Venezuela is a country in South America that enjoys the largest known oil reserves in the world… more than the U.S., more than Russia, and more than Saudi Arabia. It is the 5th largest country in South America by population, and enjoys a large border with the Caribbean Sea and the Atlantic Ocean. It was the richest country on the continent as recently as 2001, and by any standards should be safe, prosperous, and growing.
However, it is not; it is falling into chaos and potentially civil war. Today it resembles an authoritarian failed state, and if it wasn’t so sad for the people of Venezuela, it would be easy to say the predictable “I told you so.” The collapse of Venezuela is another perfect scorecard for the economic system known as socialism – it fails 100% of the time.
Current President Nicholas Maduro took over for authoritarian dictator Hugo Chavez, who had led the country down the path of Fidel Castro inspired Marxist-socialist economic policies. The results were a collapse of the economy. Maduro is currently rounding up dissidents, imposing martial law, and there are food riots in the streets. Social order has collapsed.
Many will argue that socialism is doing fine in places such as Europe, and communism – the violent enforcement of socialism – is doing great in China. That is an uninformed opinion. European socialism exists thanks to the US providing for their defense; the US brings goods and services to market with the cost of capitalist, market competition – once the MRI machine is built, for example, the Europeans get to enjoy its benefits without the cost of its invention; the US rebuilt Europe on our dime for several decades after World War II; the U.S. supported the integration of markets on the continent as the pre-cursor to the European Union… socialism works great – on other people’s money, namely, the American Taxpayer.
The same for China – a communist state with state directed industries who for decades stole, copied, and took advantage of U.S. markets and invention to cheaply catch up with U.S. GDP. The Soviet Union enjoyed many decades of high GDP growth as well, only to collapse from its own sclerotic weight. You can have some growth, copying American markets and invention, while still not having freedom or economic achievement of your own. At some point, without the free market, your system collapses.
So, what happened to Venezuela? To be so blessed geographically, and with a natural resource such as oil???
Marxist-Leninist government… socialist economics… that’s what happened. Why, you ask, does socialism fail – all those leftists, progressives, and university professors love it! Simple macroeconomics – if I get an equal share of something regardless of how hard I work for it, then I will work less and produce less and less.
I. How did Venezuela reach this point of crisis?
- Venezuela has a history of dictators and collectivism. The country gained its colonial independence from Spain in 1830, but suffered through mostly military dictatorships until the mid-1950’s. For thirty-plus years after that, it was run by democratic governments with market-based economies until the late 1980’s, and enjoyed a relatively peaceful and prosperous period during this time. But when the price of oil dropped, and Soviet penetration of Latin America was climbing, you began to see political riots in the streets. For a decade thereafter, there was political turmoil – until Hugo Chavez rose to power in a in 1998.
- Venezuelans then turned to Chavez. Hugo Chavez had been part of the political turmoil – leading a coup attempt with his MBR-2000 revolutionary movement that failed in 1992, at which time he was imprisoned. He was released in 1994 and successfully ran for President in 1998 on a completely Marxist platform. He called it the Bolivarian Revolution at that time… a Castro inspired theme. Most observers believed the election was legitimate, as was his reelection in 2000. Chavez-led reforms were straight from the socialist playbook: nationalize industries; communal councils; nationalized health care; took control of the local schools; took control of the media… by 2006, per capita GDP was up, but freedom had been taken away.
- Socialism begins to take effect… and that means failure is right around the corner. Chavez won the election again in 2006. Most election observers agreed that the vote counts were mostly legitimate. When virtually everyone is on the government payroll, and the military mans the voting booths, it was unlikely that Chavez would lose. Venezuela had high GDP numbers, and Chavez was moderately popular. He remained that way through 2008, as oil prices allowed the regime to continue to spend money on patronage. However, as oil prices began to waver in 2009, and Venezuelan industry became overwhelmed with the graft and corruption found in socialist economies, the country’s net GDP began to decline. By 2010, wage and price controls were in place, the police force was corrupted, crime went unpunished, food lines began forming, inflation was rampant… and by the end of Chavez’s life, in 2013, Venezuela had run out of “… other people’s money.”
II. Venezuela’s socialist economy fails… what happens now?
- President Maduro doubles down on the dictatorship. Chavez’s replacement, Nicholas Maduro, a hack who has no formal education and no military training, simply a Chavez loyalist, has enforced rationing, sent the police and the military into the streets, and arrested political opponents. The food lines and lack of employment has the country on the brink.
- Economic data is harrowing… and sadly predictable. Inflation rose to 800% in 2016… the economy contracted (-18.6%) as well… economic data is now unreliable as there are no civil servants that are working to collect accurate data. Oil price declines have not helped, but by nationalizing the industry under Chavez, the state run oil company Petrobas lacks the American staff which provided the skill and technical know-how which could have helped as the market changed. There is little hard currency available, and most transactions have now gone underground, with sellers only accepting U.S. dollars for trade.
- Absent a miracle, we may be looking at civil war. On Sunday August 6th, a small band of armed men, which most in the international press believe were disgruntled members of the military, attacked a heavily armed base in the city of Valencia. The Washington Post reported that many civilians are looking, and hoping, for someone in the military to step in and remove the government. When the military starts firing on each other, you are close to a civil war.
This is the path of socialism. Where socialism, or communism remains, it only exists for two principal reasons:
1) The world’s largest free market system – in the United States – provides the world with free markets, liberal trade, free transport through the protection of the American navy, and the invention of most of our modern conveniences – without those countries having to bear those costs;
2) The government limits the people’s freedom – or maintains control of the people. In Europe, there is enough capitalism left to say at best the system is mixed. China has never tried capitalism despite what you read – it is a state-directed economy. Venezuela went all in, and now is paying the price.
Socialism always fails. There are mixed systems, there are economies protected by crony capitalism, state-run capitalism… there are economies who simply benefit off the finance and protection of the United States. But left to its own devices, socialism spirals down into privation, despair, and ultimately, death.
Let’s keep the renewed spirit of American capitalism – driven by entrepreneurs, free marketers, and individual freedom – that we have seen recently, and use it to help springboard another “American Century!”