Venezuela’s economy was one of the richest in Latin America, but by 2016, it is said to have shrunk by approximately 10 percent. Understanding the disaster that unfolded in Venezuela, it is crucial to go through recent history on how the country to tried to sneak in socialism which never worked. Therefore, this paper will present the arguments discussed in the article titled ‘How Venezuela stumbled to the Brink of Collapse’, and provide a critique of the article and Venezuelan economy in general.
The article holds that Venezuela has been going throw difficult economic times. Inflation is about 720 percent which double that of South Sudan and this rendered its currency worthless (Taub 1). The three leading parties narrowed to 2 and decided to share power and oil revenue among the constituents which never worked. Chavez converted oil into loyalty by firing 18000 PDVSA workers, (most of them were skilled managers and technicians) and replaced them with 100000 supporters.
The author claims that Nicolas Maduro, a president who succeeded Chavez in the year 201 inherited an economy in shambles and the weak support from public and elites. As a result, he was desperate as he lacked full control of military started controlling food and rugs trades and even gold mining. Because he (Maduro) could not pay welfare programs and subsidies, he decided to print lots of money. Such increased the inflation which made basic goods unaffordable, and decided to fix currency exchange rate and institute price controls and such made imports expensive, businesses were shut down. Maduro printed, even more, money and inflation growth were experienced again. Food started being scarce (Taub 1). The unrest in the country grew, and the survival of Maduro grew on handouts that he could no longer afford. Such is what destroyed Venezuelans economy leading to street violence. In light of this, Maduro decided to restore order by deploying military units and police leading to bloodbaths. Venezuela has found itself in a paradox: the government is known to be too authoritarian ad this is why it cannot coexist with democratic institutions, but he is weak to remove them without the risk of collapsing.
I partly agree with the author that corruption, poor governance, and rewarding the elites in the country is the major cause of political and economic turmoil in Venezuela. However, I think that this argument is too simplistic. What led to the collapse of the Venezuelan economy is the idea of trying to turn the country into a socialist paradise by Hugo Chavez, the policies that continued to exist under the leadership of Maduro (Hausmann and Rodríguez 10). Turning a capitalist free market economy into a socialist state by nationalizing agricultural operations, power generation, steel production, telecommunications, banks, and oil industry was a miscalculated move.
Hugo Chavez wanted to repeal the law of demand and supply that holds that free markets will always set the price—increase in demand leads to price (Hausmann and Rodríguez 5). A producer willing to sell commodities at equilibrium price will do, and consumers who are willing to pay such price will acquire the product. Chavez said that the law robbed the poor and profited producers unjustly. He persuaded the legislature to enact 2011 Law unfair cost and prices which was a mechanism if price setting to make sure that there was enough social justice. National superintendence of fair coast and prices were used in establishing fair prices at retail and wholesale levels. Over 500,000 prices were issued and the companies that violated such price control who subject to seizures, fines, and exploitation (Schiller 1). The prices, unfortunately, were below market causing market shortages, production cutbacks, runaway inflation, massive government subsidies, and unnecessary government intervention. The attempt of Venezuela to repel the demand and supply law and replace with more price controls lead to economic disaster. The destruction of investment profit and work incentives halted economic growth.
To consumers, the lower prices show that it is the right time to buy particular services or good. Higher prices will discourage consumers from purchasing a particular product or start looking for substitutes (Hausmann and Rodríguez 5). Such leads to equilibrium price which is produced by market forces, not by the government. Artificial low price causes consumers to start demanding more good than the producers will be ready to supply. When demand is more than supply, shortage wile b created. Such arbitrary ceilings will affect the business productive structure and fail to allow them to supply goods in a cost effectual way (Schiller 1). Most businesses will have to incur losses; mostly if the legislative prices will fall below the market price required to meet the cost of operation. The less fortunate businesses will have to shut down since they will not e able to afford goods supply to market because of the artificially low prices. The business with means of adjusting to such regulations will supply fewer products of inferior products. The consumers are forced to cope with this market which provides inferior and fewer goods leading to the reduced welfare of consumers.
It is true that scarcity was induced for political reasons starting with the general strike of 2002-2003 that forced the regime to adopt strategies that held back the socialism advance. The government adopted populist measures which included maintenance of a huge disparity between market and regulated prices. The policy did work well as it violated the equilibrium law of demand and supply, but in the end, economic disruptions were produced that negatively affected the support for governments. Secondly, preferential treatment by the government towards the elites caused the business to penetrate the governing spheres and engage in corruption.
In sum, Socialism by nature, in transition, is prone to many ongoing political and social conflicts and extreme contradictions. The state is subjected to the internal contradictions and has a strategic field that reflects the correlation between social and political forces at a given time and inherently unstable. In the 21st century, Venezuela has been characterized by the instability and transformation because transformation with an administration that wanted to install socialism through a violent structure and capitalist structure which was weakened partly by some leftist inroads and this was a good recipe for instability. In other words, the economic laws are universal, and they apply to both developing and developed countries. Price implementation leads to the black market and shortages. There is no government; no matter how it is powerful or well-intentioned can manage to violate such principles without suffering consequences.
- Hausmann, Ricardo, and Francisco Rodríguez. Venezuela Before Chávez: Anatomy of an Economic Collapse. , 2014. Internet resource.
- Schiller, B. (2013). Hugo Chavez’s vain fight against the law of supply and demand. [online] latimes. Available at: http://articles.latimes.com/2013/mar/24/opinion/la-oe-schiller-venezuela-pricing-20130324 [Accessed 17 Dec. 2017].
- Taub, Max. “How Venezuela Stumbled To The Brink Of Collapse.” Nytimes.Com, 2017, https://www.nytimes.com/2017/05/14/world/americas/venezuela-collapse-analysis-interpreter.html.