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Venezuela: Poster Child for Socialism

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Tags Financial MarketsGlobal EconomySocialism

02/15/2019

There is no more recent example of the many theoretically apparent pitfalls of socialism coming to life than in Venezuela. The South American nation is but the latest example on the long list of countries to have fallen victim to the siren’s song of a socialist utopia. While over the past decade journalists like Michael Moore, politicians like Bernie Sanders and economists like Joseph Stiglitz have praised the so-called socialist “economic miracle” in Venezuela, with hyperinflation now leading to starvation and millions fleeing the country, it is inarguable that these praises were premature and wholly unwarranted.

Unfortunately, economist turned political hack Paul Krugman still to this day carries on the tired line that the Venezuelan government simply “mismanaged” and are corrupt, and will not admit that this situation arose from problems inherent to socialist ideals and policy. I aim to show how feeble this line of thinking is. What’s more, what may be the final months of the Maduro government are serving as a reminder of how even socialist regimes ironically rely heavily on the successes of capitalism to maintain the last vestiges of their socialist society.

Political Philosophy Has Consequences

The Bolivarian Revolution, led by the late Venezuelan President Hugo Chavez, began in 1999 under the guise of snuffing out imperialism, corruption, and inequality. In practice, this meant implementing nationalist politics and a state-run socialist economy. With a slogan like, “Motherland, socialism, or death,” it would seem that the Bolivarian Revolution should have been seen for what it was from the very outset – the beginning of the end for the Venezuelan economy. The failure of the aforementioned journalists, politicians, and economists to foresee economic and political ruin as the necessary outcome of such a “revolution,” despite the long list of historical evidence that would make such optimism clearly undeserved, speaks not only to their ideological bias but also to their poor understanding of the very foundations of economic and institutional success.

Many still to this day will not admit that the devastation witnessed in Venezuela is a problem inherent to Socialism. They claim that Venezuela is not a model of “true socialism”, but of autocracy, and blame the ills of the government and economy on corruption. However, it has long been evident that the historical correlation between the rise of tyrannies and state-run socialist economies are actually causal relationships. As Mises stated, “The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion.” Decades before Venezuelan’s were planning their revolution Mises had already observed that, “Tyranny is the political corollary of socialism, as representative government is the political corollary of the market economy.” To suggest otherwise is to ignore economic and political history.

In lieu of capitalism, socialism puts the fate of individuals in the hands of bureaucracies. Bureaucracies cannot be managed by economic calculation like businesses in a capitalist economy and are therefore destined for bloat, inefficiency, and mismanagement. As Mises wrote, “Bureaucratic conduct… is conduct bound to comply with detailed rules and regulations fixed by the authority of a superior body. It is the only alternative to profit management. . . . Whenever the operation of a system is not directed by the profit motive, it must be directed by bureaucratic rules.”

The alternative philosophy of economic and political liberalism, which originated from the age of enlightenment and places the rights of the individual over that of society at large, has thus been in the crosshairs of socialist do-gooders and unabashed tyrants since its origins. The relationship between political philosophy and material wellbeing is not a mystery given that the political philosophy of a nation is the foremost determinant of its economic policies. A political philosophy rooted in foundational principles of private property rights and individualism promotes the market exchange and innovation that allows for an abundance of material comforts like food, shelter, and medicine. Only a legal framework built on the sovereignty of private property rights allows individual citizens to own the means of production, to negotiate and depend on enforceable contracts, and gives rise to the capital accumulation and investment that causes entrepreneurship and capitalism to flourish.

Ironically for the socialists, the absence of the very profit motive for which they vilify under capitalism leads to the perverse incentives and lack of accountability in socialist bureaucracies which sow the seeds of corruption and tyranny in government. Inefficiency, corruption, graft, and tyranny are therefore features of socialism, and are not something that can be avoided if only “true socialism” were tried once more. It’s not that “true socialism” – the socialist utopia of prosperity under shared ownership of the means of production – hasn’t been the goal of many failed states like Venezuela, it’s just that it’s an inherently impossible outcome from enacting socialist policy.

The Myth of the Venezuelan Resource Curse

One such Venezuelan bureaucracy that plays a key role in the Venezuelan economy is Petróleos de Venezuela, S.A., which is more commonly referred to as PdVSA. PdVSA is Venezuela’s state-owned oil and natural gas company that serves as the largest source of government revenues due to its production and exportation of crude oil. Venezuela has the largest proven oil reserves in the world, accounting for nearly 300 billion barrels of oil. The nation is also rich in other precious natural resources such as gold. This may lead one to ask, why then does a country so rich in natural resources continue to suffer such economic hardship?

Beginning in the mid-1990’s academic literature began to hone in on a so called “resource curse,” wherein the relationship between natural resource abundance and economic growth was closely examined. Some researchers have concluded that many countries have not only squandered their natural resources, but that economic performance has actually suffered as a result of the rise of natural resource discovery and production. People are therefore quick to point to Venezuela as yet another example of the “resource curse” in action rather than attributing blame to socialism. Some recent research, however, has found evidence that it is not likely the fault of simply having an outsized natural resource industry that starves the economy of investment elsewhere. After all, there are many historical examples where this curse did not arise.

It is no accident that nations that have been largely immune to the resource curse despite their large natural resource sectors have been those that arose from foundations of property rights, individualism and capitalism. Property rights, which allow for the rise of private contracts and the private accumulation of the means of production, preclude the mass confiscation and government management of resources which is present under socialist control. As Mises so concisely stated, “Economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production.” By nationalizing industries, and then making bloated government budgets dependent on the revenue of said industries, the government is then necessarily exposed financially to its largest industries. In a socialist state such as Venezuela, where government revenues are increasingly dependent on a single highly volatile commodity like oil that is priced in the global market, it is little wonder that the economy would be marred in instability.

The supposed resource curse in Venezuela, properly described, is then nothing more than another example of the failure of socialist bureaucracies in their effort to try and function like market economies. Placing resources in the hands of “the people,” really means placing it in the hands of the government and its cronies. Furthermore, in centrally planned socialist economies such as Venezuela, where many individuals obtain their incomes in groups that compete over government revenue, it would seem to necessarily follow that corruption, graft, and a class of politically connected elites would grow at the expense of the rest of society. In political science terms, it breeds clientelism, or the exchange of goods and services for implicit or explicit political support. In fact, recent research has suggested that not only may the resource curse not exist, but that a clientelist economy may actually be a prerequisite for supposed resource curse outcomes.

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It is not merely a coincidence that even as global oil demand and production has risen in recent decades, a nation so rich in oil reserves saw its oil production peak just before the nationalization of the oil and gas industry began in the early 1970’s. Venezuelan oil production rose once more throughout the 1990’s as PdVSA began to employ private contractors, but that all changed with the election of Hugo Chávez and the start of the Bolivarian Revolution. During the Venezuelan general strike of 2002–2003, Chávez fired 19,000 employees of PDVSA and replaced them with employees loyal to his government. Since then, Venezuelan oil production has plummeted by 70 percent. This is clearly not the result of a curse that naturally arises from the laws of economics, but one that follows from government trying to ignore those laws.

Monetary Policy and Hyperinflation

A socialist economic meltdown would hardly be complete without a collapse of the currency. After all, like corruption and graft, inflation of the nation’s money supply under a socialist state should be expected. The collapse of the Venezuelan currency, the bolivar, is particularly tragic given that it was one of the strongest currencies in South America during the time of Venezuelan economic success from the 1950’s to 1970’s. Inflation began taking hold in the 1980’s following the Venezuelan government increasingly nationalizing industry and politicizing the central bank in the 1970’s.

Predictably, the expansion of government led to growth in spending, deficits, and debt. As has typically been the case throughout history, instead of admitting failure and reversing course, the government began fleecing the people of Venezuela through the initially hidden, but now obvious, tax of inflation – by printing more bolivars at the expense of the purchasing power of the currency. This policy allows governments to inflate away their debts as they drive the currency toward worthlessness. As Mises so aptly noted in The Theory of Money and Credit, “Inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism.”

For consumers, a policy of monetary inflation has led to staggering price hikes throughout the economy. In a failed effort to compensate, Maduro ordered six minimum wage hikes in the country throughout 2018, and in 2019 has already issued an additional 300 percent increase. This brings the minimum wage to 18,000 bolivars per month, or less than 7 US dollars. Coupled with government price controls, this has led to mass shortages of basic goods like food, water, and toilet paper. At this point, the bolivar is literally not even worth the paper it is printed on. Indeed, it makes more financial sense to use the bolivar as toilet paper than to use it to try and buy toilet paper. Enormous stacks of cash are needed for basic goods given the currencies worthlessness. A cup of coffee, which a year ago cost 0.45 bolivars, now costs 1,700 bolivars.

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Best estimates show that Venezuelans saw prices rise at an annualized rate of 160,000% by the end of 2018. Venezuelans have no access to medical services, children and the elderly are starving to death, and millions of people are fleeing the country in mass as a result. The tragedy is that this suffering is the direct result of something that is completely avoidable. As Mises described in the 1950’s, “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.” Indeed, as has been proven throughout history, it is a policy that follows from the growth of government under socialism.

Trade in the Final Days of the Revolution

Last July, Major General Manuel Quevedo – the career military officer who had been made president of PdVSA – met with a Catholic priest and a gathering of PdVSA workers and officials at the PdVSA headquarters for a prayer ceremony in hopes that God would help boost Venezuelan oil output. But not even calls to God could reverse the economic misfortune that follows when you place industry in the hands of military officials and socialist sympathizers.

What followed was increasing economic and political disarray throughout 2018. With little choice left, the Venezuelan government quietly reversed the two-decade drive to nationalize the oil industry and began hiring outside firms to help maintain the last bit of operations at the state owned oil giant. This comes less than a year after Maduro was quoted saying, “I want a Socialist PDVSA. An ethical, sovereign and productive PDVSA. We must break this model of the rentier oil company.”

While it is true that the Venezuelan government and economy has grown dependent on loans from their more ideologically aligned geopolitical allies China, India, and Russia over the past decade, their ideological adversary – the US – has been by far the largest buyer of the oil that finances the Venezuelan government. The US imported nearly 500,000 barrels per day of Venezuelan crude in 2018, accounting for nearly 40 percent of total Venezuelan exports and up from 34 percent of total Venezuelan exports in 2017. Given that Venezuela is greatly indebted to many of its other largest buyers like China and India, exporting oil to these countries only pays down debts and does not help meet needs for additional funding. As such, the US is thought to account for 75 percent of the total cash that Venezuela receives for their crude exports.

What’s more, Venezuelan oil is far too heavy or thick to flow through pipeline and export infrastructure without having diluent - or refined light oil products like gasoline - to blend with its crude to reduce its viscosity. In the past, PdVSA created their own diluent at their own refineries. But with nearly the entire refining base going offline after years of bureaucratic mismanagement, in 2018 Venezuela increasingly turned to refiners in the US to supply the oil products that would allow them to continue to produce and export crude. The US supplied nearly 80 percent of the total diluent imported into Venezuela in 2018. While Venezuela can source this from elsewhere globally, it would come at a higher cost than procuring the geographically proximate US supply.

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So, what happened when socialist Venezuela ran up debts to their socialist allies globally and were starved of income and the inputs their industry depends on? Ironically, but not surprisingly, they turned to the supposed evil capitalist country that Maduro blames for their economic misfortune. As global pressure mounts against Maduro and his government, we can only hope for the people of Venezuela that the country will truly turn away from the anti-capitalistic mentality that led them to this point. The true problem in Venezuela will not simply resolve with a bail out by the IMF or World Bank. There must be a resolution from within the Venezuelan people to turn away from socialism. As Mises so astutely observed, “The problem of rendering the underdeveloped nations more prosperous cannot be solved by material aid. It is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue.”

Troy Vincent is a 2011 graduate of Mises University and has a BS in economics and public policy from Indiana University. Since 2013 he has worked in energy economics for private sector research and consulting firms.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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