Lessons from Venezuela

THE CORNER ORACLE - Andrew J. Masigan - The Philippine Star

This piece is part of a continuing series that highlights the best and worst practices of nations. The hope is that the Marcos administration would extract valuable lessons from the experiences of others.

In this story, we prove that authoritarianism, corruption, the lack of manufacturing capabilities, an underdeveloped agricultural sector, import dependence, underinvestment in education, the absence of an objective legislature and politically motivated subsidies all lead to economic catastrophe.

This is the story of Venezuela.

We should take heed as these conditions are all present in the Philippines, albeit to a lesser degree.

Venezuela is a country endowed with enormous petroleum reserves, even larger than that of Saudi Arabia. From 1914 up to the 1950’s, the Venezuelan people enjoyed  the world’s third highest per capita income  on the back of petro-profits. Their fortunes continued to grow until the late 1970’s.

Today, however, Venezuela finds itself in  dire straits. Its oil-dependent economy is flagging. It has practically no manufacturing or agricultural sector to speak of. More than 50 percent of its citizens live in poverty with no social safety nets. Its debt papers are of junk status, as is its currency.

Venezuela’s story starts with the discovery of oil in 1914. Lacking capital and technology, President Juan Vicente Gomez allowed foreign companies to extract oil  with no taxes or royalties to the state. He also granted concessions for adjacent oil-related businesses to loyalists and friends. His sole condition was that they had to  financially support his dictatorship.

By the 1930’s, Venezuela became the second largest petroleum producer for which petro-profits were hogged by foreigners, cronies and Gomez himself. Gomez kept the people happy with high paying jobs (although mostly unnecessary) within the oil industry.

Oil exports led the Venezuelan currency, the Bolivar, to become the strongest in the world. This made imports cheaper and the cost of doing business expensive. The powerful currency choked the manufacturing sector since it was cheaper to import goods rather than produce them. But  the demise of manufacturing did not worry Gomez. For as long as the oil flowed, he and everyone else was happy.

High paying jobs in the oil industry attracted farmers to move to the city. This paralyzed the agricultural sector. Again, this did not worry Gomez.

Gomez remained president until his death in 1935. He died as one of the world’s richest men. His legacy was an authoritarianism style of leadership which every succeeding Venezuelan president emulated.

In 1943, President Isaias Angarita enacted a new law called the “50-50 Principle” in which the state was made equal partner in oil extracting activities. By the end of World War 2, demand for oil skyrocketed as nations rebuilt their economies. Venezuela was again rolling in cash.

In 1952, President Marcos Jimenez envisaged a modern, industrialized republic.  He spent petro-profits on infrastructure and  built state-owned companies involved in heavy industries. But runaway corruption  caused the projects to cost twice their real value. Worse, abysmal investment in education left the country without the  management expertise to competently manage these state-owned firms. Slowly but surely, all failed except those that received state subsidies.

But the good times continued to roll. A US  embargo against middle eastern countries following the Yom Kippur war of 1973  made Venezuela the leading exporter of petroleum. But instead of investing on  education, health care and industries, President Carlos Perez squandered the money by increasing state wages and  subsidies.

Awash with cash, Perez set up a sovereign wealth fund which later became the presidential piggy bank. He announced the full nationalization of the oil industry by 1983, which caused an exodus of foreign firms and capital flight.

When oil prices plummeted in 1988, Venezuela was caught flatfooted, without savings. Making matters worse was that laws were designed to maintain social spending and subsidies at a certain level regardless of national income. The country  covered the budget gap with debt. Debts under President Luis Campins increased four-fold.

Campins had no choice but to devalue the Bolivar, a move that made imports expensive. Since Venezuela relied on imports for their every need, basic essentials became unaffordable to most.

The country stopped paying its debts in 1989 and this triggered a deep recession. The number of Venezuelans living in poverty soared ten-fold. The black market flourished.

In 1992, Hugo Chavez staged a coup but failed. He was elected president in 1998.  Chavez had a socialist agenda.

A new congress was created composed of  Chavez’s allies. This obliterated checks and balances in the legislature. In 2001, he enacted 41 new laws that gave the state the power to seize and nationalize private properties. He appointed a new board to the  state oil company, PDVSA, composed of loyalists. This  allowed him greater access to the PDVSA’s financial resources.

Oil prices improved in the 2000’s but rather than invest on reviving the economy, Chavez went on a spending spree to forward his socialist agenda. He nationalized  privately owned businesses, increased  subsidies and hired thousands of state employees even if not needed.

Chavez tried to revive the agricultural sector but failed.

President Maduro assumed office in 2013 and continued the Chavez agenda.

From 2008 up until the pandemic, oil prices remained low and Venezuela’s economy continued to tank. Its gross domestic product  shrank by 62 percent since 2010. Without savings to cushion the downturn,  Venezuelans experienced acute food shortages. In 2017, the average Venezuelan lost 8.7 kilograms of weight due to food deprivation. Venezuela exemplifies how a wealthy country can be ruined by poor  governance and corruption.

There is a trove of lessons to be learned for Philippine leaders. To build a  strong, resilient economy, nothing replaces fiscal prudence, a strong manufacturing sector, a progressive agricultural sector, an empowered and educated populace and  system of government where the executive, legislative and judiciary balance each other.

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Email: [email protected]. Follow him on Twitter @aj_masigan

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