Venezuela's Economic Fractures

Authors: Danielle Renwick, and Brianna Lee
Updated: July 1, 2016

Carlos Garcia Rawlins/Reuters
Introduction

Venezuela is experiencing its most severe political and economic crisis in decades. Severe food and medicine shortages, soaring crime rates, and a government crackdown on the opposition have sparked widespread protests. The country's economy was expected to contract 10.1 percent this year, up from 5.7 percent in 2015, making it the worst performer among economies tracked by the World Bank. Inflation hovered around 720 percent, and as many as 76 percent of Venezuelans live below the poverty line, up from 52 percent of the population in 2014, according to a recent study.

Critics of President Nicolas Maduro and his predecessor, Hugo Chávez, say Venezuela's economic crisis is fruit of years of economic mismanagement. The country, which sits atop the world's largest oil reserves, has seen sharp drops in oil revenues amid falling oil prices and reduced production. Meanwhile, drought has depleted many of the country's dams, resulting in widespread electricity shortages. The opposition-led National Assembly has called for a referendum to remove Maduro, whose approval rating in March 2016 was 26.5 percent, according Datanalisis, a respected polling firm. In May, Maduro declared a sixty-day state of emergency to address "external and foreign aggressions."

An Oil-Based Economy

Years of reliance on oil exports eroded other sectors of Venezuela's economy and left it particularly vulnerable to external shocks. Oil accounts for about 95 percent of Venezuela's export earnings and 25 percent of the country's GDP, according to 2015 figures from the Organization of the Petroleum Exporting Countries (OPEC).

The state-run petroleum company, Petróleos de Venezuela, S.A. (PDVSA), controls all of Venezuela's oil exploration, extraction, processing, and exports. Critics say PDVSA is grossly mismanaged, pointing to cronyism, a bloated payroll, underinvestment in infrastructure, and lack of budgetary oversight. Oil production fell nearly 11 percent, from an average of 2.78 million barrels per day in 2015 to 2.37 million barrels per day by in May 2016.

When global oil prices fell from a high of $111 per barrel in June 2014 to a low of $40 per barrel in late 2015, Venezuela's already shaky economy went into free fall.

Oil revenue was the cornerstone of Chávez's social programs and so-called petro-diplomacy. During his presidency, from 1999 to 2013, Chávez expanded his control over the oil giant and used it to bankroll food and housing subsidies, medical services, and educational programs for the poor. Chávez also used this oil wealth to cement Venezuela's international relationships, selling petroleum at steep discounts to states belonging to the eighteen-member Petrocaribe alliance, including the Dominican Republic, Haiti, and Nicaragua, as well as Venezuela's longtime ally, Cuba.

Venezuela enjoyed 5 percent average annual GDP growth between 2005 and 2012, when oil prices more than doubled. However, when global oil prices fell from a high of $111 per barrel in June 2014 to a low of $40 per barrel in late 2015, Venezuela's already shaky economy went into free fall: by mid-2016, the country owed $120 billion to foreign creditors and its reserves fell to around $12 billion. (As of June 2016, the price of oil was around $50 per barrel.)

"Chávez did not use the massive oil price boom between 2004 and 2013 to put money aside for a rainy day," writes Harvard economist Ricardo Hausmann. Instead, he "used the boom to expropriate large swaths of the economy, impose draconian foreign currency and price controls, and to subsidize imports. All this weakened the economy and made the country more dependent on imports, which Venezuelans can no longer afford."

 Venezuela's high debt levels have raised fears of a default, although Maduro's administration has cut imports, is selling gold, and has so far met its debt obligations.

Price Controls, Scarcity, and Shortages

Venezuela's economic crisis is marked by shortages of food, currency, medical supplies, and consumer goods like toilet paper and soap. Experts say many of Venezuela's economic policies, such as strict price controls that were meant to keep basic goods affordable to the country's poor, are to blame. Limits on what producers could charge for goods led many manufacturers in the country to reduce production. As of 2015, 1,200 private enterprises in Venezuela had been nationalized, which, experts say, has further diminished productivity.

Chávez's administration made dollars available at different rates, allowing some companies and individuals to access dollars, and therefore imports, at preferential rates. The artificially low official exchange rate resulted in shortages and a black market for dollars and goods. Maduro's administration simplified the exchange rate somewhat in mid-2016, but the country's official and black-market exchange rates still diverge: the official exchange rate is ten bolivars to the dollar, but the black-market rate, which is considered more accurate, was more than one thousand bolivars to the dollar in mid-2016.

Imports, including medicines and food, have become increasingly expensive as the bolivar weakens against the dollar and have fallen to a twelve-year low. Many consumers are faced with the choice of waiting for hours in line for basic goods or paying exorbitant prices from so-called bachaqueros, or black-market traffickers.

Infant mortality in hospitals increased from 0.02 percent in 2012 to 2 percent in 2015, according to a government report.

Venezuela's shortages have spilled over to the health sector, and the Venezuelan Pharmaceutical Federation reported in April that 80 percent of basic medicines were unavailable. Infant mortality in hospitals increased from 0.02 percent in 2012 to 2 percent in 2015, according to a government report. Local health NGOs say Venezuela is vastly underreporting cases of the Zika virus, the mosquito-borne illness that has been linked to birth defects. Malaria and dengue fever are also reportedly on the rise, increasing pressure on the frail health system.

Meanwhile, a lengthy drought has dried up water sources used for Venezuela's dams, which supply two-thirds of the country's electricity. In May, Venezuela shortened the workweek for public-sector employees to two days to cope with energy shortages. Water and electricity are rationed in much of the country.

Increases in Poverty

Chávez’s administration emphasized wealth redistribution, and poverty fell from roughly 50 percent to 30 percent between 1998, when Chávez was first elected, and 2012. However, those gains had been reversed by 2016: 87 percent of the population says it does not have enough money to buy sufficient food, according to a local university. The Caracas-based Workers' Center for Documentation and Social Analysis reported in April 2016 that, adjusted for inflation, a monthly food basket cost more than sixteen times the monthly minimum wage.

Violent crime is also high, and many point to the economic downturn as a cause. According to the government, the homicide rate in 2015 was 58 per 100,000. Independent groups say it could be more than 50 percent higher. Caracas, with 119 homicides per 100,000, is the most world's most violent city outside of a warzone. (The U.S. rate, by comparison, is 5 per 100,000.)

Political Turmoil

Soaring inflation, violence, and crackdowns on dissent, including clashes with protesters in 2014 that left at least forty people dead, brought Maduro's already-low approval ratings down to 26.8 percent in March 2016, according toDatanalisis.

In December 2015, opposition lawmakers won a majority in Congress for the first time in sixteen years. Congress approved a referendum to unseat Maduro in April 2016, a move the president's supporters called a "parliamentary coup." International observers say Maduro's administration has taken several steps to undermine Congress, including stripping the legislative body of powers to oversee the economy and using the courts, which are loyal to Maduro, to annul an amnesty law that would have freed eighty political prisoners, including opposition leader Leopoldo López. In May 2016, amid international criticism and calls for his administration to allow the referendum, Maduro declared a sixty-day state of emergency and accused the United States of plotting a coup. Members of his administration met with mediators and opposition leaders in the Dominican Republic that month for talks to end the political standoff; opposition groups accused the government of using the talks to stall recall efforts.

Venezuela's creditors and neighbors have met with opposition leaders, which some experts say could signal they are preparing for a change of leadership. China, Venezuela's largest creditor, is reportedly renegotiating billions of dollars in loans with the South American country. In June 2016, China sent unofficial envoys to Venezuela, reportedly to meet with opposition leaders and discuss whether successors to Maduro would honor the country's debts. Opposition leader Henrique Capriles, who is governor of the state of Miranda, has traveled to Argentina, Brazil, and Paraguay, where he met with heads of state.

Regional Tremors

In May 2016, Organization of the American States (OAS) Secretary-General Luis Almagro called an emergency meeting to initiate talks that could result in Venezuela's suspension from the group. Almagro, a former foreign minister of Uruguay, said Maduro's refusal to allow a referendum may violate the group's Democratic Charter, which it last invoked in 2009 following a military coup in Honduras. (The Central American country's membership has since been reinstated.) Maduro, he said, was on the verge of becoming a "petty dictator." Maduro said Almagro was "filled with hate against Venezuela" and accused him of working for the United States.

Speaking at an OAS assembly in June, U.S. Secretary of State John Kerry called on Maduro's administration to release political prisoners and allow the referendum. The United States, despite having a fractious relationship with the Maduro administration (and having sanctioned senior Venezuelan officials for human rights abuses), is Venezuela's largest trading partner. In June 2016, U.S. Undersecretary of State for Political Affairs Thomas Shannon traveled to Caracas to meet with senior administration officials and opposition leaders in efforts to "help foster constructive, meaningful dialogue."

Many experts say Venezuela's recovery will hinge on international assistance and cooperation, which may prove complicated under the Maduro administration. Maduro's government "has signaled strongly that it is uninterested in working with international policymakers on a rescue program," writes CFR Senior Fellow Robert Kahn.   

Kahn says inflation under the current regime will continue to hurt Venezuelan consumers and will likely have political repercussions. "The real question is, when do the politics break down? When do [Maduro's] supporters throw up their hands and say, 'I'd rather have the opposition?'" he says. "We're in a stage where governments tend to fail."

Additional Resources

This New York Times piece looks at Venezuela's health-care crisis.

This Bloomberg feature reports on Venezuela's black market.

The Financial Times examines Venezuela's epidemic of violence.

Michael Shifter, president of the Inter-American Dialogue, gives an overview of Venezuela's crisis in Foreign Affairs.

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