6 things you need to know about Venezuela’s political and economic crisis

This piece was originally published in the Washington Post. 

Michael McCarthy is a research fellow at the American University Center for Latin American and Latino Studies and a consultant to the Woodrow Wilson International Center for Scholars Latin America Program.

Venezuela is a powder keg. Once a rich country held together by strong leadership and heavy social spending, it is now in economic disaster and could slide into widespread social disorder, triggering instability throughout Latin America. Drastic shortages of food, medicine, electricity and other necessities are causing small riots. Organized crime and extrajudicial police killings have given Venezuela a frighteningly high rate of murder and violence, with narco-traffickers allegedly in cahoots with corrupt allies in the government and security forces. Runaway inflation means that from March 2015 to 2016 a basket of basic goods for a family of five became 524 percent more expensive. According to a local NGO, Venezuela faced 170 lootings or attempted lootings from January to April 2016.

The highly unpopular socialist government of Nicolas Maduro announced electricity rationing and drastic cutbacks to the state work schedule, in part because of a drought and in part because world oil prices have collapsed, cutting government revenues dramatically. Meanwhile, the National Assembly, which is controlled by Maduro’s opposition, declared the country’s health sector a national emergency. As if this weren’t enough, the government is taking steps toward authoritarian control over its opposition. Maduro is the handpicked successor of former president Hugo Chávez (1999-2013) and leader of the chavista political movement’s United Socialist Party of Venezuela (PSUV). Maduro’s PSUV controls the Supreme Court and all national institutions. The lone exception was the National Assembly, where a heterogeneous coalition of opposition parties had a three-fifths majority. Maduro recently declared a 60-day state of emergency, after alleging that his opposition was conspiring to launch a coup. Now Maduro is threatening to effectively close the assembly down. The emergency decree already grants the president super powers by invalidating congressional authority to review key budgetary issues budget or issue motions of censure against his cabinet. Even more ominously, the decree expands the military’s role in the maintenance of public order. Sectors of the opposition have termed the decree an “auto-golpe” — self-coup — and a “tipping point” in the country’s crisis. Here are the six things you need to know about Venezuela’s crisis: 

1. Depending on oil alone has brought Venezuela to its knees

Venezuela is home to the largest proven oil reserves in the world. The country’s oil sector was nationalized in 1975, creating the state oil company P.D.V.S.A. The Venezuelan state depends on oil for approximately 95 percent of its export revenue. It is thus much more dependent than other resource-rich states on commodity prices.

The Maduro government inherited an economic crisis created by Chávez’s economic policies, which involved expropriating industries, using P.D.V.S.A.’s revenues to pay for generous social welfare benefits that won votes, failing to save for more difficult times, and discouraging private industry that could have diversified the nation’s economic base. All that came home not long after Maduro took office in 2013, when Venezuelan oil prices dropped by 50 percent in one year, between 2014 and 2015. According to IMF figures, the Venezuelan state went from earning around $80 billion from oil in 2013 to a projected $20-25 billion in 2016. Oil income provides the Venezuelan government with foreign currency that’s distributed to domestic oil producers through a controlled, multi-tiered currency exchange market. Thus, when oil prices drop, the entire economy takes a big hit. The International Monetary Fund (IMF) projects the country’s economy will contract by 8 percent this year. Economists fear the country could experience hyperinflation this year. The IMF’s chief economist for the Western Hemisphere, Alejandro Werner, described the situation as “unsustainable over the medium term.” The government’s oil minister, Eulogio del Pino, is on a diplomatic offensive to boost the oil market. Although he has failed to broker an OPEC production cut, the discussions alone – and the possibility of such a cut — are helping boost oil prices. Since January, the price for Brent oil, a type of crude commonly used as a global benchmark for gauging prices, is up more than 20 percent. With demand still strong, and the risk of pop-up crises from national disasters and instability in producing nations making things still more uncertain, some analysts believe oil price will settle around $50/barrel. 

2. The boost in oil prices could help the Maduro government muddle through, but this will not fix Venezuela’s economy.

If oil prices continue going up, that could help Maduro see out his 2013-2019 term. How? Higher oil prices could help Maduro’s relations with international creditors. If the Venezuelan government earns more income, China — which is the country’s main sovereign creditor — may be willing to take the risk of loaning more or making existing loan terms more flexible. Wall Street banks and hedge funds, which have been profiting from the country’s high-risk bonds but are concerned about whether the government can pay its debts, may be similarly willing to continue to extend credit. But while higher oil prices might help Maduro avoid being ousted, this would not place Venezuela on a path to recovery. P.D.V.S.A.’s production capacity is reaching record lows, and, for that matter, oil is a mixed blessing for the country. Even leaving aside environmental concerns, being an oil state means Venezuela hasn’t been investing in developing other parts of the economy, or fighting corruption, or working to get people to pay taxes rather than evading them. 3. Venezuela has a presidential system, with multiparty elections for all levels of government, but it doesn’t have checks and balances. In April 2013, Maduro won a thin victory in snap elections held after the charismatic Chávez died in office. When Maduro took power, the PSUV controlled the assembly with a three-fifths majority. This past December the opposition’s coalition won a landslide two-thirds majority in legislative elections — 55 percent to the Democratic Unity Table (MUD) and 41 percent to the PSUV — but since then the Maduro government has stymied efforts to restore balance to the system. The lame duck National Assembly eliminated congressional oversight over the Central Bank, replaced 12 Supreme Court justices to prevent the opposition-controlled Congress from filling scheduled vacancies, and approved a government spending package. In fact, the Supreme Court intervened in the electoral process itself, nullifying the results from Amazonas state. There, MUD had won three out of four races — but the court’s ruling suspended the results. This decision should have triggered new elections, but no progress has been made there. That leaves MUD with only a 60 percent majority in the assembly, which is not enough to remove Supreme Court justices or convene a National Constituent Assembly. Since then, the Supreme Court has continued to serve as the government’s judicial shield, knocking down bill after bill. Even before the December elections, Maduro’s government was quashing dissent, including jailing some of the country’s most important political leaders. For example, Leopoldo López, a successful mayor who became an internationally recognized leader after losing his political rights to run for office and forming a personally driven party, Popular Will, is in jail. López was sentenced for promoting political violence, but, according to Amnesty International, as well as other international watchdog groups, he is a prisoner of conscience. 4. A social explosion rocked the nation in 1989. Could it happen again? In 1989, Venezuela was rocked by the Caracazo or los saqueos: urban-based riots and lootings against the effects of IMF-prescribed austerity. State security forces attacked protesters. Officially, police killed hundreds of protesters; unofficially, many believe the numbers ran into the thousands. Many today fear that the Caracazo (literally, the big one in Caracas) could be repeated. It might, but probably not in the same way. In 1989 the government was caught by surprise, largely unaware of the tensions, and it immediately cracked down. Today, the context is different. Already, small protests over deteriorating water and electricity erupt regularly while looting is becoming part of the daily landscape as patience to stand in line or pay black market fees to obtain basic goods and services runs out. The Maduro government is looking the other way during some of these small riots or store lootings, allowing people to blow off steam in the hope of averting confrontation. The new normal of monitored instability is a very dangerous gamble. If the instability escalates, the government would be faced with the trade-off between heavy repression or complete social meltdown. 5. The world talks about Venezuela’s crisis, but no one does anything. Will that change? Venezuela’s crises are front-page news throughout the Americas and in Portugal, Spain and Italy, where many Venezuelan expatriates live. Human rights groups are pressing the Organization of American States to hold meetings that would invoke a democratic charter against Venezuela and suspend the country from the body for its anti-democratic behavior. But the international community has trouble influencing Venezuela’s government, because the country’s oil earnings have helped it maintain autonomy. The government has rejected offers for humanitarian assistance; it appears willing to pay a cost to not be beholden to other nations. Pope Francis mentioned the Venezuelan people in an Easter Sunday address that emphasized social peace. He and his secretary of state — a former Vatican ambassador in Caracas — have been influential in focusing attention on the Venezuelan peoples’ suffering and on the need for peaceful solutions. Vatican officials have made clear that any mediation process between the government and the opposition coalition should entail “dialogue at a negotiating table.” This formulation is intentionally different from calls for plain dialogue or mediation — which a three-person team of former presidents invited by the government is supporting. The Obama administration’s priorities are elsewhere — in Cuba where the U.S. is trying to reestablish full diplomatic ties with Havana, in the Northern Triangle of Central America where the United States has interests in political stability to prevent refugee crises, and in Colombia where a historic peace deal with a guerilla group could be struck soon. In 2014, the U.S. Congress passed and Obama signed legislation that called on the White House to target punitive actions — sanctions — against human rights abusers and corrupt officials in the Venezuelan government. The White House recently renewed its authority to sanction, but officials have said that they do not want to stir up a hornet’s nest by taking measures that Maduro might frame as evidence of U.S. meddling. The U.S. objective is to help Venezuela avoid a disaster. To achieve this, it can work with new regional partners in South America — in particular, new governments in Brazil and Argentina — to begin crafting a framework for multiparty talks that press the Maduro government to allow more political space for the opposition and that make clear that Venezuela’s sovereignty will be respected. The hot issue is the opposition’s proposal to hold a recall referendum on Maduro’s presidency this year, which government spokespersons have ruled out. Last year, the international community placed pressure on the Maduro government to hold scheduled elections. This year the task is to help the government believe that holding a referendum is in its interests. This will be a tough sell. Maduro is unpopular. His relations within his party are also somewhat troubled; he may fear a palace coup from rivals or be worried that some are willingly letting the country sink into abyss. 6. The debacle in Venezuela carries a strong message for the Latin American left that it is time to get back to basics. Latin America’s left turn began in Caracas when Chávez, a former coup plotter, was elected president as an outsider candidate and then tacked hard to the left once in power. But the chavista movement he founded is at risk of collapsing because of the economy’s awful performance. That needn’t be followed by a hard shift to the right. The left once had legitimacy as the voice of democratic change. With Venezuela’s authoritarian turn going unchecked by the left, this legitimacy is now lost. But chavismo was a self-defined revolutionary movement, and not all left-wing governments were as extreme as that of Chávez. Ecuador, Bolivia and Nicaragua’s left-wing governments have all followed relatively moderate economic models that entail a strong role for the private sector and market-based economic development. Chile, which is close to becoming a social democracy, is the most interesting example for the Latin American left. When transitioning from the dictatorship of Augusto Pinochet, the country’s left made difficult compromises in the name of finding inclusive ways forward. Today, the Chilean left is made up of both institutionalized parties and social movements, showing that it is possible to make incremental progress without sacrificing one’s vision.