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Commentary By Daniel Di Martino

How Socialism Destroyed Venezuela

Economics, Economics, Energy, Economics Tax & Budget, Regulatory Policy

Many in the media have blamed Venezuela’s worsening humanitarian crisis on corruption, mismanagement, falling oil prices, or U.S sanctions—anything but the rise of socialism in what was once the wealthiest country in South America.

Yet corruption and mismanagement were the direct result of increased government control of the economy—socialism—and in reality, lower oil prices and U.S. sanctions have little to do with the crisis. Instead, the mass starvation and exodus faced by Venezuelans are the natural consequence of the socialist policies implemented by dictators Hugo Chavez and Nicolas Maduro.

There are three main policies implemented by Chavez since 1999 that produced the current crisis: Widespread nationalization of private industry, currency and price controls, and the fiscally irresponsible expansion of welfare programs.

One of Chavez’s first actions was to start nationalizing the agriculture sector, supposedly reducing poverty and inequality by taking from rich landowners to give to poor workers. From 1999 to 2016, his regime robbed more than 6 million hectares of land from its rightful owners.

Nationalization destroyed production in affected industries because no government has the capacity to run thousands of businesses or the profit motive to run them efficiently. Instead, government officials face incentives to please voters by selling products at low prices and hiring more employees than necessary, even when that’s the wrong industry decision.

“Socialism run rampant—not cronyism, corruption, falling oil prices, or U.S. sanctions—caused the crisis in Venezuela.”

As economic theory predicted, as state control of the agricultural industry increased, Venezuela’s food production fell 75% in two decades while the country’s population increased by 33%. This was a recipe for shortages and economic disaster. After agriculture, the regime nationalized electricity, water, oil, banks, supermarkets, construction, and other crucial sectors. And in all these sectors, the government increased payrolls and gave away products at low cost, resulting in days-long countrywide blackouts, frequent water service interruptions, falling oil production, and bankrupt government enterprises.

Yet taking over the most important sectors of the economy was not enough for the socialist regime. In 2003, Chavez implemented a foreign currency control scheme where the government set an overvalued exchange rate between the Venezuelan currency and the U.S. dollar.

One goal of the scheme was to reduce inflation by overvaluing the currency, subsidizing imported products. But the currency control meant the regime had to ration available U.S. dollars to importers since, at an overvalued (cheap) exchange rate, there was more demand for U.S. dollars than supply. Naturally, a black market for foreign currency emerged and corrupt regime members and lucky individuals assigned cheap U.S. dollars obtained large profits. Even worse, the scheme actually increased inflation since overvaluing the currency reduced government oil revenues in Venezuelan currency, leading the regime to print money to cover the ensuing budget deficit.

The socialist regime also implemented price ceilings on hundreds of basic products such as beef, milk and toilet paper. At artificially low prices, more people were willing to buy these products but the few private factories left—not nationalized—could not profit at the government-capped price, so they reduced or halted their production. Instead of benefiting the poor, price ceilings predictably resulted in shortages that forced them to stand in lines for hours, while supermarket employees and the well-connected obtained the products they needed.

But perhaps the most harmful part of the Venezuelan socialist project is the part that the international media and leftist figures used to praise most frequently: welfare programs. The socialist regime created social “missions” aimed at tackling poverty, illiteracy, healthcare, and more. But despite enjoying higher government oil revenues due to a tenfold rise in oil prices from $10 a barrel in 1999 to more than $100 in 2008, the regime financed a growing deficit by printing more currency. Expansive welfare programs and massive public-works projects provided ever-growing opportunities for still greater corruption. Printing money to pay for endless state programs unsurprisingly led to high rates of inflation.

In this way, socialism run rampant—not cronyism, corruption, falling oil prices, or U.S. sanctions—caused the crisis in Venezuela. Welfare programs that were supposed to help the poor actually increased the cost of living. A foreign currency control that aimed to reduce inflation only increased it and allowed for massive corruption. And nationalizations that should have given “power” to workers only left them unemployed and hungry.

Corrupt regimes can certainly cause many problems, but without socialism, hyperinflation and widespread shortages are not usually among them. Moreover, even at today’s lower oil prices, Venezuelan oil sells for two to three times as much as in 1999 adjusting for inflation. And the only U.S. sanction with some chance of affecting regular Venezuelans, the ban on oil imports, has not been in effect for even two months while inflation and shortages have plagued the country for years.

So do not make excuses. As Venezuelans have learned over the past 20 years of socialism, “free things” come at a high price.

Daniel Di Martino (@DanielDiMartino) is a Young Voices contributor and Venezuelan expatriate studying economics in Indianapolis, Indiana.

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