Socialism, Not Oil, Is the Cause of Venezuela's Problems


Venezuela’s economy has collapsed. Unfortunately, most people mistakenly believe Venezuela’s policies created a successful economy prior to the collapse in oil prices. The truth is that Venezuela’s socialist policies held back its economy during the oil boom and are the direct cause of its economic collapse today.

Upon his death in 2013, and before the collapse in oil prices, Salon published an article titled “Hugo Chaves’s Economic Miracle” that praised the success of his brand of socialism. Salon was far from alone. Numerous left-leaning pundits and celebrities, and even some very influential economists, have held up Venezuela as a rare example of a successful socialist economy.

For example, in a 2007 speech sponsored by the Bank of Venezuela, Joseph Stiglitz – 2001 recipient of the Nobel Prize in Economic Sciences and former Senior Vice President and Chief Economist of the World Bank – claimed that “Venezuela’s economic growth has been very impressive.” However, a new academic study reveals that Venezuela’s economic performance during Chavez’s tenure as president was far from impressive.

Economists Kevin Grier and Norman Maynard use a sophisticated synthetic control methodology to compare how Venezuela performed under Chavez to how it should have been expected to perform based on similar oil producing and Latin American economies that did not also change to socialist economic policies. Rather than an economic success, they find a chronically underperforming economy.

After Chavez’s first five years, they find that Venezuela’s income per capita was more than $3,500 below what should have been expected. Even during the subsequent oil boom, its income per capita never closed to within $2,500 of its predicted value.

Grier and Maynard also find that Chavez’s socialist policies did not simply sacrifice economic growth in favor of redistributive policies that helped the poor. They find that neither poverty rates nor health outcomes improved more than they should have been expected to improve without the changes in policy. To the extent that inequality declined, they find that it largely occurred by reducing the income of the wealthy, rather than by increasing the income of the poor.

The global oil boom simply allowed Venezuela, which sits on the world’s largest proven oil reserves, to mask many of the harmful effects of Chavez’s socialist economic policies. Now that oil prices have collapsed, so has Venezuela’s economic performance.

The recent actions of the government’s “consumer protection agency,” Sundde, illustrate why the economy is collapsing. The agency dictated that retailers reduce the price of a range of goods by 30 percent in early December, despite the country’s recent experience with high inflation rates.

When the agency deemed that Kreisel, a toy distributor, had too high of a mark-up margin, officials seized nearly four million toys from the warehouse to redistribute to the poor. This action might have made some toys freely available this past Christmas but it also destroyed the incentive for any company to attempt to provide toys next holiday season.

Some will surely object that this example is trivial in light of the broader issues facing Venezuelans, but what happened to Kreisel has happened in many industries. The Venezuelan government fixes prices, while constantly inflating its currency, and then seizes products and jails producers, who try to maintain profitable production by charging market prices.

As a result, the production of everything has collapsed. I recently spent a week in Cucuta, on the Colombian-Venezuelan border and observed this collapse directly. Thousands of Venezuelans crossed the two bridges joining these countries on foot each day to buy essentials in Colombia that are unavailable in Venezuela.

I met a couple from Cuidad Bolivar, who had traveled for three days to get to the border. They had come to buy rice, medicines, car parts, and toiletries for their family. They have been making the journey approximately every three months. Their story was not uncommon.

There is no need for Venezuelans to be poor. In 1980, as measured in the Economic Freedom of the World Annual Report, Venezuela ranked the 14th freest economy in the world and it had one of the highest standards of living in Latin America. Then, as its economic freedom declined, so did its prosperity. After its embrace of socialism under Chavez, only the oil boom could delay its complete collapse.

Yet, there is reason for some optimism. In recent years, many countries in Latin America, including Argentina and Brazil, have moved away from populist and socialist policies and begun to embrace economic freedom. If Venezuela follows their lead, it could resuscitate its economy and eventually return to prosperity.

Benjamin Powell is a Senior Fellow at the Independent Institute, Director of the Free Market Institute at Texas Tech University. He Independent Institute books include The Economics of Immigration: Market-Based Approaches, Social Science, and Public Policy, Housing America: Building out of Crisis, and Making Poor Nations Rich.

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