By Hugo J. Faria
The most commonly adduced culprit for the ills plaguing Venezuela is the socialist policies of the last twenty years applied by the Chavez-Maduro regime. This narrative has been advanced by commentators, news anchors, and even President Trump.
Based on the facts at my disposal, I am going to provide a more balanced assessment of the causes of Venezuela’s predicament. This endeavor of clarifying the recent history aims at casting light on fundamental economic issues that should be addressed to avoid a repetition of past mistakes.
Fact 1. The oil discoveries in the early XX century, as well as its extraction and commercialization by American and British companies, ignited an enduring process characterized by high growth rates. This prolonged period of elevated growth rates explains how Venezuela reached an income per capita in 1957, equivalent to fifty percent of the US income per capita, according to data from the Penn World Tables. Moreover, calculations based on PWT data, Venezuela’s average income per capita growth rate from 1950 to 1957, reached 5.1 percent, which is similar to the growth-miracles of Hong Kong and Singapore commencing in circa 1960.
Fact 2. Based on the PWT data, the average income per capita growth rate declined to 1.8 percent from 1958 to 1980, lower than the average U.S. growth rate, which as a mature economy it is at the technological frontier and consequently with a lesser growth potential than economies far removed from the knowledge frontier such as Venezuela and China. Venezuela’s dismal growth rate is likely to have paved the way for a non-discernible impact on poverty reduction.
Fact 3. The average growth rate of the Venezuelan economy for the 1980-1998 period was 2.7 percent negative. Thus, the population grew more than production as measured by real GDP.
Fact 4. For the 1960-1998 period, ruled by the social democrats, the average growth rate of the income per capita was minus 0.27 percent. According to the empirical growth literature, Venezuela is classified as a growth disaster along with fourteen Subsaharan countries and Nicaragua, where a civil war erupted.
Fact 5. By 1975 the Venezuelan government was the owner of the Commanding Heights of the economy. That is, in addition to the subsoil the state was, and still is, the proprietor of the companies in charge of extracting and transforming oil, natural gas, iron, aluminum, and electricity. Not to mention the ownership of gasoline stations, airports, ports, damns, among others.
State ownership of profitable companies is the hallmark of socialism. Imagine the acrimoniousness of American voters if a presidential candidate promises to nationalize an oil company. However, Venezuela’s widespread socialism before Chavez’s electoral victory is seldom mentioned in public discourse discussions that dwell into the causes of Venezuela’s hardships.
It is also worth noting the panoply of policies, adopted between 1960 and 1998, that conspired against the well functioning of markets, namely, price, interest rate, and exchange rate controls, complex business regulations, cost of living increasing trade barriers, rampant inflation, and concomitant devaluations, co-founders of the OPEC oil cartel, barrage of minimum wage increases by decree, creation of a central planning office and last but not least corruption of the judiciary. Given the poor economic performance of the country, it should be no surprise the electoral victory of Chavez in 1998, and the wane of the traditional political parties.
In sum, socialism in Venezuela intensified during the social-democracy era, 1958-1998. Socialism, as usual, did not work, even if it is vegetarian. Its poor performance facilitated the rise of carnivorous socialism, which is of a worse strand. However, a greater evil does not justify a lesser evil. The country clamors for a full-fledged market economy, which rolls back the frontiers of socialism, increasing the probability of shackling the Venezuelan Leviathan. Venezuelans, particularly the leaders, should heed to the meager economic legacy from the past by allowing the emergence of a market economy.
Hugo J. Faria is a lecturer of Economics at the University of Miami.