surrounding the demand hyperinflation of the bolívar soberano. “Hyperinflation goes back to the central control of the economy,” he said. “Inflation is generally caused by too much money chasing too few goods; you have too much demand and not enough supply. Because you have some government official hundreds of miles deciding what to do, they’re not making efficient decisions about how much to produce to sustain the villages in the country.”
Venezuela has the power to be one of the most economically powerful countries in the world, but it relies on a political system that constantly creates economic inefficiency. Maguire emphasizes, “It all leads back to the fact that markets work.”