Venezuela Was Destroyed by Central Planning, Not Foreign Sanctions – Eccentric Economics

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Of the many failed socialist economies one can introduce into a conversation, Venezuela has been the most common modern example brought forth. Those in favor of a lassiez faire or free market approach tend to use this devastated country to illustrate the destructive tendencies of a centralized economy. On the other hand, anti-capitalist asserts a counter statement, that outside influences such as the United States and their use of sanctions are responsible for toppling the socialist utopia. Perhaps, this argument has some merit due to the United States government’s history of economic and political interventionism. However, with a more speculative outlook of what socialist policies inherently consists of, this argument has little to no substance.

First, let’s take a moment to define what socialism is to refrain from entering a war of semantics. Socialism, essentially, is an economic and social system that is characterized by public ownership of the means of production, distribution and exchange. Contrary to mainstream beliefs, this “public” is not limited to a government body. It may reflect other bodies such as a collective, a cooperative, community, or other methods of universal social ownership. But let’s be honest: In practice, this economic directing body has exclusively been that of a government. An important characteristic is that it intends to do away with the free enterprise system, and instead guide the economy through a centrally planned and technical method.

This is where socialism loses its feasibility. Rather than utilizing a price system, the Venezuelan government centrally planned their economy.  A group of bureaucrats handpicked by Hugo Chavez altered the market, and installed distorted prices into the market. Naturally, prices are generated through an aggregate combination of supply from producers, and demand from consumers. Producers attempt to meet the many demands of these consumers through the use of a profit and loss system, which allows producers to realize if they are efficiently utilizing scare resources.

With that being said, Chavez was able to pave Venezuela on a path to a decent standard of living. In the early 2000’s, Chavez and his regime actually witnessed economic growth and recovery from the previous administrations. Inflation dropped to its lowest levels since the 1980’s, and unemployment dropped to 7.8% in 2011. However, this is owed to the soaring prices of oil at the turn of the century, which allowed Chavez to fund his populist social programs and decrease reliance on foreign entities. Like many other socialist or centrally planned economies, the possibility to thrive exists in their infant stage due to the massive confiscated wealth. However, one can only disregard price signals and market forces for a limited duration before repercussions are observant. The command policies that granted the Chavez economy prosperity would also ignite its predictable downfall.

Beginning in 2006, Chavez and his regime began nationalizing several industries as a means of conducting his economic policy. This in turn removed the profit loss system, and replaced it with a command economy in order to reduce multinational corporate interest, and fund his wealth redistribution polices. Investment saw a dramatic decrease due to eminent domain, having property or capital confiscated or nationalized. The absence of entrepreneurial and market forces made the 2008 recession an utter catastrophe for Venezuela, as they were never able to fully recover. Massive government spending secured their livelihood in the short run, but government stimulus is not stable in the long run.

Due to the nationalization of industries, particularly oil, the Venezuela economy became dependent on the resource. Venezuela suffered from the market phenomenon known as Dutch disease. The command economy ignored growth in other industries, and placed an emphasis on their crude oil supply which accounted for nearly 96% of its exports earnings. In a market economy, entrepreneurs invest in a multitude of industries, ensuring growth in a whole host of sectors, and maintaining sustainability in the aggregate.  When the price of oil fell, Venezuela retained an extensive surplus of oil stocks which devastated the oil export dependent economy. The Venezuelan economy maintained a system absent of price signals which act as “knowledge” for producers. The deficiency of price signals caused a misallocation of their valued resource.

Chavez’s successor, Nicolas Maduro, continued the expensive social programs. To fund these programs Maduro saw a massive increase in government spending, inducing hyperinflation. A study in 2018 has observed that the Bolivar has been devalued by a whopping 48,760%. The poverty rate floats around 87% at the moment. Even with the recovery of the oil price in recent years, oil production has decreased due to bureaucratic maintenance and malinvestment.

Despite the obvious observations that the command economy failed due to the absence of free exchange and private ownership of capital production, many insist that the demise of Venezuela is owed to foreign sanctions.  Although research shows sanctions rarely have the effect they intend to impose, it is acceptable to argue that international sanctions negatively affected the Venezuelan economy to an extent. That is not being contested. Their inability to export their massive oil supply made it more difficult for the government to receive income for imports. Additionally, financial markets have been shut off from Venezuela, leaving them unable to restructure their enormous debt or receive new credit. Though I would wager, regardless, not many institutions would grant them further credit due to the government’s consistent fiscal mismanagement.

Here’s the catch. These sanctions would have done very little if the economy wasn’t completely centralized. They wouldn’t have to rely on its oil exports if the government didn’t direct all scarce resources to that particular industry, nor would the citizens have to rely on the government importing consumer goods if they were free to do so themselves. There wouldn’t be unsustainable debt to restructure if the bureaucracy didn’t mal-invest its citizen’s money. These sanctions would have done little if its citizens were initially free to exchange and produce privately.

To claim the absence of foreign trade and financial relations from market oriented economies destroyed the growth of Venezuela is ironic. In other words, socialist economies cannot properly function without trading with market economies or capitalist nations investing into the socialist economy. Therefore, not only can socialist economies not commence without an initial thriving capitalist system to fund its programs, it can not sustain its livelihood unless other market economies exchange with it. Never mind the authoritarian government policies that violated human rights and fundamental liberties. Surely an oppressed populace and the exodus of valuable human capital have little to do with its failure! Is it possible that eminent domain and productive asset seizure turned away investment more so than the foreign sanctions? Again, the sanctions played a role. But to say that the Venezuelan economy wasn’t already tanking due to its centralized mismanagement before the US sanctions is completely asinine.  (For the figure below: Note the violent spikes in 2005-2006, this was when Chavez seized the means of production. After a sharp increase, it was followed by a chaotic downturn.)

Like other socialist economies, its citizens are indeed equal; however their equality is nothing less than misery. While the citizens are digging through garbage cans in search of food for their children, the bureaucrats who control the economy sit upon a pile of wealth. Chavez’s daughter is the richest woman in Venezuela, and it has been reported government administrators have stashed billions of dollars of the countries wealth in offshore accounts. How many more socialists states need to fail before these utopian dreamers realize that market forces will not allow artificial manipulations in its domain?

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Logan Davies

Logan Davies is a Regional Manager in the Banking Services industry, and the director of the non-profit organization, Voluntaryism in Action. He graduated from Middle Georgia State University with a degree in Business Administration. He is the father of a loving son, an avid outdoorsman, firearm enthusiast, and unwavering supporter of liberty.