Venezuela was once Latin America's success story, and then came socialism

Here is a puzzle. Take a country with the largest proven oil reserves in the world by OPEC's count, a coastline, farmland, a literate population and a century of experience selling the most valuable commodity on earth. Give it twenty years. Then ask how it came to be a place where doctors fled, where supermarket shelves emptied, where the currency became worth less than the paper it was printed on, and where millions of people walked out of the country with what they could carry.

The answer is not a mystery, and it is not bad luck. It is a policy record. The story of Venezuela is one of the clearest natural experiments in the modern world, and the honest way to tell it is in order, with dates, and then to take up the best defence of the other side.

The claim and the terms

Let me state the thesis precisely, because precision is what keeps an argument honest. My claim is that Venezuela's collapse was caused primarily by the economic policies adopted from 1999 onward: expropriation of productive assets, price and currency controls, the politicization of the state oil company, and the financing of government spending by printing money. It was not caused primarily by foreign sanctions or by a fall in oil prices, although both made things worse at the margin and the defenders of the regime like to mention them first.

Some terms. Nationalization is the transfer of private property or an industry into state ownership. Price controls are legal limits on what may be charged. Exchange controls require that foreign currency be bought and sold at official rates, often through a government agency. Hyperinflation is, by the usual convention, inflation of 50 percent a month or more. Socialism, in the sense used by the government that ruled Venezuela, meant the state taking command of the commanding heights of the economy and directing resources by political decision rather than by price.

The starting point: rich, with problems

Venezuela in the twentieth century was a country that struck oil and grew rich. By the middle of the century it was among the wealthier countries of Latin America by income per person, and it attracted immigrants from Europe and neighbouring countries. It was no paradise. Oil wealth had made it dependent on a single export, and corruption and inequality were real. The decades before 1998 included an economic crisis in the 1980s and 1990s, an attempted coup in 1992, and widespread anger at the political class. That anger is the necessary context, and a fair account does not pretend otherwise.

Into that anger stepped Hugo Chavez, a former army officer who had led the failed 1992 coup attempt. He won the presidential election in December 1998 and took office in February 1999. He promised to end the corruption of the old parties and to use the oil wealth for the poor. A new constitution was written in 1999. The promise was attractive, and it is worth being clear that the high price of oil in the early 2000s gave him, for a time, plenty of money with which to keep it.

Step one: take control of the oil company

The state oil company, Petroleos de Venezuela, PDVSA, was the engine of the economy. In December 2002, opponents of the government launched a general strike that included many PDVSA managers and employees, and it lasted into early 2003. The government's response was decisive and was the pivotal act: it dismissed roughly eighteen thousand PDVSA employees, a very large share of the company's workforce, including many of its engineers, geologists and managers. Whatever one thinks of the strike, the result was that a technical enterprise lost much of its expertise and was reconstituted as an instrument of the government's political project.

In February 2003 the government also introduced exchange controls, requiring that foreign currency be obtained through an official agency at official rates. That created a gap between the official exchange rate and the rate at which people could actually trade, and a gap like that is an invitation to corruption, because whoever gets dollars at the official price can sell them at the market price. The mechanism is simple arithmetic: buy at a low fixed price, sell at a high real one, and keep the difference.

Step two: nationalize

From 2007 the pace of expropriation quickened. The government took control of the oil projects in the Orinoco Belt on terms that forced foreign companies to accept minority stakes or leave. It nationalized the main telephone company, the largest electricity company in Caracas, and, later, steel, cement, food-processing and other firms. Farmland and farms were expropriated in the name of land reform. The pattern repeated: the state takes a productive enterprise, installs political managers, and the enterprise's output falls.

The logic of why it falls is not a matter of ideology. It is the problem of incentives and knowledge. A private owner who runs a farm badly loses money and must fix it or lose the farm. A state-appointed manager who runs it badly may be rewarded for loyalty. If you want the deeper reason why command economies cannot calculate what anything is worth, Why Soviet shoppers stood in line, and the calculation problem behind it explains it, and the Venezuelan case is the same lesson in a tropical setting.

Step three: price controls and shortages

The government fixed prices on basic goods, among them food, medicine and household products, and set them below what it cost to produce them. The effect is something every first-year economics student can predict. When a price is held below cost, producers stop producing, or produce less, and shortages appear. Controlled prices also encourage smuggling, because a good sold at a controlled price in one place can be resold at a free price across a border, and hoarding, because owners expect the price to rise.

The result was the picture the world came to know: long lines outside shops, bare shelves, and a black market in which everything could be found at a price that ordinary people could not afford. A government that sets the price of flour below the cost of making it has not made flour cheap. It has made flour disappear.

You can find the same story in other places, and Rent control's record from Stockholm to San Francisco is the same story shows how a price ceiling plays out in the housing market. The logic does not change when the good does.

Step four: print the money

When a government spends more than it takes in, it can tax, borrow or print. Venezuela's government had spent heavily when oil prices were high, and when prices fell sharply from 2014 its revenue collapsed. It had few savings, its borrowing was limited, and its productive base had been weakened, so it financed deficits by creating money through its central bank.

Nicolas Maduro, who had been Chavez's vice president and was narrowly elected president in April 2013 after Chavez died in March of that year, presided over what followed. The currency lost value faster and faster. By 2016 inflation had become extreme, and in the years after it reached the level of hyperinflation. In 2018 the International Monetary Fund projected inflation in the millions of percent for the year ahead, a figure the government disputed. The country's central bank ceased to publish reliable data for long stretches, which is itself an indicator of how things stood. Wages became nearly worthless as the currency fell, and people took to carrying bags of banknotes to buy groceries. The state redenominated its currency more than once by removing zeroes from the bills, because the numbers had grown absurd.

The mechanism is not complicated. A currency is worth what it will buy. When more of it is created than there are goods to buy, each unit buys less. If the creation continues faster than the decline, the process feeds on itself, because people spend money as quickly as they can before it loses more value. Hyperinflation is a destruction of the most basic public good, a unit of account everyone can rely on. For the cost of inflation for ordinary families, even at modest rates, see inflation hurts the poor most, and the arithmetic of a fixed paycheck.

The oil production record

Here is a fact that matters for the sanctions argument. Venezuela's oil production was at roughly three million barrels a day or more around the turn of the century, and it fell, year after year, to under one million barrels a day by the end of the 2010s. The decline was steady and substantial, and it was well advanced before the most severe United States sanctions on the oil sector in 2019. A company that loses most of its skilled workers, underinvests in maintenance, and is used as a political piggy bank will pump less oil. That is not a speculation. It is what the production figures from OPEC and the International Energy Agency show, and you can check them in those organizations' published tables.

The exodus

The most human measure of what happened is how many people left. The United Nations refugee agency, UNHCR, together with the International Organization for Migration, has counted Venezuelans who have left the country as more than seven million, making it one of the largest displacement crises in the world. These were not soldiers fleeing a war. They were mothers, nurses, engineers and teenagers leaving because they could not buy food or medicine or earn a wage that was worth anything.

When a country forces out so many of its people without a shot being fired, it is passing a verdict on its government that no election result can match. People vote with their feet when they cannot vote with their ballots.

The strongest objection: it was the sanctions

The other side's best argument deserves a fair statement. It runs like this. The United States imposed sanctions on Venezuelan officials beginning in 2015, restricted the country's ability to borrow in 2017, and in January 2019 sanctioned the state oil company. Those measures, the argument says, cut off oil revenue and financing, worsened the humanitarian crisis, and caused a great deal of suffering. Critics also point to the fall in oil prices after 2014 and to the opposition's own sabotage and violence. Therefore, they say, the collapse cannot be blamed on socialism.

Let me take it point by point.

One. The sequence is wrong. The sanctions came after the decline had begun. Shortages, price controls and a rising inflation rate were in place before the broad financial sanctions of 2017 and the oil sanctions of 2019. A cause cannot come after its effect. Sanctions may have deepened the crisis, and an honest observer should say so, but they did not start it.

Two. Oil prices fell for everyone. Other oil exporters in Latin America and elsewhere faced the same fall in prices after 2014. They did not experience hyperinflation or a seven-million-person exodus. The question is why Venezuela fell so much further, and the answer is the policy record described above.

Three. The production decline predates the sanctions. As the figures show, output had been falling for years because of mismanagement and underinvestment. Sanctions cannot reduce a flow that is already small.

Four. The controls and the printing were choices. No foreign government forced the Venezuelan state to set prices below cost, to take over farms, to fire its oil engineers, or to finance deficits by printing money. Every one of those decisions was made in Caracas.

Five. A country with a functioning economy does not collapse from sanctions alone. Iran, Cuba and North Korea have been under sanctions for decades; the point is not that sanctions are harmless but that the severity of Venezuela's collapse, and its timing, tracks domestic policy. If sanctions alone explained it, the collapse would have begun when the sanctions did.

It is possible to hold two thoughts at once: that sanctions on a country's whole economy can hurt its people, and that the principal author of Venezuela's ruin is the government that spent two decades dismantling its own productive base. Conservatives can debate the wisdom of sanctions, a legitimate argument, without letting the debate hide the main cause.

Measure it against the record

Look at what Venezuela had. It had resources, a literate workforce, and decades of oil income. It had what economists call the endowment. What it lacked, in the end, was the institutions that turn an endowment into lasting prosperity: secure property, honest courts, prices that carry real information, and a currency one can trust. A country can burn through the greatest natural wealth in the world if it destroys the institutions that make wealth usable.

That is the lesson that conservatives, and Americans generally, should take. The Founders understood that property rights and a sound currency are not conveniences; they are the foundation of liberty. The Constitution forbids the states to issue bills of credit or make anything but gold and silver coin a tender in payment of debts, and the Fifth Amendment bars the taking of private property for public use without just compensation. Venezuela's rulers did the opposite on every point. The people who paid were the ones who had no say.

For the wider comparison between systems that tried planning and systems that did not, Two Germanys and two Koreas, the natural experiments that socialism lost sets out the evidence, and eight socialism myths tested against the countries that actually tried it tests the most common defences. For the opposite example, a country that freed its prices overnight and recovered, see Ludwig Erhard ended price controls on a Sunday and launched a miracle.

The case in brief

1. Venezuela had the largest oil reserves in the world and a strong standard of living by regional measures, so its collapse cannot be explained by poverty of resources.
2. The decisive policies were the 2003 firing of roughly eighteen thousand PDVSA workers, exchange controls from 2003, the nationalizations from 2007, price controls that produced shortages, and the financing of deficits by printing money under Maduro.
3. The sanctions argument fails on sequence, comparison and mechanism: the decline began before broad sanctions, other oil exporters faced the same price fall without a collapse, and every key decision was made in Caracas.
4. The human verdict is the exodus of more than seven million people, counted by the United Nations.
5. The lesson is that property rights, honest prices and sound money are the foundation of prosperity, and a government that destroys them can ruin even the richest country.

What you can do: look up the Fifth Amendment's takings clause on the Constitution page, then ask your state legislator what your state's rules are for compensating owners when government takes private property.