Venezuela: the anatomy of a defaulting country

Migration and humanitarian crises are not only about Middle East Countries: Latin America is facing a comparable situation.

Venezuela and Syria have nothing in common, except for one thing: they are collapsing, and Western Countries will stare at them until they will be lost. The main consequence is migration. Syrians (and Iraqis) are leaving their home Countries  to become refugees in the nearest Countries – i.e. Jordan, Lebanon, Turkey – and in Europe, causing one of the biggest migration crisis in the modern history.

In Venezuela – a 30 million citizens Country – it is essentially the same. In fact, most of its citizens are fleeing a country which once served as haven for economic migrants and political refugees from around the world. For the first time, it is “producing”, rather than receiving, migrants. Last year there were 27,000 Venezuelan asylum seekers worldwide. So far in 2017, more than 52,000 have applied for asylum, according to the UN’s refugee agency UNHCR. Venezuela has recently surpassed China and Mexico as the largest source of asylum applications to the US, which is the top destination.

In 2016, a Datin Corp poll found that 57 percent of registered voters, i.e. 12 million people, wanted to leave the country.

The easiest destination to reach is Colombia, just across a porous and largely unprotected border. A Venezuelan association (The Association of Venezuelans in Colombia) estimates about 1.2 million Venezuelans currently living in Colombia, a Country of 45 million of citizens. For this reason, the Colombia’s Government sent a delegation to Turkey to study its experience with Syrian refugees. Bogotá is steadier economically and politically than Venezuela, however it is not able to respond to a large number of migrants.

Also, Brazil has seen an increasing number of migrants and it has kept its frontiers open. Adding a special two-year temporary residence option  – even if this is too expensive for many Venezuelans – it has become one of the preferred destinations.

Trinidad de Tobago, a Country of 1.3 million, has received 40,000 Venezuelans; same situation in Panama and Dominican Republic. These Caribbean Countries faced some social problems, when local citizens didn’t accept refugees. Peru introduced a special visa allowing Venezuelans already in the country to study, apply for jobs, get a bank account and access to health services for up to a year. Argentina has also made it easy for Venezuelans to obtain a work permit.

Which are the causes of the current situation of Venezuela?

From an economic point of view, Venezuela is facing the worst economic crisis in its history, and it is probably one of the worst worldwide. The main point is that Venezuelan is an oil-based economy. Oil accounts for about 25% of its GDP and 95% of national export earnings, according to the Organization of the Petroleum Exporting Countries (OPEC). For this reason, the Country is highly vulnerable to external shocks in oil market.  The state-run petroleum company PDVSA (Petroleum de Venezuela S.A.), controls all the country’s oil exploration, production and exportation. However, it suffers from cronyism, a bloated payroll, underinvestment in infrastructure and lack of budgetary oversight.

Proceeding step by step, the analysis should start from 1998, when Hugo Chavez, a former military officer inspired by Simon Bolivar, was elected and the Country turned to socialism. He cut ties with United States and cozied up to China and Russia, both of which loaned to Venezuela billions of dollars. During his presidency, he used the oil boom revenues and foreign debt to reduce poverty and inequality, by food and house subsidies, health care and educational programs. Prices of food and medicine were reduced below the cost of production.
He expropriated millions of acres of land and nationalized hundreds of private business and foreign owned assets, including oil projects run by ExxonMobil and ConocoPhillips.
Moreover, to stop people from changing the national currency into dollars, Chavez restricted the access to dollars and fixed the rate.

Ricardo Hausmann, a professor at Harvard Kennedy School said that during the Chavez presidency “they were spending as if the price of oil was $200 per barrel”. The problem was that the highest price was about $110 per barrel.
Basically, Venezuela spent more than it could afford in the past and it didn’t use the oil wealth to diversify its economy, which is still too dependent to natural resources.

After Chavez’s death in 2013, the appointed successor was Nicolas Maduro. He, who won the presidency in the same year, pledged to continue his former boss’s socialist revolution.

In 2014, the collapse of oil price caused terrible problems to the Venezuelan economy. Its economy contracted by about 30% in three years, even worse than Greece. In 2016 GDP reduction was 10%. The International Monetary Fund forecasts Venezuela will be in recession until at least 2019.

The Government has responded to the consequent hole in public finances (in 2016 the budget deficit was about 25% of GDP) by printing money, fuelling inflation. It was about 21% in June 2017, IMF estimates 720% for 2017 and it will be probably around 2000 percent in 2018.

Another policy contributing to the country’s economic problems are currency controls, which were first introduced by Chavez. By selling US dollars at different rates for specific business sectors, the Government effectively created a black market and increased opportunity for corruption. A firm authorized to buy dollars at preferential rates (i.e. food and drug industries), could instead sell those dollars for a significant profit to third parties. In July 2017 the official exchange rate was 10 bolivars to the dollar while the black market rate was more than 8000 bolivars to the dollar.

Due to economic crisis, the current situation in Venezuela is literally a humanitarian crisis. The head of the Venezuelan Pharmaceutical Federation estimated that 85% of basic medicines were not available or difficult to obtain. Infant mortality in 2016 increased by 30 percent and maternal mortality by 65 percent over two years prior. Diseases like diphtheria and malaria have remerged in the Country.
Poverty has also spiked. 82% of people live below the poverty line and 52% of them is considered extremely poor.
In 2016, 30% of school-aged children were malnourished. Furthermore, according to a Human Rights report, the Maduro administration has vehemently denied the extent of the need for help and has blocked an effort by the opposition-led National Assembly to seek international assistance.

In the end, poverty and lack of opportunity are exacerbating Venezuela’s high rates of violence. In 2016 Venezuela experienced its highest-ever number of homicides: 28,479, that is 91.8 homicides per 100,000 residents. This is the second highest worldwide after El Salvador.

On the other hand, Venezuela is also in political turmoil. In fact, Maduro administration has become increasingly autocratic.

The Venezuelan evolution started with Hugo Chavez. Indeed during his 14-years presidency, he transformed a pluralistic democracy into a hybrid regime, namely a political system where the mechanism for determining access to state office combined both democratic and autocratic practices. Oppositions were allowed to exist but the system of checks and balances became inoperative.
The rise of an hybrid regime in Venezuela occurred in the context of significant electoral support, and Chavez used this to reduce vertical and horizontal accountability, limit alternation in office and expand the powers of the executive like few other countries in Latin America.
First of all, he changed the Constitution in 1999. Despite many democratic innovations, he increased the power of the President, eliminating the Senate (an important veto player) and banning public funding for political organizations.
Moreover, the “Organic Law of Telecommunications” (2000), allowed the Government to suspend or revoke broadcasting concessions to private outlets if it is “convenient for the interests of the nation or if public order and security demand it”.
As a consequence the balance between private independent media and government-controlled media shifted in favour of the latter. The result has been a significant decline in press pluralism.

Another element of autocratic legalism is, paradoxically, reliance on illegality. This has been especially significant in electoral politics, plagued by irregularities and governed by a biased regulatory agency, the National Electoral Council. For example, the Government allowed PSUV to exceed spending or airtime limits, arbitrarily banned candidates and observers, manipulated voting rules and harassed voters at polls.

As written above, Maduro won the election on 14 April 2013 following the death of President Hugo Chavez on 5 March 2013. In the electoral contest previously described, Maduro prevailed over his opponent Henrique Capriles Radonski with a margin of 1.49%, becoming the closest Presidential Election of the Country since 1963.
The opposition claimed that repeated and new irregularities, which gave Maduro his narrow victory, significantly influenced the vote.

After 2014, when the economic crisis started, the Maduro’s political consensus declined rapidly because of soaring inflation, rising poverty and shortages of medicines and basic commodities. He lost control of the National Assembly in December 2015, when voters inflicted a heavy legislative election defeat on the ruling United Socialist Party of Venezuela (PSUV).

The MUD – a coalition against Maduro – won 109 of the 164 general seats and all three indigenous seats, which gave the supermajority in the National Assembly. GPP (a political alliance supporting PSUV) won the remaining 55 seats. Voter turnout  exceeded 70 percent.

After this result, Maduro tried several time to limit National Assembly’s powers changing the rules of the democratic game. Since late March 2017, when a Supreme Court’s decision stripped the Congress of powers, Venezuela  has been rocked by nonstop street protests. Although the decision was partially reversed, demonstrations have continued against an increasingly authoritarian government widely blamed for the country’s taking economy and soaring crime rate.

On 1 May 2017, a month into the protests, President Maduro announced his decision to call for a new constitution, saying it was the “only road to restore peace” in the country, solving political and economic challenges.
On 30 July 2017, Venezuelans were asked to elect the members of the 2017 Constituent Assembly of Venezuela.
In general, Venezuelan constituent assemblies have the authority not only to change the constitution but also to dismiss existing officials and institutions. This is the second time that Venezuela has a Constituent Assembly; the first one was in 1999, during Chavez’s Presidency.
However, today the election was ordered by decree, while in 1999 a referendum indicated that the majority of citizens wanted a change.
Venezuelans were supposed to answer one question: “Who should represent you in the Assembly?”.
The main problem is that representatives could not be freely chosen. The Constitutional Assembly is composed by 545 members, where 364 has been chosen by local polls within around 6000 candidates (none are from opposition), while the remaining 181 members has been elected by members of seven social sectors, including pensioners, indigenous groups, business people, peasants and students, accused to be Maduro’s supporters.
Indeed the new Assembly is made up completely of government supporters but will have authority over the lives of all Venezuelans.

Datas about election participation are quite uncertain. The National Electoral Council said that nearly 8.1 million people had voted. But many Venezuelans rejected those figures as unrealistic high. No election monitors from the opposition were present to watch for evidence as it came in. The absence of auditors, allowed for a manipulation of the turnout numbers.
Reuters reported that just 3.7 million votes had been cast by 5:30 pm, not long before polling centres closed.
Last element about the Constitutional Assembly, neither Maduro nor the Venezuelan Electoral Council, have specified how long this process will last, or what will happen with the existing legislative power, currently controlled by opposition forces, during the process.
Until it will survive, there won’t be any Presidential election, and the next one is planned in 2018. Hence, Maduro could keep his powers without a democratic support.

What happens now? There are four possible scenarios.

The first one is a soft-landing scenario, where opposition ideology and Chavismo live together in the Country, would be a consequence of successful, increased international and regional pressure.
This may be a concrete solution since some Chavistas, having lost faith in Maduro’s government, would accept a managed transition that offers them some protection.
Under a new National Electoral Council, monitored by the Organization of American States and other observers, Venezuela could have credible elections and a new leadership, recognized by the International Community, and then starting a long-term process for an international assistance plan for Venezuela.
Though possible, this “best case” scenario appears difficult to achieve in the short term because of fragmentation in the opposition and Maduro’s sustained support within various government agencies.

The second possibility is a slow unravelling of the Bolivarian experiment, thanks to international pressure on the regime fizzles. The central government continues to weaken, but the lack of coordinated and organized international pressure allows the regime to maintain control and prevents any peaceful negotiated transaction of power in Venezuela.

Continued disorganization and disunity of the opposition leads to further fragmentation, increased social unrest, violence, and crime, while the government’s failed economic policies continue, including hyperinflation, corruption, and expropriation of private property. Externally, the provision of loans from China and Russia, prevents Venezuela from defaulting on its debt and allow Maduro to hold on.

In this scenario, Maduro emerges successful and maintains control and social order.

The third alternative is a short or long term Military government. Maduro has reportedly asked the military to join the newly proposed constituent assembly, but this has yet to happen.

If the military successfully executes a coup d’état, there are two possible outcomes: the military stays in power and takes control of the government and executive branch; or, the military transfers power in a controlled transition, allowing for institutional reform, national rebuilding, and democratic elections, with the caveat of some guarantees of institutional protection.

The last scenario, and probably the worst one, is a civil conflict and the National collapse. The economy would continue to deteriorate, deepening the humanitarian crisis. Hyperinflation, expropriation of private companies, unproductive foreign loans and decline in gross domestic product would cause even more economic pain than now.

Giacomo Carugo

Student of Msc in Economics and Social Sciences, I have a bachelor in Economics and Finance. Intern at the Italian Embassy to Tallin during the Estonian presidency of the Council of the European Union.

Giacomo Carugo

Giacomo Carugo

Student of Msc in Economics and Social Sciences, I have a bachelor in Economics and Finance. Intern at the Italian Embassy to Tallin during the Estonian presidency of the Council of the European Union.

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