Hugo Chávez's transformative presidency left behind an economic model that has sown deep divisions within Venezuelan society. Redistribution of wealth has been a guiding principle in the state-controlled economy, which is largely sustained by the country's oil reserves. But stringent currency and price controls and a thriving black market for U.S. dollars have contributed to inflation, stagnant production, and frequent shortages, catalyzing widespread discontent with the government's economic management. Falling oil prices and reduced production lowered petroleum exports, the country's main source of income, by more than half between 2012 and 2015, putting the economy on course to contract by nearly 10 percent in 2015 (PDF).
The country’s worsening economic situation comes amid growing frustration with soaring crime rates and the government’s crackdown on the opposition. By December 2015, President Nicolás Maduro, Chávez’s hand-picked successor, saw his approval ratings fall as low as 22 percent, according to polls.
An Oil-Based Economy
Venezuela's oil industry, helmed by the state-run petroleum company Petróleos de Venezuela, S.A. (PDVSA), underpins the economy. The industry, which sits atop the world's largest oil reserves (it surpassed Saudi Arabia in 2012), accounts for about 96 percent of export earnings and 25 percent of the country’s GDP, according to the Organization of the Petroleum Exporting Countries (OPEC).
Chávez 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 its longtime ally, Cuba. Under barter agreements, many of these countries export agricultural products to Venezuela, whose food production has declined since the 1990s. Venezuelan oil exports also sustain the eight-member Bolivarian Alliance of the Americas (ALBA), founded by Chávez and Cuba's Fidel Castro in 2004. Venezuela uses oil to repay its external debts, as it does with China, which has loaned it nearly $50 billion since 2007.
In 2014, oil accounted for about 96 percent of export earnings.
PDVSA controls all of Venezuela's oil exploration, extraction, processing, and exports, making it one of the largest oil companies in the world. But as Chávez expanded his control over the oil giant, it became a politicized body. The company bankrolls food and housing subsidies, medical services, and educational programs for the poor. Critics say PDVSA is grossly mismanaged, citing diminished production, a string of refinery accidents, and the addition of a hundred thousand employees to the company's already-bloated payroll during Chávez's fourteen-year presidency.
Another result of the Venezuelan economy's reliance on oil has been the erosion of other productive sectors of the economy. "[The Venezuelans] make nothing besides oil today," CFR's Shannon K. O'Neil told Bloomberg TV in 2014. "What you've seen in the last ten years, under Chávez and now Maduro, is a hollowing out of the rest of the economy through regulations, bureaucracy, price controls, and sheer amount of expropriations of businesses. You've seen the agricultural sector decline and manufacturing decline." In 2014, oil accounted for about 96 percent of export earnings.
In December 2015, global oil prices hovered around $40 per barrel, down from $111 in June 2014, threatening to further derail Venezuela's economy. According to ING Group data cited by Bloomberg, Caracas would need crude oil to cost $125 per barrel to balance its budget. This shortfall, paired with waning foreign reserves (at $14.8 billion in November 2015, they were at their lowest level since 2003), continue to stoke fears that Venezuela will default on its external debt. Venezuelan bonds “trade at levels associated with a default,” according to Bloomberg Business, and in February 2015 Standard & Poor’s downgraded the country's credit rating to CCC. (Moody’s Investor Service and Fitch Ratings had previously downgraded the country to Caa3 to and CCC, respectively.)
A Multi-Tiered Currency System
High oil prices, in addition to expansionary fiscal and monetary policies, led to average annual GDP growth of about 5 percent from 2005 to 2012. But growth slowed in 2013 to about 1 percent, and the economy was expected to contract by as much as 10 percent in 2015 (PDF), with inflation averaging 159 percent, according to the IMF.
Many barriers to increased production and investment can be traced back to strict currency-exchange controls, in which dollars are sold at three official rates; the lowest rate, used for food and essential household items, is 6.3 bolivars to the dollar. The black-market rate, however, was more than nine hundred bolivars to the dollar in December 2015. These economic distortions make it difficult for businesses to calculate costs and have caused the costs of some consumer goods to skyrocket while producing shortages in others. The currency system, which allows some importers to purchase dollars at artificially low rates but then caps the price of goods the importer would resell, creates incentives to cheat: importers stand to gain more by selling those dollars on the black market than by selling imports, resulting in shortages.
Scarcity and Shortages
Price controls on some foods and household items have resulted in shortages across industries. Shortages of items like milk, cornmeal, and toilet paper are frequent, and the short supply of staples has resulted in notoriously long lines at supermarkets. In 2015, the Venezuelan Pharmaceutical Federation reported that around 70 percent of medicines in the country are in short supply.
Venezuela's scarcity index, which measured the amount of basic goods that are out of stock at a given time, reached a record 28 percent in January 2014. Since then, the Venezuelan Central Bank has stopped publishing scarcity index figures.
Support for the Poor
Chávez’s administration emphasized wealth redistribution, and poverty fell from roughly 50 percent to 30 percent between 1998 (the year Chavez was first elected) and 2012. However in 2015, many analysts say those gains have been erased. A 2015 study by a group of Venezuelan academics found that 76 percent of the population lived in poverty when measured by income. The Caracas-based Workers' Center for Documentation and Social Analysis reported in October that, taking inflation into account, a monthly food basket cost more than eight times the monthly minimum wage. Price controls on staples such as corn flour and rice keep those goods cheap, but have also lead to their scarcity.
Economic instability in Venezuela poses concerns for its regional and international trade partners. Venezuela is a member of the regional trade bloc Mercosur, which includes Argentina, Brazil, Paraguay, and Uruguay, and its economic woes, pared with the crackdown on opposition leaders, may foster further divisions within the already fractious group. (Upon winning Argentina’s presidential election in November 2015, Mauricio Macri said he would seek to expel Venezuela from the bloc.) The United States also remains an important trade partner, but Venezuela's exports to the United States have slowed in recent years, from $43 billion in 2011 to $30 billion in 2014.
Falling oil production has put Venezuela's oil commitments to the Petrocaribe states on shaky ground, leading to delayed shipments and readjustments of exchange rates. Between 2012 and 2014, Venezuela cut its subsidized oil shipments to Cuba in half to fifty-five thousand barrels a day, according to Barclays.
Soaring inflation, violence, and crackdowns on dissent, including the high-profile arrest and imprisonment of opposition leader Leopoldo López, brought Maduro's already-low approval ratings to as low as 22 percent, according to a December 2015 poll by Datanalisis, a respected Caracas-based polling firm. A 2015 Pew Research Center poll found he had a 29 percent approval rating. Pew also found that 85 percent of Venezuelans are dissatisfied with the way things are going in their country, up from 57 in 2013, the year Chávez died.
The Americas Society/Council of the Americas offers a primer on Venezuela's 2015 parliamentary elections.
This New Yorker piece examines Chavez's legacy in Venezuela.
This Wall Street Journal article looks at poverty rates in Maduro's Venezuela.
CFR's Shannon K. O'Neil analyzes the oil price drop on Bloomberg TV.