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What on earth is going on in Venezuela?

Image Credit: ruurmo (Flickr: Creative Commons)

Not long ago, Venezuela was the richest nation in Latin America. Last year the average Venezuelan lost 11kg due to food shortages, and 90% live in poverty. There hasn’t been a war or a natural disaster, so how does a country fail so spectacularly?

Riding high on oil at the height of the commodities cycle, President Hugo Chávez dreamed big of a socialist paradise, but also of uniting Latin America against US imperialism. He boosted anti-American regionalism, derided countries deemed too close to the US, funded left wing governments like Cuba with its oil wealth, and made rallying speeches against America. Venezuelans fell behind him, many having been lifted out of poverty under his regime as social programs were greatly expanded and the incomes boomed. But since shorty after Chávez's death in 2013, Venezuela’s economy has almost completely collapsed.

How did this happen? Venezuela blames America; others blame oil. Starting in 2014 prices fell from around $100 per barrel to less than $50, and as low as $30 at times. Government revenue and foreign currency dried up; oil accounts for around 95% of Venezuela's export revenue and oil and gas makes up 25% of GDP. Yet although the country was hit hard by the oil crash, this only tells part of the story. More important has been how Chávez's hand-picked successor, Nicolás Maduro, has systematically mismanaged the economy. Widespread and ill-conceived import barriers have left businesses unable to operate. Exchange rate rules, which in practice allow only those with government connections to buy foreign currency, further limit imports. The result is that supermarkets are empty, hospitals lack basic supplies, and businesses are closing for lack of inputs, funding, and customers. Inflation of almost 4000% last year has reduced the value of people's savings to nothing, and the International Monetary Fund estimates that by the end of this year GDP will have fallen 50% from its peak in 2013. Those who can are flooding out of the country, mostly into neighbouring Colombia and Brazil. Many more visit to buy essentials unavailable at home.

Meanwhile, in the oil sector output has dropped considerably as the nation struggles to keep its infrastructure operational without spare parts or foreign assistance. The government responded by sacking the head of the state oil giant, PDVSA, and putting the army in charge, only for output to continue falling. The country is now pumping less than half of its pre-crisis output. The military has continued to take over more and more of the economy, usually with poor results.

These issues haven't gone unnoticed by Venezuelans who are battling a shortage of, well, everything. Political opposition began shortly after the 2013 election, which Maduro won by a razor thin margin and which many have claimed was rigged. When voters gave the opposition a majority in congress Maduro invented an alternative 'people's assembly' stacked with supporters. A pliant supreme court waived through these actions with little opposition. Critics, including the regime's own Attorney-General, have been persecuted and forced to flee. Since then widespread protests, culminating in 2017, have been met with a deadly response. All this has left the opposition struggling to unite as their leaders are detained, repeated waves of protest fail to get results, and ordinary people focus on survival.

Venezuela was hoping that as the regime's ability to pay its debts came to an end - amid increasingly desperate measures to keep it solvent - it would finally burn itself out, as its last source of foreign currency - oil sales from Venezuelan state-owned oil company PDVSA - were frozen when foreign creditors seized its overseas assets. American sanctions seemed likely to force default; they bar American creditors from buying replacement bonds or even talking with the Venezuelan Vice-President, an alleged drug kingpin who is in charge of negotiating with creditors. But so far this hasn't happened, as China bought bonds backed by oil and creditors proved unwilling to seize assets lest the slow trickle of revenue dry up completely.

Nations in the region have criticised Venezuela unusually strongly, suspending it from South American trade bloc Mercosur and a number of other regional groupings and most recently banning Maduro from attending the annual Summit of the Americas last month. But he still has allies in the region and most nations feel helpless to respond. An election is due on May 20, and might lead to more violence or simply lock in the government's power. For now, the world just watches the slow burning crisis continue.

Sam Bradshaw is currently completing a dissertation on regional integration in Latin American as part of his Master of International Relations at Sydney University.

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