Venezuela under Hugo Chávez, 1

Venezuela under Hugo Chávez, 1999–2013

On March 5, 2013, Hugo Chávez, the president of Venezuela, died after losing a battle against cancer. Chávez had been president of Venezuela since 1999. A former military officer who was once jailed for engineering a failed coup attempt, Chávez was a self-styled democratic socialist who won the presidential election by campaigning against corruption, economic mismanagement, and the “harsh realities” of global capitalism. When he took office in February 1999, Chávez claimed he had inherited the worst economic situation in the country’s recent history. He wasn’t far off the mark. A collapse in the price of oil, which accounted for 70 percent of the country’s exports, left Venezuela with a large budget deficit and forced the economy into a deep recession.
Soon after taking office, Chávez worked to consolidate his hold over the apparatus of government. By 2012, Freedom House, which annually assesses political and civil liberties worldwide, concluded Venezuela was only “partly free” and that freedoms were being progressively curtailed.
On the economic front, things remained rough. The economy shrank in the early 2000s, while unemployment remained persistently high (at 15 to 17 percent) and the poverty rate rose to more than 50 percent of the population. A 2003 study by the World Bank concluded Venezuela was one of the most regulated economies in the world and that state controls over business activities gave public officials ample opportunities to enrich themselves by demanding bribes in return for permission to expand operations or enter new lines of business. Indeed, despite Chávez’s anticorruption rhetoric, Transparency International, which ranks the world’s nations according to the extent of public corruption, noted that corruption increased under Chávez. In 2012, Transparency International ranked Venezuela 165th out of 174 nations in terms of level of corruption. Consistent with his socialist rhetoric, Chávez progressively took various enterprises into state ownership and required that other enterprises be restructured as “workers’ cooperatives” in return for government loans. In addition, the government took over large rural farms and ranches that Chávez claimed were not sufficiently productive and turned them into state-owned cooperatives.
In mid-2000, the world oil market bailed Chávez out of mounting economic difficulties. Oil prices started to surge from the low $20s in 2003, reaching $150 a barrel by mid-2008. Venezuela, the world’s fifth-largest producer, reaped a bonanza. On the back of surging oil exports, the economy grew at a robust rate. Chávez used the oil revenues to boost government spending on social programs, many of them modeled after programs in Cuba. In 2006, he announced plans to reduce the stakes held by foreign companies in oil projects in the Orinoco regions and to give the state-run oil company a majority position.
Riding a wave of popularity at home, in December 2006 Chávez won reelection as president. He celebrated his victory by stepping on the revolutionary accelerator. Parliament gave him the power to legislate by decree for 18 months. In late 2010, Chávez yet again persuaded the National Assembly, where his supporters dominated, to once more grant him the power to rule by decree for another 18 months.
Notwithstanding his ability to consolidate political power, on the economic front Venezuela’s performance under Chávez was decidedly mixed. His main achievements were to reduce poverty, which fell from 50 percent to 28 percent by 2012, and to bring down unemployment from 14.5 percent at the start of his rule to 7.6 percent in February 2013. State-owned enterprises helped Chávez achieve both these goals.
However, despite strong global demand and massive reserves, oil production in Venezuela fell by a third between 2000 and 2012 as foreign oil companies exited the country. Inflation surged and was running at around 28 percent per annum between 2008 and 2012, one of the highest rates in the world. To compound matters, the budget deficit expanded to 17 percent of GDP in 2012 as the government spent heavily to support its social programs and various subsidies. (Most recently, Venezuela’s GDP has been shrinking every quarter since the beginning of 2014).

1. What do you think will happen if oil prices continue to stay below $100 a barrel?

2. What are the broader implications to the country’s economy, and its people, of having such a highly regulated economy for over 15 years?

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