“Venezuela should have been the Norway of South America”

Published: 2018-02-09

The Venezuelan hyperinflation has reached record highs this year. But how did this happen? Andrés Palacio, post doc at Lund University School of Economics and Management, explains why.

Low levels of trust—between people as well as between citizens and the state—and an entirely mismanaged macro economy. Those are some of the reasons behind Venezuela’s economic problems.

Not long ago, Venezuela together with Argentina was among the wealthiest and most well-being countries in Latin America. Today, it is tormented with inequality, social and political fragmentation, dependency of nature resources, weak market institutions and low diversification.

“What we witness in Venezuela today has been going on, at least since 2012, when inflation was already getting at three digits, with Chavez still alive. Crime rates in Caracas had been at its highest then, and we in Colombia were amazed about the level of random violence and the stories from those arriving back then, today we are horrified, and that is impressive in the sense that we have been running a civil war for the last 50 years”, says Andrés Palacio.

No regard for monetary or fiscal policy

”The reasons for the fall of Venezuela are at least three: a socialist interventionist government with no regard for monetary and fiscal policy, the rule of law and no capabilities in running the oil state company. Venezuela has the highest oil reserves in the world, but their value is close to zero given the rate at which these reserves are explored.”

Has there, historically, been similar scenarios in Venezuela or elsewhere?

”I believe the Venezuelan crisis worsened with Chavez, but he was lucky to enjoy the longest commodity boom in history. It lasted for almost seven years of high prices. We cannot say there is any other country that has spoiled so much income in so little time, not even Nigeria gets close to that level of corruption and mismanagement. Other developing countries experiencing the boom did set up sovereign funds to manage the income.”

How could this have been prevented?

”I am among those who thought that with the death of Chavez the country would take another turn. It was clear then already that people had to queue for in supermarkets, shortages were widespread, and at least one episode of hyperinflation had already occurred, meaning, 30 days with an inflation above 50 percent in a month.”

”But the political transition was not transparent, and the international community did not get involved seriously in helping that dying democracy to resurrect. I believe that in Latinamerica we still were getting cheap oil from Venezuela, and in countries like mine we were also silent given that Venezuela had been harbouring and pushing the Farc leaders to get into the peace process that culminated last year.”

What does this mean for the country—for the people living there, and for Latin America in a larger context?

“It has been a horror movie for all of us, especially knowing that Venezuela is among the few countries in the region with all the ingredients for success. It should have been the Norway of South America, and with perfect weather all year round. People living in Venezuela have taken the heaviest toll of all. The income distribution is supposed to have improved, but the inflation levels does not allow anyone to run a normal life, regardless how much money you have. Now that the regime is supposed to be involved in drug trafficking, including the military forces, is just a disgrace. I believe that we will have to learn how to deal with the migrants and the lawlessness coming from Venezuela in the next decade, or at least until there is some sort of regime transformation, let us not say change…”

How can the country avoid ending up in the same spiral?

“More politics, try to restore democracy, and protect the autonomy’s state from vested interest in Petróleos de Venezuela, the state-owned oil and natural gas company, the judiciary, the central banking and trade authorities, to begin with.”

More about Andrés Palacio

Andrés Palacio is an associate senior lecturer and a post doctoral fellow in economic history at the Centre for Economic Demography at LUSEM. He also has a background working as deputy minister of labor affairs of Colombia and director of social promotion in the ministry of health in Colombia.

His research focuses on structural transformation and institutional capabilities in developing countries, social demography and health inequalities, climate change and productivity—and much more.