An economic crisis in Venezuela leads senior Jacko Walz to examine the reasons behind it, as well as the solutions needed to reignite the economy.
In January 2016, the International Monetary Fund (IMF) predicted that inflation in Venezuela would reach 720%, a figure they currently look to exceed. Venezuela is dealing with a catastrophic humanitarian crisis, featuring food shortages, hospital blackouts, and massive GDP contractions. To properly assess how to resolve this disaster and prevent it from reoccurring, it’s critical to understand the factors that drove its emergence.
Venezuela’s vast oil reserves – believed to be the largest in the world – motivated leaders to nationalize the petroleum industry and enjoy robust profits while leaving competing industries forgotten and weakened. The collapse in oil prices in 2015 crippled the Venezuelan economy that was entirely propped up on the success of the industry. As a result, the government radically increased the money supply in order to keep the country functioning, igniting hyperinflation. As the country’s economic situation grows more perilous, Venezuelans fall deeper into despair as looting and kidnapping become more commonplace.
Many factors fuel Venezuela’s crisis, but there are two elements that are particularly key. First, Venezuela is a prime example of the inexorable link between politics and economics. The country’s domestic politics are highly corrupt, enabling incompetent and authoritarian leaders to take power. These leaders behave like dictators, making unilateral and sweeping decisions with grave consequences. The current president, Nicolas Maduro, for instance, stacked the judiciary with supporters and used it to orchestrate a block on a congressional move to oust him late last year. These actions have allowed for the consolidation of power at the top of the government, making forcing a change within the current system all the more challenging. Furthermore, the political issues in Venezuela enable its economic issues: mismanagement, authoritarianism, and nepotism have made the economy incredibly fragile.
The second factor driving Venezuela’s crisis is the inherently global nature of modern macroeconomics. Venezuela’s one-dimensional economy operated smoothly until a crash in global oil prices resulted in a dramatic fall in government revenues. The global economy also speaks to the distinct interests at play on various sides of the crisis: China is invested in Venezuela and seeks to establish influence in Latin America while capitalizing on the country’s natural resources. Conversely, the United States is wary of a crisis in its backyard.
Thus, there are two dimensions to the crisis in Venezuela. One is domestic, and one global. Likewise, one is resolvable, and the other is not. So far, Venezuela has not been able to determine which is which.
Venezuela has indeed been punished by the global economy, but running away from it is the wrong option. By stepping away from the IMF and rejecting aid from NGOs, Venezuela has demonstrated its disinterest in participating in global markets. The current strategy to close the economy and impose strict price controls has birthed an explosive black market and a severe shortage of essential goods.
Thus, quelling Venezuela’s crisis requires first resolving the country’s systemic domestic issues. Stamping out corruption and diversifying the economy are the only true paths to a Venezuela that is fair and safe, and an economy that cannot be destroyed by external shocks. Increasing the accountability of the government and conferring greater political rights to the Venezuelan people are essential steps. Likewise, state involvement in the economy must be both curtailed and redirected, in order to enable needed growth in a diversified array of industries.
Assistance from outsiders is essential in the long term, but is unlikely to come immediately. While international support would be a productive avenue for the resolution of Venezuela’s woes, the international community must ensure that the systemic issues that plague the country are resolved first, lest the country slip back into crisis soon thereafter. For now, change will be difficult, and people will die. But Venezuela must be reengineered from the ground up to succeed.