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The fall of Venezuela 2100
Venezuela was the one of the largest known oil reserves in the world with a democratic government, Venezuelan entrepreneurs recognized that oil resources in Venezuela possessed great potential when oil was discovered for the first time off the coast of Venezuela near the mid-1900s. Businessmen and politicians alike saw incredible economic opportunity for the South American country. Interestingly, Venezuelan citizens preferred government control of the oil industry. They recognized the potential wealth that oil could produce, but they felt that private control of the resources would enrich few while the average Venezuelan labored intensively for years in order to find economic security. They felt that the government could take the profits produced from oil and invest directly into the country’s infrastructure and agriculture. Venezuelan intellectuals and politicians warned of economic catastrophe if the government did not control oil.
Until 1943, private oil businesses still operated with little government intervention, other than political rhetoric from those that wanted the government to control more of the oil industry. In 1943, the Venezuelan government passed a law that stated that Venezuela would earn the same amount of money as the oil companies’ net profits through royalties in addition to imposing taxes on oil production and income. Oil companies incorporated in the United States agreed to the deal. Because the United States and other allied nations relied on Venezuelan oil during World War II, bureaucrats and statesmen in Washington, D.C. told American oil executives that they would get no help from their own government if they chose to oppose Venezuelan officials. The law’s nickname is “the fifty-fifty deal.” The deal was a historic win for those in favor of heavy government intervention in the oil industry and a precedent setting moment for the expectations of Venezuelan citizens.
Venezuelan citizens and politicians understood that they could negotiate with oil companies to extract more wealth and impose higher taxes if necessary. The President of Venezuela at the time of this law’s enactment was Isaías Medina. World War II had disrupted Venezuela’s imports, so this deal was especially important. Unfortunately for Medina, his term as Venezuelan President ended in 1945 when the military ousted him. The new government appointed Pablo Pérez Alfonzo as the new development minister, and he wielded exceptional power within the new government. Alfonzo virulently opposed the fifty-fifty deal. Initially, his opposition might appear to be an opportunity for oil companies to retain more of their profits, but he opposed the law because he felt oil companies were still retaining too many profits. He favored increasing taxes on oil companies to fix what he saw as an injustice. Oil profits poured into Venezuela during this time period. Venezuelan citizens began demanding that more of the oil money in the government’s hands should be spent on social programs, and the government obliged.
The increase in oil profits became yet another important precedent setting event. Venezuela recognized its position in the world, and its leaders learned that they could influence other oil producing nations. Through this influence, Venezuelan officials could make sure that Venezuela remained an attractive place for oil companies to do business. Venezuelan leaders also learned that the oil business could produce lucrative profits and the citizens could be kept happy with increases in spending on social programs. One thing that Venezuelan leaders did not learn is that they would need to save some of the oil revenues instead of immediately spending all on these social programs. The failure to grasp this concept would prove to be costly to future generations of Venezuelans and late he was ousted by the military.
Then under Pérez Jiménez’s regime, Venezuela saw historic economic prosperity. The post-World War II economic boom being felt all over the world increased demand for oil, and Venezuela became a key supplier. Venezuela gained most of its profits from foreign consumption of Venezuelan oil. Instability across the Middle East spooked European and North American oil companies, and Venezuela saw foreign investment triple from 1950-1957. Pérez Jiménez had grand visions for Venezuela. He invested heavily in a public works program that would improve infrastructure, low-income housing, schools, and hospitals. All of this was meant to impress foreign investors and change perceptions of Venezuela. Eventually, his government’s spending caught up to him. The spending became very inefficient due to corruption within his own administration. To fix the problem of corruption within his administration, he chose to ignore the corruption and cut business subsidies and social spending instead. The end of some business subsidies angered the entrepreneurial class, and the cuts in social spending angered low and middle-income Venezuelans. Eventually, he too was ousted by the military in 1958.
Venezuelans elected Rómulo Betancourt to be president and he called on a former Venezuelan leader to help shape oil policy, Pablo Pérez Alfonzo. He again created an alliance with Middle Eastern oil producing countries, and they formed the world’s first cartel of oil producing nations, the Organization of the Petroleum Exporting Countries, or OPEC. Together, OPEC could control foreign companies extracting oil in their countries more closely and OPEC members changed the fifty-fifty agreement to a sixty-forty agreement in favor of the oil producing nations, not the oil corporations. For Venezuela, manufacturing was growing annually at seven percent, and accounted for nearly a quarter of all jobs. Oil and manufacturing provided the most jobs in Venezuela and agriculture offered little. Clearly, Venezuelan leaders did not learn from the lessons of the Pérez Jiménez dictatorship. Increased regulation and oversight sent signals to foreign oil corporations that they would not necessarily be able to rely on Venezuela as a nation that would continue loose oversight of the oil industry as long as the country saw economic prosperity. This time period also signaled to the world that Venezuela possessed strong diplomatic negotiating skills that would allow it to dictate the terms and conditions under which foreign oil companies were able to operate in the Middle East as well as Venezuela.
In 1973, Arab oil producers announced an embargo on crude oil shipped to Western nations because of 8 Western nations’ support for Israel in the conflict. As a result, the price of Venezuelan oil rose 260 percent, and the amount of money the country earned from oil tripled. The president at the time, Carlos Andrés Pérez, asked congress for special powers to better distribute the large influx of cash. For the first time in Venezuela’s history, inflation became a major concern. President Pérez created unnecessary government jobs and increased spending on social services. Despite his efforts, inflation rose quickly to 11.6 percent between 1974 and 1975. His solution to stop the rapid inflation was to implement price controls and dictate an increase in wages and salaries. While inflation was a problem for Venezuelans, they learned a valuable lesson in economics. When inflation rises rapidly, money loses its purchasing power. Venezuelans figured out that their money sitting in bank accounts were actually losing purchasing power as the interest paid on deposits fell far below the rate of inflation. This created an incentive for borrowing and spending heavily. Venezuela found itself woefully unprepared for the 1980s. The global price of oil dropped by more than fifty percent, but Venezuelans continued to consume. Because the Venezuelan President at the time, Luis Herrera Campins, wanted to remain popular, he continued government spending on social programs. The amount of foreign currency coming into Venezuela dropped dramatically.
In an attempt to manage foreign exchange between the Venezuelan Bolivar and the U.S. dollar, Campins unilaterally ordered the devaluation of the bolivar against the U.S. dollar in 1983. He created Recadi to facilitate the exchange of bolivars and dollars and set two exchange rates. One exchange rate at 4.3 bolivars per dollar and the other at 6 bolivars per dollar. There were riots in the streets of Venezuela that left hundreds of Venezuelans dead. In 1989, poverty levels in Venezuela reached ten times their levels in 1981. Most Venezuelans did not understand that the crisis they were enduring was a result of mismanaged oil funds and overspending by the government. Instead, they blamed corruption by government officials and importers. While corruption certainly played a role, the mismanagement of oil riches contributed to the crisis far more than the corruption.
In 1992, a Venezuelan paratrooper led a coup attempt against the government. The coup failed, but the people cheered him anyway. In 1998, Venezuelans elected Hugo Chávez as their president. Venezuelans believed political corruption was the biggest thing holding back their country, and Chávez had the strength to stand up to the political class in the minds of many Venezuelans. Chavistas viewed PDVSA’s reinvestments as a trick to keep money out of the Venezuelan government’s hands and as another example of the company functioning too independently. In 2002, Chávez made his move to take control of the company. He appointed loyal allies, some with no business experience, to the company’s board. Employees protested this action in the streets and demanded that Chávez allow PDVSA to operate independently, and opposition leaders led a coup that briefly unseated him. With the military still on his side, Chávez was reinstated as leader. Opposition inside PDVSA was so powerful that workers declared a two-month strike, knowing that it would cause economic stress.
Unsurprisingly, the country lost billions in oil revenues, and gas stations inside Venezuela ran out of gas to sell. Instead of realizing that PDVSA could bring in more revenue, thus giving his regime more money to finance its socialist projects, Chávez saw the strikes as the perfect time to seize control of the company. Chávez fired over nineteen thousand employees in addition to PDVSA executives. When Chávez died in 2013, his popularity levels were high. Many supported his social programs, which had been largely successful, albeit very costly. Economically, he had inadvertently created a booming black market for currency, price-controlled commodities, and even oil with price controls and currency exchange controls ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"o7GG3Dqj","properties":{"formattedCitation":"(Fuentes)","plainCitation":"(Fuentes)","noteIndex":0},"citationItems":[{"id":563,"uris":["http://zotero.org/users/local/9Hfkg8Y0/items/MSRB2ZL8"],"uri":["http://zotero.org/users/local/9Hfkg8Y0/items/MSRB2ZL8"],"itemData":{"id":563,"type":"article-journal","container-title":"Green Left Weekly","issue":"1214","page":"16","title":"Venezuela: Despite crisis, Chavez's legacy endures","author":[{"family":"Fuentes","given":"Federico"}],"issued":{"date-parts":[["2019"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Fuentes). At the time of his death in 2013, Venezuela’s GDP was $371 billion. The price of a barrel of crude oil was $105.87, and Venezuela produced 2.68 million barrels that year. PDVSA paid nearly ninety percent of its revenues to the Venezuelan government, but it was still far below the amount that the government spent. Spending in 2013 represented more than a fifty percent increase from the previous year. That same year, government debt levels were at more than seventy two percent of GDP ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"CodtFpyb","properties":{"formattedCitation":"(John)","plainCitation":"(John)","noteIndex":0},"citationItems":[{"id":565,"uris":["http://zotero.org/users/local/9Hfkg8Y0/items/5HE26UTH"],"uri":["http://zotero.org/users/local/9Hfkg8Y0/items/5HE26UTH"],"itemData":{"id":565,"type":"article-journal","container-title":"Migration and Development","issue":"3","page":"437-447","title":"Venezuelan economic crisis: crossing Latin American and Caribbean borders","volume":"8","author":[{"family":"John","given":"Mauricia"}],"issued":{"date-parts":[["2019"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (John).
A significant drop in the price of oil produced by OPEC countries would mean that debt levels would have to spike in order to maintain Venezuela’s desired level of government spending, assuming leaders wanted to keep spending levels constant and assuming that import prices do not rise. It is unrealistic to assume that prices of goods purchased by the government would not increase due to inflation. When the price of crude oil produced by OPEC countries finally fell, Venezuela was not prepared for what would happen next. As a strategy to reverse the adverse scenario, on the domestic and international levels, on May 1, 2017, President Nicolas Maduro convened a National Constituent Assembly (ANC), based on articles 347 and 348 of the 1999 Constitution15. Maduro’s strategy is allegedly to prevent a new coup d’etat, to retake the parliamentary majority of the opposition and, consequently, to control institutional political channels. His speech justified the convening of the ANC to reverse the crisis in Venezuela and improve the living conditions of the population.
In the case of Venezuela, in fact, there was a lack of popular consultation in ANC convocation in 2017. The anticipation of presidential elections calls on the population to decide on the future of the government, even though the latter still has a year of mandate to fulfill. The traditional constitutional theory teaches that, in different conjunctures, in thesis, the same constitutional-democratic rules must be applied. Who defines them? The Constitution. Who respects them? Not all, on both sides of the political spectrum. The dispute, in fact, is beyond the abstract management of constitutional norms that are, in particular, convenient or inconvenient for the situation or the opposition, depending on the historical, social, political and, above all, economic context. For this reason, constitutions are historically created, recreated and revoked, including in the European context. In the case of Venezuela, although there is a democratic deficit in the convocation of the ANC, analyzing the same political process more broadly, Maduro and the PSUV act strategically to stay in office for another term, with the management of constitutional and electoral rules ADDIN ZOTERO_ITEM CSL_CITATION {"citationID":"rV9Em1U0","properties":{"formattedCitation":"(Messina)","plainCitation":"(Messina)","noteIndex":0},"citationItems":[{"id":564,"uris":["http://zotero.org/users/local/9Hfkg8Y0/items/YSQKB7RN"],"uri":["http://zotero.org/users/local/9Hfkg8Y0/items/YSQKB7RN"],"itemData":{"id":564,"type":"article-journal","container-title":"Perceptions","issue":"1","title":"The Effects of Chavez's Populism on Today's Venezuela","volume":"5","author":[{"family":"Messina","given":"Italia"}],"issued":{"date-parts":[["2019"]]}}}],"schema":"https://github.com/citation-style-language/schema/raw/master/csl-citation.json"} (Messina).
In the colonial and post-colonial periods, the history of Latin America is full of coups d’état. In the twentieth century, attention is drawn to the frequent alternation of democratic and authoritarian political regimes, as well as the numerous constitutions promulgated and granted. Even after the last cycle of military dictatorships in the 1980s, and with the cooler global geopolitics ever since democratic stability is something that Latin American oligarchies do not promote or respect. Therefore, it is a very different scenario from the European one, where the concepts, theories, and institutions applied in Latin America today were created. This difference is due to many factors, especially in terms of institutional ruptures, which have served and serve to continue and deepen historical problems, such as poverty and social inequalities, guaranteeing the historical dominance of certain social sectors in the control of public and private institutions. As mentioned, it is neither novelty nor peculiarity of Latin America to claim the rule of law and the use of the Constitution and its norms with political connotations according to the convenience of those who are or are not in the control of the State. The abstract plan of concepts, theories, and institutional models is an ideal that does not always follow reality and vice versa. Hence the relevance of reflecting on the role of Law as a political element and part of politics, with ambiguous functionality of conservation or transformation of the social order, so that one does not take on the usual misunderstandings of taking sides on one side of the dispute by idealizing abstract elements and without comprehensive knowledge of concrete reality. The case of Venezuela demonstrates the need to go beyond the appearance of constitutional disputes for the proper understanding of the essence of political conflicts in the flow of their historical process.
Works Cited
ADDIN ZOTERO_BIBL {"uncited":[],"omitted":[],"custom":[]} CSL_BIBLIOGRAPHY Fuentes, Federico. “Venezuela: Despite Crisis, Chavez’s Legacy Endures.” Green Left Weekly, no. 1214, 2019, p. 16.
John, Mauricia. “Venezuelan Economic Crisis: Crossing Latin American and Caribbean Borders.” Migration and Development, vol. 8, no. 3, 2019, pp. 437–47.
Messina, Italia. “The Effects of Chavez’s Populism on Today’s Venezuela.” Perceptions, vol. 5, no. 1, 2019.
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