Venezuela in Crisis

Authors: Danielle Renwick, and Brianna Lee
Updated: April 18, 2017

Carlos Garcia Rawlins/Reuters
Introduction

Venezuela is in the midst of an unprecedented economic and political crisis marked by severe food and medicine shortages, soaring crime rates, and an increasingly authoritarian executive. Critics of President Nicolas Maduro and his predecessor, Hugo Chavez, say Venezuela’s economic woes are fruit of years of economic mismanagement; Maduro’s supporters blame falling oil prices and the country’s “corrupt” business elites.

In January 2016, opposition lawmakers took a majority in the legislature—the National Assembly—for the first time in nearly two decades. However, the Maduro government has taken steps since to consolidate his power, including usurping some of the legislature’s powers. Maduro’s actions have been met with massive protests and international condemnation, including threats of expulsion from the Organization of American States.

Chavez’s ‘Bolivarian Revolution’

Chavez, a former military officer who launched an ill-fated coup in 1992, was elected president of Venezuela in 1998 on a populist platform. As a candidate, he railed against the country’s elites for widespread corruption, and pledged to use Venezuela’s vast oil wealth to reduce poverty and inequality. During his presidency, which lasted until his death in 2013, Chavez expropriated millions of acres of land and nationalized hundreds of private businesses and foreign-owned assets, including oil projects run by ExxonMobil and ConocoPhillips.

Chavez, whose rhetoric often drew inspiration from Simon Bolivar, the Venezuela-born revolutionary of the nineteenth century, aimed to align Latin American countries against the United States. He led the formation of ALBA, a bloc of socialist and leftist Latin American governments, and established the Petrocaribe alliance, in which Venezuela agreed to export petroleum at discounted rates to eighteen Central American and Caribbean states.

Chavez also greatly expanded the powers of the presidency. Shortly after he took office, voters approved a new constitution that allowed him to run for another term, removed one chamber of Congress, and reduced civilian control over the military. In 2004, two years after he was briefly removed from office in a coup, Chavez effectively took control of the Supreme Court by expanding its size and appointing twelve justices. In 2009, he led a successful referendum ending presidential term limits.

Chavez remained popular among the country’s poor throughout his presidency, expanding social services including food and housing subsidies, health care, and educational programs. The country’s poverty rate fell from roughly 50 percent in 1998, the year before he was elected, to 30 percent in 2012, the year before his death.

Maduro, who narrowly won the presidency in 2013, pledged to continue his former boss’s socialist revolution. “I am ensuring the legacy of my commander, Chavez, the eternal father,” he said after the vote.

An Oil-Based Economy

Venezuela is highly vulnerable to external shocks due to its heavy dependence on oil revenues. Oil accounts for about 95 percent of Venezuela's export earnings and 25 percent of its GDP, according to figures from the Organization of the Petroleum Exporting Countries (OPEC).

The state-run petroleum company, Petroleos de Venezuela, S.A. (PDVSA), controls all the country’s oil exploration, production, and exportation. Critics say PDVSA is grossly mismanaged and suffers from cronyism, a bloated payroll, underinvestment in infrastructure, and a lack of budgetary oversight.

 As global oil prices fell from $111 per barrel in 2014 to a low of $27 per barrel in 2016, Venezuela’s already shaky economy went into free fall. That year, GDP dropped 12 percent while inflation soared to 800 percent. By early 2017, the country owed $140 billion to foreign creditors while it held only $10 billion in reserves, raising fears of a default.

As global oil prices fell from $111 per barrel in 2014 to a low of $27 per barrel in 2016, Venezuela's already shaky economy went into free fall.

Many critics fault the Chavez government for squandering years of record oil income. “Chavez did not use the massive oil price boom between 2004 and 2013 to put money aside for a rainy day,” wrote Harvard University economist Ricardo Hausmann in 2016. Instead, he “used the boom to expropriate large swaths of the economy, impose draconian foreign currency and price controls, and to subsidize imports. All this weakened the economy and made the country more dependent on imports, which Venezuelans can no longer afford.”

Price Controls and Shortages

Venezuela’s economic crisis is marked by soaring inflation and shortages of food, medical supplies, and staples like toilet paper and soap. Experts say the government’s strict price controls, which were meant to keep basic goods affordable for the country’s poor, are partly to blame. Many manufacturers in the country cut production because of the limits on what they could charge for their goods.

Another policy contributing to the country’s economic problems, many experts say, are currency controls, which were first introduced by Chavez in 2003 to curb capital flight. By selling U.S. dollars at different rates, the government has effectively created a black market and increased opportunities for corruption. For instance, a business that is authorized to buy dollars at preferential rates in order to purchase priority goods like food or medicine could instead sell those dollars for a significant profit to third parties. In April 2017, the official exchange rate was ten bolivars to the dollar, while the black market rate was more than four thousand bolivars to the dollar.

Imports reportedly fell to $18 billion in 2016, down from $66 billion in 2012, as foreign-made goods became increasingly expensive. Many consumers are faced with the choice of waiting for hours in line for basic goods or paying exorbitant prices to so-called bachaqueros, or black market traffickers.

Experts say widespread expropriations have further diminished productivity. Transparency International, which ranks Venezuela 166 out of 176 on its perceived corruption index, reports that the government controls more than five hundred companies, most of which are operating at a loss. (By comparison, Brazil, which is more than six times as populous as Venezuela, has 130 state-run companies.)

A Humanitarian Crisis

Observers have characterized the situation in Venezuela as a humanitarian crisis. In 2016, the head of the Venezuelan Pharmaceutical Federation estimated that 85 percent of basic medicines were unavailable or difficult to obtain. Hospitals reportedly lack supplies like antibiotics, gauze, and soap. Infant mortality rates reportedly reached 18.1 per 1,000 live births in early 2016, up from 11.6 in 2011, while maternal mortality reached 130 per 100,000, more than twice the 2008 rate. Diseases like diphtheria and malaria, which had been previously eliminated from the country, have reemerged.

Poverty has also spiked. In 2016, a local university study found that more than 87 percent of the population said it did not have enough money to buy necessary food. Another study by a local nutrition organization found that 30 percent of school-aged children were malnourished. According to a 2016 report from Human Rights Watch, the Maduro administration “has vehemently denied the extent of the need for help and has blocked an effort by the opposition-led National Assembly to seek international assistance.”

Infant mortality rates reportedly reached 18.1 per 1,000 live births in early 2016, up from 11.6 in 2011.

Poverty and lack of opportunity are exacerbating Venezuela’s high rates of violence. Long one of the world's most violent countries, in 2016 Venezuela experienced its highest-ever number of homicides: 28,479, or roughly 91.8 homicides per 100,000 residents, according to the Venezuelan Violence Observatory, an independent monitoring group. (The U.S. rate, by comparison, is 5 per 100,000.) Maduro’s administration has deployed the military to combat street crime, but rights groups and foreign media have reported widespread abuses, including extrajudicial killings.

The humanitarian crisis has spilled across Venezuela’s borders, with thousands of desperate people crossing into neighboring Brazil and Colombia; others have left by boat to the nearby island of Curaçao. By some estimates, as many as 150,000 Venezuelans left the country in 2016 alone.

Political Turmoil

Amid the crisis, the Maduro administration has become increasingly autocratic. Opposition lawmakers, under the Democratic Unity Roundtable coalition, won a majority in the National Assembly in 2015 for the first time in sixteen years, but Maduro has taken several steps to undermine them. In September 2016, Venezuela’s electoral authority, which is considered loyal to Maduro, ordered the opposition to suspend a campaign to recall the president, sparking protests and international condemnation. The following month, the Supreme Court stripped the National Assembly of powers to oversee the economy and annulled a law that would have freed eighty political prisoners, including opposition leader Leopoldo Lopez. The president and the opposition subsequently entered into Vatican-brokered reconciliation talks, but those were declared “frozen” in November after Maduro administration officials stopped attending meetings. Maduro said he plans to stay in office until his term ends in 2019.

In March 2017, the judicial branch briefly dissolved the National Assembly. The court revised its order days later following an international outcry, but kept the legislature in contempt, effectively preventing lawmakers from passing laws. A week later the government barred opposition politician Henrique Capriles, who narrowly lost to Maduro in the 2013 presidential election, from running for office for fifteen years, citing Capriles’s failure to secure proper approval for budgets and contracts.

Government security forces have attacked journalists, and several foreign reporters have been detained and, in some cases, expelled, according to the Committee to Protect Journalists. In 2017, Freedom House rated Venezuela as “not free,” making it one of two countries in the Western Hemisphere, along with Cuba, with the democracy watchdog’s lowest ranking.

The Region Reacts

Mercosur, an economic and political bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela, suspended Venezuela in 2016. In March 2017, the secretary-general of the Organization of the American States (OAS), Luis Almagro, recommended suspending Venezuela from the bloc unless the Maduro administration moved quickly to hold elections. The last time OAS suspended a member country was 2009, when it did so to Honduras following a military coup.

U.S. policy under President Donald J. Trump appears to follow that of former President Barack Obama, writes CFR Adjunct Senior Fellow Matthew Taylor. In February 2017, the Trump administration imposed sanctions on Vice President Tareck El Aissami for his alleged involvement in international drug trafficking. Later that month Trump met with Lilian Tintori, the wife of Leopoldo Lopez, and called for his release. In April 2017, as protests continued in Caracas, the U.S. State Department issued a statement voicing concern over government actions against Capriles and demonstrators. Despite tensions between Washington and Caracas, the United States remains Venezuela’s largest trading partner.

Meanwhile, the Maduro administration retains the support of allies in Bolivia, Ecuador, and several Caribbean nations. China has lent Venezuela more than $60 billion since 2001, and is the South American country’s largest creditor. Meanwhile, Venezuela has sought significant ties with Russia. Before oil prices fell in 2014, Venezuela was set to become the largest importer of Russian military equipment by 2025. In February 2017, Russian Foreign Minister Sergey Lavrov reaffirmed Moscow’s support for the Maduro government, saying bilateral relations “are on the rise.”

Additional Resources

This New York Times piece looks at Venezuela’s health-care crisis.

This Bloomberg feature reports on Venezuela’s black market.

The Financial Times examines Venezuela’s epidemic of violence.

Michael Shifter, president of the Inter-American Dialogue, gives an overview of Venezuela’s crisis in Foreign Affairs.

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