February 2019

By Daniel P. Erikson and Willa Lerner

Venezuela’s political turmoil has been building for years, but it is the tragedy of economic collapse that has given it such urgency. On January 10, 2019, Venezuelan strongman Nicolás Maduro was sworn into office on the basis of his May 2018 reelection that was widely denounced as illegitimate by many Venezuelans as well as the international community. On January 23, National Assembly President Juan Guaidó deemed the presidency to be constitutionally vacant, creating an opening for him to take over as “interim president.” Over the last three weeks, the emergence of two parallel presidencies and the resulting fissures in the international community have also brought new focus to the pressing humanitarian issues. In fact, the economic crisis in Venezuela has been worsening for years and there are no easy solutions to the predicament. With that in mind, it is important to understand that the current political disputes are occurring on a base of economic instability, which will have profound implications for the future.

Economic Collapse

Venezuela has been economically unsteady for many years, stemming largely from economic mismanagement coupled with declining prices for oil, its major export, since 2014. Meanwhile, inflation has risen at a startling rate, while infrastructure investments stagnated or declined. In 2018, though, the bottom fell out. According to the World Bank, annual GDP growth dropped to a record low of negative 18 percent while the International Monetary Fund (IMF) assesses that inflation topped 1.37 million percent. In hopes of stabilizing inflation and restoring national purchasing power, the Maduro government restructured the national currency, cutting three zeroes from the “Strong Bolívar” and replacing it with the “Sovereign Bolívar.” The planned redenomination has made little difference, though, as current data from the IMF suggests that the Venezuelan people may see inflation reach ten million percent in 2019.

Venezuela’s contracting gross domestic product (GDP) also reflects a broader decline in the nation’s exports, which decreased from $153 billion in 2012 to $27.8 billion in 2017, in large part due to Venezuela’s faltering oil industry. Crude and refined petroleum combine to account for over 90 percent of the Venezuelan export market, but production from Venezuela’s state-owned oil company (known as PDVSA) has been in a rapid free-fall throughout the Maduro presidency. With fewer export dollars coming in, the Venezuelan government has been forced to use the little money available to service their high external debt load, rather than purchase the imports necessary to support an increasingly desperate population. According to the World Bank, Venezuela’s national debt rose to $105 billion in 2017 and is owned in large part by the United States, China, and Russia.

New sanctions issued by the Trump administration at the end of January will likely lead to a further decline in Venezuela’s exports, despite efforts by PDVSA to find alternate buyers. The sanctions prevent U.S.-based entities from purchasing Venezuelan heavy crudes or selling refined products and diluents to PDVSA. The Venezuelan government will likely look to India and China to increase their purchases and play an even greater role in the national oil market. The White House reports that the targeted sanctions will block $7 billion in PDVSA assets and will cause $11 billion in lost export profits.

Social Impacts

One study estimates that more than 61 percent of Venezuelans were living in extreme poverty in 2017, nearly triple the 23.6 percent living in extreme poverty just three years prior. Only 13 percent of Venezuelans continued to live above the national poverty line in 2017 as per capita GDP dropped to $12,500. More than 78 percent of the population also report that they have involuntarily eaten less, either because food has not been available or because their monthly salary is not sufficient to cover the expense.

Few options are available to those looking for relief from resource scarcity, as corruption and repression permeate Venezuelan civil society and governance. According to Freedom House, Venezuela is “not free,” and in fact scores a dismal 19 out of 100 possible points for political rights and civil liberties and freedom. (While Venezuela had never been a high performer on these indices since the late Hugo Chávez took power in 1999, as recently as 2016 Freedom House still judged Venezuela to be “partly free” on the basis of political pluralism such as the 2015 victories by opposition candidates in the National Assembly, a body that Maduro later attempted to neuter, which provoked the current crisis.) Furthermore, the Venezuelan people are not disillusioned about the current status of political institutions in their country. In its 2017 survey of Venezuela, respected polling firm Latinobarómetro found that nearly half of all Venezuelans polled – 48.8 percent – were “not at all satisfied” with the functioning of democracy, while only 8.8 percent described themselves as “very satisfied.” 

Additionally, the Venezuelan economic crisis has provoked a refugee crisis – as Venezuelan citizens are increasingly voting with their feet and seeking to leave the country for other neighbors in South America, the Caribbean, and increasingly the United States. Colombia now hosts approximately one million Venezuelan migrants, or one-third of the total Venezuelan migrant population. The cost of providing basic services to Venezuelan migrants requires an estimated 0.2-0.4 percent of Colombia’s short term GDP. With almost 400,000 Venezuelan migrants seeking asylum in the region, and an additional 960,000 having accepted other forms of short and long term legal residency, the cost of Venezuela’s economic crisis will not be contained within its national borders.

Venezuela’s current political struggle, then, will eventually be followed by an equally dramatic struggle for the country to restore its economic footing, recover human capital, and reverse the crushing poverty that has affected millions of Venezuelans.

This will be a daunting task, but one of vital importance for Venezuela and the international community to embark on together.