The devastating Venezuelan crisis
Emeritus Editor-In-Chief note
Surgical Neurology International (SNI) received this paper from A. Venezuelan who left Venezuela and now lives in South America. The person was recommended to SNI as highly reliable. The person is nameless to SNI. The text has been checked as factual. Miguel A. Faria, MD has described this article as “better than I have read in the American and international media, including the BBC.”
This Editorial is followed by comments made by Miguel A. Faria, M.D., an SNI Associate Editor- in-Chief in socioeconomics, politics, medicine, and world affairs of SNI. He is the author of Cuba in Revolution: Escape from a Lost Paradise (2002). His upcoming book is America, Guns, and Freedom: A Journey into Politics and the Public Health and Gun Control Movements (2019). His website is https://haciendapublishing.com. Dr. Faria escaped from Cuba in the 1960s in its transition to a Castro controlled Communist country. He was educated as a neurosurgeon in the USA and has been the Editor of two American medical journals.
Without having gone through a war or a natural catastrophe, Venezuela suffers a grave humanitarian crisis and the worst economic performance in the world, perhaps one of the most serious in recent times. It comes from bad politics, bad policy, and corruption. Chávez and Maduro managed $1 trillion in oil revenues over two decades, and the country is in shambles.
Venezuela’s crisis is political, economic, and social. It worsens at a dizzying speed and threatens to drag the country into a failed state chaos. Bold reforms are needed to steer the country out of its morass. Citizens must be empowered through education and jobs instead of being kept subservient to government handouts. The government’s footprint in the economy must shrink, and the administration must focus on essential public goods: health care, education, security, and infrastructure. The country must open the doors to private investment with clear rules and legal protection, and embrace modernity instead of trying to live off its hydrocarbon resources with a short-term vision. Reforms can succeed, if implemented by new leadership with stable political standing, conviction, and strong international support.
Under Chávez, elected president in 1998, Venezuela came to experience one of the worst cases of Dutch disease in the world. (“Dutch disease is the rapid increase in the production of raw materials [like oil and gas] causing a decline in other sectors of the economy. When the raw materials run out [or are not produced-EEd], the economy can be in a worse position than before. T. Pittenger “Dutch Disease;” economicshelp.org; November 15, 2017) other countries in the world have undergone Dutch disease in the past.
The current crisis is rooted in Venezuela’s society’s effort to maintain its way of life with a short-term vision of easy money. Venezuelans gave all the power to one man, Hugo Chávez, who generated the illusion of prosperity through short-sighted populism and sank the country into communism and lawlessness by abolishing property rights and the rule of law, by expanding the government’s footprint in the economy, by over-regulating whatever is left of a private sector, by destroying all institutions that are key to a civilized society, and by allowing corruption to contaminate all government’s functions. It is also the story of the rise and decline of a revolution that went from being applauded by many in the world to becoming an illegitimate dictatorship.
Some analysts find a parallel between Venezuela’s bankruptcy today and the Spanish bankruptcy of the 16th century. Spain wasted the gold and silver brought from the Americas on an unsuccessful imperial policy, on droves of entitled noblemen, and on the importation of manufactured goods. Venezuelan petrodollars were spent similarly.
AN OIL STORY
Venezuela has a century-long oil history and the largest oil reserves in the world: 360 billion barrels. Saudi Arabia is the second with 270 billion barrels. An unprecedented bonanza due to high oil prices in 2004-2008 brought a windfall of $300 billion to the country. The money was spent on consumption and on building international support for the “Bolivarian Revolution” instead of investing in health, education, infrastructure and modernization, and saving for future generations. After the oil price boom, Venezuela emerged more vulnerable to the ups and downs of oil.
Hugo Chávez died in early 2013 and his anointed heir, Nicolás Maduro, took office. The collapse of oil prices in 2014 shed light on the weaknesses of an economy where private investment had been systematically destroyed. Maduro’s political footing eroded as living standards lavishly subsidized for over a decade turned into hardship. He chose the road to overt authoritarianism instead of seeking to restore the basics of an open society and a prosperous economy: the rule of law, property rights, transparency, prudent fiscal and monetary policy, and essential public goods such as education, health, housing, transportation, and infrastructure.
Short-termism and ignorance killed the golden goose. Oil production fell from 3 million barrels a day in 1998 – 1.5 million in 2017 and continues plunging. It may close at 600,000 barrels a day by year-end. The depression in Venezuela has lasted for 5 years, its gross domestic product loss exceeds 50%, and the end is not yet in sight. In the Great Depression, the U.S. economy shrank by 30% and lasted only 3 years. Intense hyperinflation has impoverished Venezuelan society since 2018: the annual inflation rate heads toward 500,000% this year. In the past 20 years, 60% of the companies that existed in 1999 closed. The minimum wage is $3/month, 90% of the population is poor, and 15% of children are at risk of dying from malnutrition.
About 85% of medicines are scarce or utterly unavailable, while the number of people at risk rises. The vulnerable population includes over 140,000 cancer patients, 300,000 with cardiological diseases, 300,000 chronic patients (i.e., Parkinson’s and hemophilia), and 79,000 people with HIV, who stopped receiving treatment since 2016 or receive it intermittently. More than one million cases of malaria were reported in 2018, a disease eradicated in Venezuela in the 1940s. The shortage of medicines stems from foreign exchange controls and corruption, and $6 billion owed by the government to pharmaceutical companies. Quality control rules on medicines also eroded over time, allowing poor quality medicines to enter the country. The lack of food makes things worse.
Venezuela suffers one of the worst peacetime migratory crises known in modern times, with 3 million migrants around the world according to the United Nations High Commissioner for Refugees and the World Organization for Migration. Many have left on foot to neighboring countries, where they live in shelters or on the streets. This figure is in the ranks of Afghanistan (2.5 million refugees), Syria (6 million), and Colombia (almost 7 million internally displaced persons).
The most recent electricity crisis is another example of the failure of central control. The national electricity system collapsed on March 7, 2019, after 15 years of mismanagement, underinvestment, and corruption. Successive nationwide blackouts began on March 7 and left the country without electricity, water, functioning hospitals, public transportation, and communications critical for payment system operations. The government officially began to ration electricity a month later, limiting service everywhere except Caracas, the capital, where it fears social unrest. Power outages are frequent and unpredictable, suggesting that the system is incapable of generating and distributing enough power to meet even post-rationing needs. The “new normal” implies electricity with interruptions, irregular supply of water, partial and unstable connectivity, lack of perishable food, reduced working hours, schools and businesses closed on and off by government decree, and a worsening health crisis.
WHAT WENT WRONG?
Venezuela was the second largest oil producer in the world until 1960 when the Soviet Union displaced it, and the first world exporter until the early 1970s, when Saudi Arabia occupied that place. In the 1950s and 1960s, Venezuela was one of the 20 wealthiest countries in the world measured in per capita income. The state provided cheap loans, subsidies, numerous jobs, and free public services, and made sure that an overvalued currency made imported goods accessible. Everyone got a little of what they wanted. Venezuela became a society of rent seekers living in an ideal world with lots of oil rent distributed by the government, making politicians powerful.
Democracy was instituted in 1958 when Marcos Pérez Jiménez (a military dictatorship) was ousted. A broad social consensus helped fight right-wing military coups and secure a fast victory over leftist guerrillas. People felt well despite inequality (the top 20% captured 80% of the income) and 90% of the voters supported the two-party system that allowed 70% of Venezuelans to be broadly considered middle class.
Prudent fiscal and monetary policies prevalent in the first half of the 20th century gradually gave way to macroeconomic populism. The outcomes left people unhappy and distrustful. The decline of rent-seeking capitalism in the 1980s was traumatic. Incomplete market reforms in the 1990s failed for lack of popular support. The people did not understand that it was impossible to get back the bonanza of the old days. A military organization, the Bolivarian Movement 200 created by a group of military officers in 1983, decided to strike a blow and launched two military coups in 1992. They failed to gain access to power, but Hugo Chávez, one of its most visible leaders, won considerable support.
Chávez won elections in 1998 offering the typical program of a reformist nationalist military. In a carefully planned sequence, between 1999 and 2006 he changed the constitution, reformed institutions, and got full control of the government and the media. He displaced the old political class and replaced a watered-down version of “neoliberalism” with controls and multiple forms of state interventionism.
Initially, Chavismo was an alliance of left- and right-wing politicians and intellectuals who shared “anti-system” views since 1958, shunned neo-liberalism and, to varying degrees, opposed representative democracy. The Chavista alliance quickly moved to the left. The Cuba-Venezuela agreement was forged in 2000. A close friendship between Chávez and Fidel Castro led to the arrival of thousands of Cuban advisors who took over strategic government functions and ended up providing critical intelligence support to the government. In 2001, Chávez was granted special powers to legislate by decree. The land and oil reforms he enacted heralded problems. The economy was far from improving, and people felt disappointed. In late 2002, Chávez’s popularity had fallen to <30%. Two things came to his aid: the failed 2002 coup against him, and the boom in oil prices that began in 2004. He rebuilt his political footing as an “invincible hero.”
In early 2003, Chávez took control of PDVSA, the national oil company, after firing 20,000 of its highly skilled managers and workers. PDVSA morphed from being a professionally- run oil company to becoming the source of petty cash for the government. He purged the Army and turned it into another of his supporting pillars, and also sought to build up his international standing as a righteous revolutionary that successfully confronted conservative elites, a partial truth. In any case, the old system died in 2002 when many of its key players were defeated including the two traditional parties, the trade unions linked to them, oil industry managers, and businesspeople who, until then, had shared power in a consensus-based oil rent distribution mechanism.
Then came another oil boom. Oil prices rose steadily to over $100 a barrel in mid-2008 from the low $20s in 2001- 2003. Venezuelan oil exports added $300 billion to the government’s coffers in 2004-2008. The world financial crisis brought prices down precipitously in the second half of 2008 and caught Venezuela unprepared.
Nevertheless, the oil windfall had boosted Chávez’s standing. Along with higher revenues came a surge in public spending, with multiple subsidies and welfare policies known as “missions.” These were programs to massify access to education and health, subsidized food, free housing and direct aid in money, seeking to take Venezuela to “zero poverty” in 2021. Strict foreign exchange control was put in place in 2003 for political reasons: it allowed the government to rein in the private sector which was (and is) dependent on foreign currency generated by oil – private exports that have traditionally been minimal. The Bolivar was artificially overvalued, to allow for cheap imports.
The government showed encouraging results to the world: the poorest doubled their consumption capacity, poverty dropped from 70% in 1999 to 30% in 2013, and the United Nations Development Program noted that the human development index had risen to 0.764, ranking Venezuela in 67th place out of 187 countries. It was Chavismo’s golden age.
Venezuela sought to become a regional power by helping left- wing governments rise in many Latin American countries and by providing them strong financial support to stay in power. The goal was to create an alternative axis to the United States. The Bolivarian Alliance for the Peoples of Our America was born in 2004 and Petrocaribe, a scheme geared to subsidize imports of Venezuelan oil for other countries was begun in 2005. Petrodollar diplomacy secured for Chávez (and more recently, Maduro) the votes needed to survive challenges in the international forums. Billions of dollars went to fulfill this goal. According to some calculations, facilities granted to Petrocaribe countries cost Venezuela $50 billion between 2000 and 2017.
In 2007, Venezuela officially became a “socialist state.” The government began by purchasing companies privatized in the early 1990s such as the National Telephone Company (Cantv) in 2007, the Orinoco Steel Company (Sidor) in 2008, and Banco de Venezuela, the largest commercial bank in the country in 2009. Subsequently, the government moved to expropriate property without compensation, as attested by billions of dollars in lawsuits filed at the International Center for Settlement of Investment Disputes (ICSID) attest. In large farms, the process began earlier by fostering, or at least tolerating, invasions of these farmlands by peasants.
About 1000 companies were nationalized between 2005 and 2017. The plan was to put all the fundamentals of the economy in the hands of the government, leaving a small space for the private sector. Companies became subject to rigorous controls on prices, and their access to foreign currency, extending even to their ability to choose to whom to sell. Companies were often forced to sell at a loss and also to sell at least half of their production to the government.
Non-oil output fell, while oil output was also trending down. Rice production fell to 405,000 tons in 2017 from 900,000 in 2007; corn production went down to 1 million tons in 2017 from 2.4 million in 2007, and sugarcane, dropped to 3.5 million tons in 2017 from 8 million in 2006. From 170,000 vehicles produced in 2007, the automotive industry production dropped to only 2768 in 2017. Liquid steel manufacture went from 4 million tons in 2008 to 270,000 in 2017, and aluminum went from 600,000 tons in 2007 to 400,000 10 years later. No sector escaped the destruction.
While oil prices were high, massive imports masked the effect of declining production of local goods. When oil exports began to shrink, imports fell, and shortages soared. By 2017, imports were already at a quarter of their peak 2012 level, when Chávez was campaigning for reelection. Rationing became a fact of everyday life. Black market flourished.
THE ROAD TO OUTRIGHT DICTATORSHIP
Personalism in leadership and corruption drove many Venezuelans away from Chávez. The poor results of “socialism” with low oil revenues drove away more. The political erosion of chavismo without both petrodollars and Chávez became evident. Nicolás Maduro, Chávez’s political heir, has managed to hold on to power thanks to the support of the military and, increasingly, of paramilitary groups serving as his “Republican Guard.”
Maduro called elections for a National Constituent Assembly in 2017 without abiding by the constitution. Those elections were not recognized as legitimate by the opposition and by foreign governments, including the United States and several members of the European Union. He then called for sham presidential elections in May 2018 also rejected as unfair and illegal by the opposition and by the international community. Several parties had been made illegal, and many opposition leaders were prevented from running for office, pushed to exile, or jailed.
The opposition considers Maduro’s new 6-year term (2019- 2025) illegitimate. It declared an absolute vacancy of the Presidency of the Republic and, according to the constitution, appointed Juan Guaidó as Interim President. Sixty countries recognized Guaidó and are working to support a solution to the political crisis through free and fair elections as soon as possible. They agree that these changes can only happen after Maduro steps down. The United States government is the strongest and most assertive opponent of the Maduro regime and has been applying major sanctions since 2017.
The road to recovery starts with politics. Maduro’s departure is the prerequisite for free and fair elections that bring new leaders to power. Reforms can only succeed if they are carried out by new leadership, with a robust political standing so that reforms can take place democratically, and with conviction, because these changes will neither be quick nor easy. Decision-making will have to be inclusive, with buy-in from critical constituencies. Strong international support is also essential. In the economy, it must be back to basics: the rule of law, property rights, practical beliefs for expectations, and a social safety net for all. Three key institutions need to be rebuilt quickly: the judiciary, to restore the rule of law; PDVSA, to feed the country; and the central bank, to restore confidence in the currency.
A reform plan called “Plan País” has been crafted and approved by the opposition. It is a sensible blueprint. It foresees humanitarian assistance (food, medicines, and health care), macroeconomic stabilization, structural reforms, fiscal reforms, imports to fill the shelves early on, and direct subsidies to support the most vulnerable population. It contains policies geared to reactivate the oil industry and to attract foreign investment. Agriculture and industry need to get back on their feet, along with programs to generate quality jobs. All of this is to be driven by the private sector.
Security challenges include the pressing need to regain control over the territory, now plagued by illicit drugs and arms businesses and multiple paramilitary groups. The Armed Forces, law enforcement agencies, and the public administration all need to be rebuilt. A complex debt restructuring also awaits, with over $160 billion in foreign debt in default. All of this means that Venezuela’s recovery will require substantial upfront funding from the International Monetary Fund, multilateral institutions, bilateral export financing agencies, foreign donations, and the debt restructuring process. Private capital will follow, once the dust settles.
(I want to express my gratitude to the author of this paper for allowing Surgical Neurology International (SNI) to bring this objective information to our readers that is not easily obtainable elsewhere. Its value is in showing how corruption, the desire for power and money in a country can affect its government leaders, and ruin the lives of the people of the country who are the patients of our colleagues there and elsewhere. James I. Ausman, MD, PhD-EEd).
COMMENTS BY MIGUEL A. FARIA, MD
SNI Associate Editor in Chief: Socioeconomics, Politics, Medicine, and Would Affairs
This is an excellent review article/editorial for which the author(s) should be congratulated. It describes perceptibly and accurately developments in Venezuela from the time the socialist, revolutionary-turned military dictator, Hugo Chávez, came to power in 1998 promising prosperity to the present age under his successor Nicolás Maduro, bringing full devastation and disaster whose seeds had been planted with the advent of socialism in the 1990s. All this is well recounted in this article, better than I have read in the American and International Media, including the BBC.
The author(s) describe how Venezuela was afflicted with the Dutch disease, a disease that also afflicted Mexico with the same commodity, oil, during the presidency of José López Portillo in the early 1980s. Likewise, it was a disaster for Mexico. However, unlike in Venezuela, the citizens of our neighbor to the south eventually voted out the progressive and corrupt Institutional Revolutionary Party, and voted in the more accountable, free-market oriented, conservative National Action Party (PAN), bringing and consolidating relative prosperity and stability in Mexico.
The tragic story of Cuba in the past 60 years is even more apropos. The heart-rending story of Venezuela cannot but bring to mind the even more disastrous events that took place on the Caribbean island since the Cuban Revolution of 1959. This was exactly 40 years before the advent of dictator Hugo Chávez in Venezuela. One cannot help but draw social, economic, and political parallels between the two nations.
Cuba, like Venezuela, was a prosperous country, despite the much-touted ruthlessness and corruption of President Fulgencio Batista. Even with the turbulent years of revolutionary violence in the 1950s preceding the Castro revolution, Cuba’s prosperity was unparalleled. This was true for education, standard of living, and health care. The Cuban socialist revolution ended all of that – and most importantly, it extinguished freedom.
The author(s) write: “Venezuela was the second largest oil producer in the world until 1960 when the Soviet Union displaced it, and the first world exporter until the early 1970s when Saudi Arabia occupied that place. In the 1950s and 1960s, Venezuela was one of the 20 wealthiest countries in the world measured in per capita income. The state provided cheap loans, subsidies, numerous jobs, and free public services, and made sure that an overvalued currency made imported goods accessible. Everyone got a little of what they wanted. Venezuela became a society of rent seekers living in an ideal world with lots of oil rent distributed by the government, making politicians powerful. Democracy was instituted in 1958 when Marcos Pérez Jiménez (a military dictatorship) was ousted…”
Indeed, a great future was squandered by mismanagement, and eventually the formation of a corrupt socialist dictatorship, the same as in Cuba. In my book, “Cuba in Revolution: Escape From a Lost Paradise” (2002), I wrote: “In 1958, just prior to the revolution, Cuba had three times as many doctors as all of the Central American countries combined, but there was no oversupply because freedom and the ordered liberty of the free market reigned.” Public health was a la par with the United States. Life expectancy in Cuba in 1958 was rising at the same pace as those of industrialized European countries. Cuba had the lowest infant mortality rate in Latin America. In education, Cuba also ranked at the top and had the third highest literacy rate in Latin America. Just before the Revolution, prosperity reigned, and the standard of living was comparable to those in many European countries. Even without oil, the economy was thriving, the same as with Venezuela in the decade of the 2000s, but all of this ended in both countries with the advent of socialism and the loss of freedom.
The decline and eventual devastation of the two countries began in earnestness once they openly declared themselves socialist States: Cuba in 1961, immediately after the travesty of the Bay of Pigs, and Venezuela in 2007, after Chavez, like Fidel, had fully consolidated power. Both proceeded with nationalization and expropriation of private property. Freedom of the press and private education ended, and full socialist dictatorship became the order of the day.
In Cuba, communist dictatorship and misery still reigns due to the police state totalitarianism enforced in an island by the evil genius of Fidel Castro. However, neither Chávez nor Maduro had the genius component, and the Venezuelan situation, which can only be characterized as anarcho-tyranny in the political spectrum, will not last much longer. In fact, Maduro has lasted this long not only due to the support of the top military ranks led by the corrupt henchmen of Chávez and Maduro, who fear prosecution for corruption and war crimes but also due to the bolstering of four authoritarian nations: Russia, China, Iran, and Cuba.
Juan Guaidó, the President of the National Assembly, has already been recognized as the legitimate President of Venezuela by the US and most of Latin America. The dictatorship will soon collapse, and it is only a matter of time before freedom returns to the long-suffering South American nation, the proud country of Simón Bolívar, the great Liberator. I want to thank the author(s) again for bringing the issue of Venezuela eloquently and incisively to the intelligent readers of SNI.
COMMENTS BY RUSSELL L. BLAYLOCK, MD
SNI Associate Editor-in-Chief, Neuroinflammation Section
The paper on Venezuela demonstrates, quite well, a repeated methodology by the revolutionary left. First come, the promises and extensive use of propaganda – painting a picture of a coming utopia, should the people be wise enough to elect the leftist “progressive.” Then follows the welfare state, which initially grows and the plight of the poor seems to actually improve. This gives the new leftist president time to consolidate his power and build his police state. Of course, the money is created out of nothing – mere entries in a ledger of the state or from the wealth built by the previous free enterprise government. Once the police state is completed, then the initial utopian illusion is dropped. Rapidly, the totalitarian state rises and all references to the utopia fade into the distance. Elections are then rigged and true democracy disappears. Enemies are arrested and removed from positions that might endanger the new totalitarians. At this stage, the economy begins to collapse, as it was built on fiat (fake) money. The stage of hyperinflation rises, international investment dries up, banks are taken over by the government, and commerce is destroyed. Starvation is close behind. Store shelves are empty, food lines grow, people migrate in mass numbers to other countries to avoid this devastation of the economy; and to keep their power, the government becomes increasingly violent and oppressive. At that stage, we have full communism. All pretense of this being a revolution for the “little people” continues to be believed only by the simple minded and those benefiting from the new bureaucracy and/ or the enforcers of the police state.
Miguel’s comments are beautifully crafted and poignant. With his addition, all should understand this process and the enormous value of the private property, the rule of law based on transcended natural law, a constitutional system that guarantees liberty and an economic system that recognizes private contracts and negotiations outside the state. The evil of collectivism is contained in this wonderful paper.
SNI receives papers on socioeconomics and politics from around the world due to its devotion to Freedom of the Press, its desire to enlighten our readers everywhere with the truth in its concern about the health and welfare of people, who are our Patients everywhere. (James I. Ausman, MD, PhD, Emeritus Editor, SNI, an operational part of a charitable foundation, The James I and Carolyn R Ausman Educational Foundation).
These Editorials may not necessarily reflect on the opinions of the members of the SNI Board and publishers.
Comments from SNI’s readers are welcomed and will be published if appropriate to this subject.
DisclaimerThe views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Journal or its management.
- Emeritus Editor-In-Chief note
- AN OIL STORY
- WHAT WENT WRONG?
- THE DECLINE
- THE ROAD TO OUTRIGHT DICTATORSHIP
- WHAT’S NEXT?
- COMMENTS BY MIGUEL A. FARIA, MD
- COMMENTS BY RUSSELL L. BLAYLOCK, MD