Once richer than Poland, today on the verge of collapse. The history of the Venezuelan regression
In the 1970s, Venezuela was one of the richest countries in Latin America, but between 2013 and 2023 the standard of living in this country dropped by 74%. According to data from the Economics Observatory analytical center, this is the fifth most serious economic decline in modern history that was not the result of warfare or a natural disaster.
The scale of the collapse is illustrated by the dynamics of inflation: while for three decades before 2015 it remained between 10 and 100 percent. annually, in 2018 it increased to 1.37 million percent. More than 7.7 million people have fled the country since 2014, which attracted immigrants from Europe and other countries in the region after World War II.
Paradoxically, what should be Venezuela's greatest asset – huge oil deposits – has become its so-called resource curse. This phenomenon occurs when resource wealth weakens democratic institutions and encourages elites to fight for control of export profits rather than to develop a healthy economy.
Despite having the largest reserves, in recent years Venezuela has become one of the smallest oil suppliers in OPEC, producing less oil than Gabon.
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In the late 1970s, Venezuela had a much higher GDP per capita than Poland – around 3,300, according to various estimates. hole. against 2.2 thousand hole. In 2024, the situation was completely different – according to World Bank data, Poland reached the level of approximately 25,000. dollars, and Venezuela, according to various estimates, 4.2 thousand. hole.
Dutch disease of Venezuela
The foundations of the current crisis were laid in 1922 with the discovery of deposits in northwestern Venezuela around Lake Maracaibo. By 1929, the country had become the second largest producer of this raw material in the world, which, however, quickly triggered a phenomenon that economists call the so-called Dutch disease.
This term describes a situation in which a sharp increase in earnings from the export of natural resources weakens other sectors of the economy and leads to excessive strengthening of the domestic currency. This makes imports relatively cheap, while domestic industrial and agricultural production loses competitiveness and becomes marginalized. In the case of Venezuela, oil already accounted for over 90 percent in 1935. exports, permanently weakening other sectors of the economy. In the following decades, whenever oil prices fell, the country plunged into crisis.
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In 1960, Venezuela was one of the founders of the Organization of the Petroleum Exporting Countries (OPEC), and in 1976 it fully nationalized the oil industry, creating a state-owned company PDVSA. At the time, the company enjoyed a high degree of management autonomy and was run relatively professionally, which allowed Venezuela to become one of the richest countries in the region.
The stability of the democratic system, based on the political agreement of the main political parties, began to crumble in the 1980s with the global decline in oil prices. The turning point was Black Friday on February 18, 1983, when the government was forced to drastically devalue the Venezuelan currency, the bolivar.. Growing foreign debt, corruption and inefficiency of the public sector led to bloody riots in 1989. They were a violent reaction of society to the package of austerity reforms imposed on the country by the International Monetary Fund. As a result of the abolition of price controls and subsidies, a sharp increase in fuel prices and deteriorating living conditions, there were mass demonstrations and looting of shops. The incidents were brutally suppressed by the security forces, resulting in the deaths of at least several hundred people.
Hugo Chavez comes to power and destroys the oil industry
Those events became a turning point in the country's history and, along with the growing disillusionment with traditional political parties, opened the way for Hugo Chavez's career. In 1992, he staged an unsuccessful coup d'état for which he was imprisoned, but six years later he won the presidential election, promising to use natural resources to fight poverty.
When Chavez took power in 1999, Venezuela was producing about 3.4 million barrels of oil per day. The new president started the so-called the Bolivarian Revolution (named after Simon Bolivar, the 19th-century leader of the fight for Latin America's independence from Spain), whose goal was using profits from oil sales to finance extensive social programs. According to many political scientists and economists, Venezuela then began to drift towards a system that allows the elite to almost completely take over society's wealth instead of supporting development and innovation.
A key step in this direction was the destruction of the professionalism of the state-owned company PDVSA. After the 2002–2003 general strike, Chavez fired more than 18,000 workers. experienced engineers and managers, replacing them with political loyalists. PDVSA ceased to be an oil company and became a government financing tool and a supplier of food and medical services, not subject to full budgetary control.
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The government also took control of hundreds of private companies and projects of foreign giants such as ExxonMobil and ConocoPhillipswhich led to the paralysis of foreign investments. The complicated system of currency exchange rates has become a breeding ground for corruption, estimated by the Economics Observatory at $300 billion. These funds, instead of going to the budget, went to people associated with the government.
Oil profits had been largely eaten up – used to maintain an expensive state and buy public support – already in the 1970s and 1980s, but PDVSA operated in a more professional manner at that time and some of the revenues were reinvested. Chavez, however, escalated bad practices, destroying the company's institutional independence and diverting its revenues almost exclusively to consumption and the support of political allies.
Falling oil prices and hyperinflation
Although Venezuela survived the global financial crisis in 2008, when the price of a barrel dropped from approximately $140 to below $40. — this was the first serious signal of the instability of the Bolivarian model. Chavez's death in 2013 and Nicolas Maduro's takeover of power coincided with another sharp drop in oil prices in 2014, when the price of a barrel dropped from $100. up to $30
Unlike, for example, Norway, which has been saving revenues from oil sales in a sovereign wealth fund since the 1990s, Venezuela, burdened with enormous debt and deprived of savings, fell into a spiral of hyperinflation. Instead of necessary reforms, Maduro's government focused on even tighter price controls and money printing, which destroyed the market and caused huge shortages of food and medicines.
News agencies cited local studies that in 2018, Venezuelans lost an average of 11 kilograms of body weight.
Inflation in 2018 reached 1.37 million percent. per year according to IMF estimates, which means that prices increased on average by 13 thousand. 700 times a year. In 2021, oil production fell to 654,000. barrels per day – levels not seen in decades.
In 2017 and 2019, the US imposed financial and oil sanctions on Venezuela. Although supporters of the government in Caracas blame them entirely for the crisis, analyzes by many economists indicate that the collapse of the Venezuelan oil industry began much earlier due to mismanagement and corruption. Maduro officially won the 2024 presidential election, but many observers considered the voting process unreliable and the result manipulated.
Venezuela has also fallen into a technological trap. Most of its reserves are the so-called heavy and extra-heavy oil, which is difficult to extract and transport due to its density and chemical composition. Its exploitation requires investments in refineries and refining installations, which the ruined country cannot afford.
As a result, the country that in the 1970s was responsible for over 7 percent global oil supplies, today provide only about 1 percent. global supply. Venezuela can be an example that even spectacular natural resources, when confronted with populism and the dismantling of the rule of law, can become a path to civilizational regression.
