What America Must Learn From Venezuela's Economic Collapse

By PNW Staff August 15, 2016 Share this article:

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Venezuela has made the news again this week for yet another low in the history of what anyone would classify as a failed state. Government Decree 9855, issued by President Nicolás Maduro under his broad emergency powers, allows for any Venezuelan to be forcibly relocated to agricultural labor camps in order to combat widespread food shortages. 

These forced labor camps are not in punishment for any crime, political or otherwise, but instead yet another failed Communist solution to government mismanagement that will remove ordinary Venezuelans from their jobs and homes and force them onto government-controlled slavery on plantation farms, unable to leave for an extendable period of 60 days. 

Now echoing the worst abuses of Stalin and Mao, the slave labor camps, starvation, corruption and disorder that characterize Venezuelan society should serve as a warning to Americans who don't believe in the consequences of socialist theory in action.

Let's take a quick survey of how far Venezuela has fallen. Decades before, Venezuela was one of the richest and most prosperous nations in South America. Without the drugs of Colombia and with oil wealth and an educated population that embraced both capitalistic and democratic principles, Venezuela showed great promise. But it also suffered from enormous social inequality. 

Hugo Chávez rose to power on the back of a populist movement that promised social welfare to the poor underclass of Venezuelan society. Once in power, however, he nationalized the oil industry and used its profits to fund housing, healthcare and food subsidies for millions. 

Over time, the mismanagement of these social programs, the kleptocratic nature of government officials and the sharp drop in oil prices pulled the country further into ruin. 

Chávez was replaced by the clownish and inept Maduro, a former bus driver and union organizer who had failed to graduate high school, and Venezuela has rapidly accelerated both its conversion to a communist autocracy and its death spiral as a nation.

Venezuela now has the world's highest crime rate and its capital of Caracas competes only with the City of Tegucigalpa, Honduras for the world's most dangerous city. The country has by far the highest inflation in the world, with official numbers found at Statista putting the current rate for 2016 at 481.52%, ahead of South Sudan at 212.44%, Suriname 36.82% and Yemen at 27.54%. 

Massive food shortages continue to plague the country and force Venezuelans to wait hours in line to be allowed to buy even a few basic goods when they become available in the mostly-bare store shelves. 

Medical supplies have been depleted for more than two years and the failing energy infrastructure is responsible for frequent widespread blackouts. A corrupt government uses its near-complete media control to put down food riots and imprison opposition leaders. 

So how did Venezuela get where it is today and how can we avoid the same fate?

1. Currency Controls: The socialist government instituted a regimen of control on foreign currency exchange that requires government permission and central control for any exchange between Bolívares and a foreign currency. 

Imports and exports were shut down almost overnight, businesses competed to pay bribes to government officials and the black market for dollars flourished alongside 6 official exchange rates that were rarely used. The government has been locked in a legal battle with the website dollartoday.com to prevent displaying the true exchange rate for the dollar.

Lesson: Centralized currency control doesn't work but free markets do.

2. Price Controls: The Chavista government sought to combat inflation by setting a precio justo (fair price) for a growing list of staple products. Vendors selling above this price would have their goods confiscated and could be jailed. The problem is that the precio justo was often significantly lower than the cost of product. Shop owners threw cartons of eggs into the street rather than lose money on each sale and the economy continued is death spiral.

Lesson: Centralized currency control doesn't work but free markets do.

3. Red Tape: Socialism meant government control, of everything. Businesses need permits to purchase raw materials, permission to manufacture, specific permissions to ship to the warehouse and then another permission to bring the product to the retail store. 

There are fees to be paid, forms to be filled out and the cost of business, for those that can import raw materials, has grown exponentially. Politically uncooperative business owners find their permissions delayed or denied, food products spoiled on the trucks or factories seized "for the people".

Lesson: Get government out of business. Less regulation helps everyone.

4. Entitlements: The socialist government, known as Chavista, after Hugo Chávez, gained power by promising free benefits to the poor. This redistribution of wealth bought the Chavistas enough votes to gain power, but once in power they were tied to a system of constant handouts of food, housing and community medical technicians. 

Now the only way to survive is through the government-subsidized food system. For example, a single chicken or 7 pounds of beans on the open market costs more than a month's minimum salary. 

The free housing the government distributed to millions? The Chavistas neglected to mention that their government retains title to those apartments and, in the last election, the districts that voted for the opposition saw their residents evicted from their free housing. 

With the collapse in the price of oil, on which Venezuela depends for 96% of its exports, the system of social entitlements is unsustainable and has led to lines, food riots and a burgeoning black market economy.

Lesson: Wealth redistribution systems are destructive. Liberal policies in the US that buy votes with housing, welfare or free medicine should be seen for what they really are, attempts to buy the votes of the poor with the tax dollars of the middle class. 

The US falls deeper into debt every year trying to pay for social programs that, even in the absence of a crash, promise to hobble the economy in the future with crushing interest payments.

5. Imported Voters: Hugo Chávez promoted his social programs and invited the poor and downtrodden from Colombia to immigrate and take advantage of free housing, free food and socialized medicine. 

As many as 5.6 million Colombians migrated to Venezuela, either to escape the Colombian conflict or to enjoy a lower cost of living. The Chavistas granted this population, 156,000 of whom had official refugee status, voting rights and further build a party of dependency. 

That is until recently when the economic crisis intensified and Colombian communities threw their votes behind the opposition. Then Colombia was blamed, legal immigrants were forcibly deported, families were broken, houses were demolished and Maduro fanned the flames of xenophobia in order to shift attention from his own failed policies. 

At the height of the crisis, Maduro promised to allow in 20,000 Syrian refugees in a fresh attempt to import foreign voters.

Lesson: Immigration is healthy when it is controlled, not used to buy voting blocks. The move to allow uncontrolled immigration from the Middle East into the US and plans to grant amnesty to illegal aliens echoes similar plans that have wreaked havoc in Venezuela and Europe.

6. Corruption: The socialist government of the Chavistas is among the most corrupt on the planet. Government officials have become billionaires with Miami vacation homes and Swiss bank accounts while ordinary citizens, earning starvation wages, wait 8 hours or more in line to buy food that may never become available. 

For a party that campaigned on bringing down rich oligarchs, the fact that María Gabriela Chávez, the 35-year-old daughter of Hugo Chávez, has $4.2 billion in various bank accounts speaks volumes.

Lesson: Jail corrupt politicians and ban paid lobbying. The US system of corporate lobbyists and corrupt politicians is both an enormous drain on the economy and among the greatest threats to democracy today.

7. Lack of Production: Venezuela's currency controls and red tape combined with the seizure of factories reduced both imports and domestic production to nearly zero. State-owned factories ceased to produce and entire product categories such as diapers, toilet paper, flour, medicine, cooking oil, car batteries and tires, just to name a few, became unavailable on a national level. 

Without oil income, imports or sufficient raw material, widespread scarcities have led to skyrocketing crime, a collapsed health system and starvation.

Lesson: Domestic production and free enterprise are essential for a healthy economy. The US's trade deficit is not only a macro-economic hindrance but a strategic liability that threatens to cripple the country.

8. Wasteful Spending: In 2015, while Venezuela struggled to feed its citizens amid massive shortages of food, medicine, electricity, automobile parts and pay for government employees, the Chavista government spent more than 500 million dollars to purchase 13 Su-30 Russian fighter jets (after 24 were purchased in 2006). 

The memorial built to Hugo Chávez, Cuartel de la Montaña, is a massive stone palace complete with a company of guards that constantly parades its marble halls while the common Venezuelan scrapes for food in the gutters of the slums just outside.

Lesson: Wasteful government spending on unnecessary projects burdens a country with debt and drains its treasury. It ruined Venezuela and it can ruin the United States.

9. Too Much Foreign Aid: Generosity can be a wonderful thing, but Venezuela continued to donate to other nations in the depths of its crisis, selling its gold reserves, oil refineries and taking on more debt to give $400 million to Bolivian public works, $5 million to fight Ebola in Africa, $250 million to rebuild schools in Chile (a far richer nation). Chavistas continued to give freely to fight global warming, improve education in Haiti and a thousand other causes while their own country crumbled.

Lesson: Take care of your own house before giving to others. The US provides $35 billion in foreign aid to 140 countries and although the US is not (yet) in a Venezuela-style economic crisis, it is over $19 trillion dollars in debt.

10. National ID System: Many countries maintain national identification systems with cards issued either at birth or the age of majority. Venezuela has recorded the fingerprints of every citizen and in a truly frightening move that recalls passages from the Book of Revelation, the only access to the cheap, subsidized food is by scanning with your fingerprint at an official supermarket. 

Each person has a set limit of products available to purchase each month, ostensibly to prevent hoarding, but the result is that elderly parents, sick spouses and the disabled are forced to wait hours in brutal lines for food. 

As Nicolás Maduro proved in the last election, those critical of the government can simply have their already meager food rations cut off by blocking their fingerprints in the national system. With black market prices hundreds or even thousands of times higher, political opposition is tantamount to starvation.

Lesson: National ID systems and biometric data collection is open for abuse by autocratic governments and any attempts to institute such a system in the US should be resisted.