The price of stupid leadership: Venezuela is on the brink of collapse

Years of extreme ideology and economic ignorance have consequences.

Venezuela should be a rich – or at least comfortably middle class – country. It has the largest oil reserves on earth. Even though prices are down now, Venezuela had years of record high oil prices bringing in lots of revenue.

Now, instead of prospering, Venezuela is on the brink of becoming a failed state. A report from the New York Times goes into detail on the horrendous situation:

“In recent weeks, the government has taken what may be one of the most desperate measures ever by a country to save electricity: A shutdown of many of its offices for all but two half-days each week. But that is only the start of the country’s woes. Electricity and water are being rationed, and huge areas of the country have spent months with little of either. Many people cannot make international calls from their phones because of a dispute between the government and phone companies over currency regulations and rates. Coca-Cola Femsa, the Mexican company that bottles Coke in the country, has even said it was halting production of sugary soft drinks because it was running out of sugar.”

I previously wrote about Empresas Polar, the company responsible for producing 80 per cent of Venezuela’s beer. They were on the verge of shutting down weeks ago. Now they are gone.

How has it gotten so bad in Venezuela?

The key factor is a government blinded by ideology. The socialist Hugo Chavez came to power as a response to legitimate concerns about an out of touch government that served a small elite, rather than the majority of Venezuelan’s. Chavez took some important steps to provide more education and medical services to the poor. For that, he should be commended.

But Chavez also stifled dissent, concentrated power, and put political patronage ahead of efficiency. Rather than making long-term investments, the Venezuelan government put oil profits into short-term vote-buying, and increased military spending. Much of this was lost to corruption, not even benefiting those who needed help.

Chavez could keep this system going through the force of his cult of personality and thanks to high oil prices – which make up 96 per cent of Venezuela’s export revenue. But his death and subsequent replacement by the far less charismatic and far less popular Nicolas Maduro, combined with a collapse in oil prices – has left Venezuela in dire straights.

Still, while a recession is understandable in Venezuela, the near collapse of the country is due to pathetic incompetence on the part of Venezuela’s leaders. After years attacking the market and capitalism as pure evil, the government has been unable to let market forces re-adjust the economy as needed.

How can a country with so much oil run out of essentials like toilet paper? Pure stupidity. When prices started to go up, the government instituted strict price controls, limiting the prices businesses could charge. The effect has been predictable and severe.

Imagine you own a store selling toilet paper. Inflation goes up, so your money is worth less than before. That means you have to spend more to buy the same amount of inventory. In order to make a profit or just break even, you have to raise your prices. If the government stops you from raising your prices you will run out of money and won’t be able to buy any toilet paper to put in your store. That will lead to a shortage and that’s exactly what is happening.

The government’s response: Accuse businesses of “economic war” and accuse America for good measure.

This is the danger of extreme ideology – it blinds us to possible solutions. Solving the shortages would be easy, just lift all the price controls. At the same time, targeted financial aid could be provided to poor Venezuelan’s.

Of course, it’s probably too late for that. Venezuela made the mistake of trying to replace the free market with central planning. The free market is by far the most effective and efficient system for providing goods. It has severe flaws, and government has a role in addressing those flaws – but it must do so through income distribution – not through controlling the market itself.

With the opposition having taken control of the Legislature and Maduro facing a recall referendum, there is hope that Venezuela will get a more reasonable government. But for now, the tragedy continues. Innocent Venezuelan’s will continue suffering due to the incompetence of their leaders.

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Photo credit: A. Davey (Flickr)