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Tuesday, August 11, 2020

Columns

Venezuela’s economy doesn’t show signs of improving


Venezuela is an interesting country in an economic sense. It is socialist, South American, and the most oil-reliant nation in the world.

Venezuela began socialist rule under Hugo Chavez in the late 90s, and despite a brief coup in 2002, the socialist party remains in power. Though the walls are closing in on the regime with collapsing oil and hyperinflation, the Maduro regime, which took power after Chavez died, continues to dig in.

Throughout the Venezuelan economic crisis, people are asking: Will Venezuela liberalize?

Based on an empirical analysis of other oil dependent nations, Venezuela will not liberalize their economy in response to the oil collapse. Why?

President Nicolas Maduro refused attempts at a recall.

The oil crisis peaked in January 2016, meaning the government maintaining up to this point makes reform extraordinarily unlikely.

Thirdly, oil will stabilize in the years preceding Venezuela’s 2018 presidential election, which will re-legitimize Maduro’s regime, making the socialists in Venezuela relatively competitive.

The Venezuelan government’s approval and legitimacy is largely based in oil. Oil wealth allows governments to offer large amounts of public spending, bolstering the regime’s popular support. But this also puts government revenue at the mercy of market forces.

The Venezuelan government’s decline in approval began after two events: Chavez dying, which granted power to the Maduro regime, and the beginnings of the oil crisis.

The bottom fell out as August 2016 corresponded to a nine-month low of 21.2 percent support. When Chavez died in 2012, oil was high, and his approval rating remained at 57 percent.

The combination of oil-dependency and a command economy creates a particularly volatile situation. Venezuelans are uniquely justified in pointing fingers at their government because it is much more responsible for their individual well-being than in other, more capitalist nations like the United States or Hong Kong.

There is no doubt that the Venezuelan government has the ability to reform if it so chooses, especially considering Maduro’s regime was granted the power to rule by decree in order to tackle Venezuela’s inflation problem.

Maduro continues to rule this way by continually extending his decree and mandate. Maduro’s rule allows him to unilaterally take over entire industries in order to, in the government’s mind, stabilize output — something he characterizes as an “economic offensive.”

Therefore, if Maduro saw fit to change the economy in a fundamental way, he could make this change happen. However, even as Venezuela’s inflation rate tops continues to increase, the Maduro regime continues to dig in.

Maduro attempted slight economic reform at the peak of the oil collapse. In February 2016, the Maduro government increased the cost of one gallon of fuel for the first time in decades from one penny to about 60 cents in USD. While the fuel remained “the cheapest in world,” the hike amounted to a 6000 percent increase.

This, of course, caused widespread protest. A core requisite for policy success is timing. Though the Venezuelan government chose the best possible time for the policy change (the peak of the oil collapse) they did two things wrong: First, the government increased the price plainly, rather than by easing the subsidy. Second, the increase in price was not incremental, meaning the people had almost no time to adjust to new pricing conditions.  

To change the economy, there must be regime change. But after over fifteen years of socialist domination in Venezuela, nearly every office from the supreme court to the local municipal councils is packed disproportionately with socialist representatives.

These offices include the electoral council, which denied petitions for a recall over the suspension of fraud in several states. So, an election is unlikely to create reform.

Nonetheless, Maduro remains deeply unpopular, so conventional wisdom says that he will simply be ousted in democratic fashion on the ballot in April 2018. However, most analysts agree that oil prices will increase, but there is large disagreement about the degree of increase, with some analysts projecting oil at $80 per barrel and some projecting as low as $60 per barrel by the beginning of 2018.

This projection was based on analysis before OPEC agreed to a sweeping production cut. This will only bolster the oil price increase more. An oil cut in a market with excess demand allows for an inflated oil price immediately following the production cut, beginning in early 2017, which would eventually settle at a higher-than-current price. The increase in demand and price could stabilize government revenues and lead to a more popular government.

The probability of more liberal economic reform in Venezuela, even based in this theoretical framework, is certainly not zero.

However, based on the regime’s resilience in even the most dire economic times coupled with the people’s individual dependence on oil make reform relatively unlikely — especially in comparison to nations like Saudi Arabia, which went through a regime change, or Indonesia and Malaysia, which are less dependent on oil.

Columnist Cameron Barrett is an economics senior and can be reached at [email protected]

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