Venezuela's crisis: Exploring some root causes

02 March 2015
Venezuela's failure to develop an effective strategy to reduce its economy's dependence on gas and oil threatens the social successes and future viability of the Bolivarian project.

This article is a compressed version of a longer paper which can be seen here:

This has been a time of dynamic grassroots organising and participation. Most of this has been the result of government policies aimed at promoting such processes. Venezuela had a major impact  on Latin America’s progressive shift to the left. This shift led to the setting up of various regional integration mechanisms – UNASUR, CELAC, Petrocaribe, ALBA – that have strengthened the region’s autonomy and lessened its dependence on the United States.

The significant progress achieved in social indicators is the consequence of a very important re-orientation in how oil proceeds are distributed, with clear priority being given to the needs and demands of low-income groups. This however means these policies are extraordinarily vulnerable to fluctuations in oil revenues – upon which dependence has risen in the past 15 years.

Such policies also generate growing expectations that can only be met if there is a continuing sustained rise in oil revenue. Moreover, while these social policies and successive wage rises have notably increased people’s purchasing power, this sustained increase in demand has not been accompanied by a proportionate increase in the domestic production of goods. The resulting gaps between supply and demand have to be filled by ever-increasing imports. 

Lack of debate on a post-capitalist model

These changes have been accompanied by remarkably little theoretical debate about what a post-capitalist society might look like in the 21st century and how relations between the state, the market and the rest of society could or should take shape.

In the absence of this, two proposals by the Venezuelan government have dominated the political discourse. The first is the automatic identification of socialism with statism (state ownership and/or state control).  As soon as any enterprise is brought under state ownership, it is immediately labelled a “socialist enterprise”.  Many of the industrial and agricultural enterprises brought under state control have since been managed less efficiently and their production levels have fallen – the result of excessive bureaucracy, corruption, continual labour disputes, lack of investment, and sales prices for products that are out of line with production costs. Consequently, many of these enterprises are operating at a loss and only survive thanks to injections of funds from oil revenues.

The second tendency by the Bolivarian government has been to identify post-capitalism with the communal state .This notion of the communal state exists more in political debate and as a way of promoting a wide range of arrangements for grassroots political organising rather than as an actual process of transition towards decentralised ways of organising production, or as part of a processes of self-government for society’s grassroots. Government policies to encourage and finance various types of grassroots organisations, especially the Communal Councils and Communes, have generated contradictory consequences in these organisational processes. 

On the one hand they have promoted levels of popular organising unknown in the country’s history and transferred huge funds to communities to enable them address their problems – roads, housing, productive activities etc – and strengthen their social fabric. Many grassroots experiences have managed to take advantage of these organisational and financial boosts. Above all, they have been nourished by the politicisation and activism that has cut across Venezuelan society over these years, and, in many cases made it possible to carry out extraordinarily rich and autonomous community processes.

But on the other hand, as a result of the reaffirmation of the rentier petro-economy, grassroots organisations tend to depend directly on transfers of state funds. Thus, possibilities for grassroots community arrangements to become an alternative to state structures have been blocked.

An oil economy

Venezuela has the largest reserves of oil in the world and major plans to expand the oil industry have been repeatedly announced in recent years. To achieve this, the government has encouraged a large-scale involvement of international corporations, both public and private, with Chinese companies having a major presence. Venezuela has also negotiated large loans (once again especially from China), which are used both to maintain current spending and to fund infrastructure and expansion projects for the oil industry.

The  Plan de la Patria,  originally presented by Hugo Chávez in the 2012 election and formally approved by the National Assembly as the present government’s programme, has – as one of its five main goals – the transformation of Venezuela into a great energy power and double oil production to reach six million barrels per day by 2019. Fortunately for the planet, however, and despite huge investments, oil production today is somewhat lower than it was in 1998.

One of the most serious problems confronting the Venezuelan economy is the ongoing historical over-valuation of the currency and so-called Dutch disease. Imports account for such a large share of the economy that if the currency were to be devalued to a more reasonable level, it would inevitably cause an even greater surge in inflation. Consequently, apart from oil, practically everything is cheaper to import than to produce in Venezuela. This has generated serious consequences and distortions. The current situation of four different exchange rates is both unmanageable and unsustainable.

Firstly, it undermines efforts to promote domestic production, whether in the public, private or social economy. It also implies a permanent and unsustainable flow of highly subsidised foreign currency to pay for imports of food and other basic consumer goods, intermediate inputs and supplies, as well as luxury items. Successive bureaucratic-administrative mechanisms created to control the use of subsidised foreign exchange have led to severe bottlenecks in imports, with a significant impact on prices and the availability of products as well as massive levels of corruption.

Generous social policies, food subsidies and intensive food imports by the state, the massive gasoline subsidy, the transfers of funds to public enterprises that in some cases do not produce enough even to cover their own staff payroll costs, and the sustained increase in public sector employment, together with the oil industry’s investment requirements, all imply a constant and ever-growing pressure on public expenditure and increasing demands of foreign currency.

Growing discontent among large sectors of the population

There are various reasons why growing levels of discontent have been brewing among large sectors of the population, especially opposition supporters. Inflation has eroded purchasing power and has reversed some of the gains in consumption capacity achieved over this time. The widespread scarcity of everyday consumer goods requires people to devote many hours to searching and queuing for these items. Added to this are the constant concerns about safety. According to the United Nations Office on Drugs and Crime, the murder rate in Venezuela in 2012 was 53.7 per 100,000 inhabitants, the second highest rate in the world after Honduras.

This economic and social situation coincides with a set of new conditions in the political arena. During its time, Chavismo proved incapable of expanding its support base. On the contrary, it has gradually been losing it, thanks in part to policies and discourses that have prioritised political-ideological confrontation and exclusion (“non-socialists not welcome here”) over dialogue and inclusion. Those in government have frequently denounced the entire opposition as coup-fomenting fascists. This friend-or-enemy polarisation was very useful to Chavismo in the early years as it enabled it to mobilise the grassroots and create and consolidate a solid, committed support base: a Chavista popular identity.

However, it has also contributed to the formation and consolidation of a solid block of opposition, not just to the government but to the very idea of socialism. The project for change has been unable to build bridges with other sectors of society that can in no way be considered oligarchs or fascists. It is difficult for a profound process of societal change to move ahead and become consolidated if half of society – going by election results – does not only fail to identify with that project for change but strongly disagrees with it and, for whatever reason, fears it deeply. 

In early 2014, anti-government demonstrations resulted in two months of street barricades, marches both peaceful and armed, and violent clashes with the police and the army. Forty one people died, many were wounded and hundreds were arrested, while the material damage will cost millions. The dead and wounded included opposition activists, members of the security forces, and citizens who had nothing to do with the clashes. It is difficult to determine who is responsible with any degree of accuracy.

A society divided

Venezuela today is a society divided between those who identify with the government versus those who identify with the opposition. Their sources of information are different. They meet and form their opinions with people who think the same as they do. This creates profound differences in the interpretation of events. 

President Maduro lacks the leadership abilities that allowed Chávez to forge unity even when the former President proposed policies that provoked resistance among his followers. And despite having defeated opposition protests, the government came out of it weakened. At the same time, the opposition itself seems to have little ability to provide an outlet for the public’s widespread dissatisfaction with the situation in the country. Venezuela has a trustworthy electoral system that is not only fully computerised but also has multiple auditing mechanisms. Together with the government’s successive election victories, this helped to ensure that in the past it had sufficient international legitimacy to protect it from the US government’s aggressive destabilisation policies. As a result of frequent arbitrary uses of power and its elastic interpretation of the constitution, however, the government has now lost part of that international legitimacy. It has also strengthened the hand of those who argue that the current institutional structures do not allow for change through elections.

No more resources to buffer against crises

In these circumstances, the global corporate media have ramped up their offensive. The government lacks both the political and the economic resources that enabled it in the past to respond to critical situations by launching new programmes or missions with a high social impact.

The absence of Hugo Chávez has left the government and his party suffering from serious internal tensions, without a leadership strong enough to unite the different factions behind a common purpose.  There is much discontent among the chavista grassroots. The economic crisis has worsened. In 2013-2014, the policy of increasing public spending based on oil rents has entered into crisis due to a fiscal deficit that is difficult to determine from the official figures but some analysts estimate at around 15% of GDP. International reserves have been shrinking steadily, and by mid-2014 had fallen to US$21.6 billion, less than half what they were in mid-2008.

The country’s external debt practically doubled between 2008 and 2013. Loans obtained from China alone total US$50.6 billion, much of which will be paid back in the form of oil. Conditions for the country to obtain foreign loans are increasingly unfavourable and carry ever higher interest rates. Given the large and sustained inflow of foreign exchange from oil exports, it is unlikely that Venezuela will get to the point where it suspends payment to its creditors in the short run, but as oil prices have collapsed from more than US$100 a barrel to less than US$40  between mid 2014 and the beginning of 2015 the country’s financial situation has become extremely critical.

The very high rate of inflation in 2013 (56.2%) did not slow in 2014; on the contrary, it rose, with a year-on-year increase in consumer prices between August 2013 and August 2014 of 63.4%. The increase in food prices was even higher.  The scarcity of foreign exchange and bureaucratic obstacles and delays involved in obtaining it, the slowness in paying foreign suppliers, cross-border contraband, the selling of price-controlled products that have disappeared from supermarkets at much higher prices in the informal economy, hoarding and speculation all combined to create a situation of constant shortages of food and other staple consumer goods, personal hygiene products, household goods and medicines. Everyday life is made more and more difficult. The shortage of medicines and medical supplies threatens to cause a public health crisis.  Public services have deteriorated.

Faced with this situation, the government is responding to what it sees as the components of an economic war (speculation, hoarding, cross-border contraband): it is introducing new rules for people to apply for foreign exchange, imposing more controls such as inspecting warehouses and vehicles transporting merchandise, and closing the border with Colombia. It is also introducing a fingerprinting scheme to prevent individuals from buying more than a set amount of subsidised products per week and thus prevent these goods from being sold on by speculators or smuggled across the border. Not on the horizon, however, are concrete policies aimed at increasing production and removing the multiple bottlenecks that hamper it. Clearly, corrective measures need to be taken to respond to the growing economic difficulties the country is facing. These measures do not have to follow the structural adjustment prescriptions of the Washington Consensus. Even so, until policies of a structural nature are defined, it seems essential to take some macroeconomic decisions in the short term.

These would include adjusting currency values to stem the haemorrhaging of foreign exchange, restricting the money supply and taking action on gasoline prices. 2014 was probably a particularly favourable year for implementing certain measures considered necessary despite their potentially high political cost at the ballot box. In a country that has had elections or referendums practically every year, the unusually long pause of two years between the 2013 parliamentary election and the municipal elections in 2015 brought a respite from electoral pressure. Nevertheless, the government seems paralysed. It does not even dare to act on the gasoline price, which at 2 US cents per litre,  is considered absurd by much of the population. If policies to move toward a post-oil, post-rentier state social and productive model were not introduced at times of financial prosperity and broad political legitimacy, it will be even more difficult to put them forward in current circumstances.  In the midst of this crisis, President Nicolás Maduro announced a major shake-up of his government to move forward with the expressed goal of overcoming the bourgeois state and to replace top level government officials to launch a new stage in the Bolivarian project.

When the actual reshuffle was finally announced at the start of September 2014, little had actually changed. A new organisational diagram was created which basically regrouped the same ministries as before under the coordination of six new vice-presidents (Productive Economy and Finance; Food Security and Sovereignty; Planning and Knowledge; Social Development and Missions; Political Sovereignty; and Territorial Socialism and Ecosocialism). Nearly all the ministers stayed in their posts or were moved to head other ministries. The most problematic move was the elimination of the Environment Ministry (the first in Latin America), whose portfolio now forms part of the Ministry of Housing, Habitat and Ecosocialism. 

At the beginning of 2015 President Maduro travelled to China, Russia, Saudi Arabia, Algeria, etc., with the dual purpose of asking for more financial backing (basically from China), and to try to convince  members of OPEC to reduce production in order to recover oil prices.  He does not seem to have been particularly successful. China has offered new investments, but, apparently, no new major credit lines. Saudi Arabia announce in very clear terms that in order to protect its market share, it was determined to let prices down as low as necessary to price out competing sources of oil and gas such as fracking in the United States and others that require high prices in order to be profitable.

Beyond the rentier state, beyond capitalism

The emergence and global primacy of industrial capitalism was based on access to cheap and widely accessible fossil fuels. For the last two and a half centuries, industrial capitalism has managed to turn the immense deposits of these fossil fuels – laid down over millions of years – into the energy that enabled both spectacular economic growth and the rapid destruction of the conditions that make life on this planet possible.

Nobody is suggesting that the shift to a post-oil society means that all the oil wells can be shut down from one day to the next. Nevertheless, there is an urgent need to take steps and define the route for this essential transition. This imperative is absent from the public policies of practically every government in the world – nowhere less so than in Venezuela. Most of the main objectives for transforming society that have been formulated in the Bolivarian project, in the text of the constitution and in policy papers and proposals, culminating in the  Plan de la Patria, cannot be fulfilled by reaffirming the production model that depends solely on oil.

This political process is riddled with deep contradictions between its main stated objectives on the one side, and the systematic reinforcement of the colonial logic of development and the rentier petro-state on the other. The government’s stated objectives to transform society include  participatory democracy and the  communal state;  national sovereignty;  food sovereignty;  pluriculturalism and the  recognition of the constitutional rights of indigenous peoples ; and the fifth objective of the  Plan de la Patria , “help to preserve life on the planet and save the human species.” These objectives not only clash but are structurally incompatible with a petro-state and a predatory extractivist economy whose revenues are moreover highly concentrated in the hands of the executive. 

A fuller realisation of grassroots participatory democracy and communal self- government is constrained in this oil-centred economy by the fact that communities lack a productive base of their own and permanently depend on the top-down transfers of funds and policy guidelines from the executive and the governing party. Without autonomy, both in relation to the state and in relation to the market, it is not possible to build a genuine participatory democracy. No matter how much grassroots organising and participation is promoted, we cannot speak of people power democracy if the main decisions about the country’s direction are taken at the apex of the highly centralised political, bureaucratic and official structures that characterise the Venezuelan petro-state. 

2015 will be a critical year for the future of Venezuela. Parliamentary elections will be held most likely towards the end of the year. Current opinion polls show that government support is at its lowest level since Chávez was elected president in 1998, so its quite possible that the opposition might win this elections and thus have a majority in the National Assembly, which, among other things, would imply their control over the national budget. Forestalling that will require the government to make some brave short-term and long-term strategic decisions that truly address the curse of the rentier petro-state.


Read the full paper

Photo by Jumanji Solar