Over the Christmas week, CapX is republishing its favourite pieces from the past year. You can find the full list here.
Venezuela has announced a state of “economic emergency”.
You would be forgiven for not being overly surprised by this. Venezuela has been on the path to self-destruction for years. As I wrote in May 2015, the country that earned $800 billion during the oil boom now sees people in the capital queuing for hours in the street for essentials like toilet paper. It is hardly breaking news that government corruption combined with the socialist policies of Chavismo has squandered the country’s great potential.
The latest panic, however, is still worth paying attention to. Inflation in Venezuela has hit 141%, the worst in the world, and with the price of oil down to below $28 a barrel (from a peak of $145 in 2008), there is little hope of recovery for a country which relies on oil for 96% of its revenue.
And it is not just the economy that is in crisis. Last month, Venezuelans went to the polls in historic parliamentary elections, and by a majority of over two-thirds voted out the United Socialist Party of Venezuela, led by current President Nicolas Maduro. This would have given the opposition coalition (known as MUD) a super-majority in the assembly, enabling them to mount serious challenges while Maduro remained president, including making changes to the constitution, appointing Supreme Court judges, and shortening Maduro’s presidential term.
This could have been a triumph for democracy in action. Instead, the current justices, including 13 who had just been appointed by Maduro’s regime, voted to suspend three opposition deputies following allegations of voting irregularities. After the opposition defied the court by swearing in the deputies anyway, the court ruled that all decisions made by the assembly would be void until they stepped down, which they finally did last week. Conveniently, this robs the MUD of their super-majority, curtailing their power in the assembling and hamstringing their ability to hold Maduro to account, as he aims for ever more extensive presidential power.
The 60-day state of economic emergency called on Friday, which comes on the heels of a 120-day state of emergency declared in September, gives Maduro the power to ‘fix’ the economy by intervening more heavily in companies and in the currency markets.
At this point, it is worth taking a step back to look at how Venezuela got into such a mess to begin with. That corruption is systematic, as it is in many Latin American nations, is a given. But the socialist policies of Hugo Chávez, continued by Maduro, are also to blame. The last fifteen years have seen an overwhelming assault on private enterprise and property rights by the state. In 2001, the Chávez regime required companies involved in oil production to be majority-owned by the government. In 2006, 32 privately operated oil fields were taken over by the government. And in 2009, the oil sector was entirely nationalised.
If you have ever wondered how a country with more oil than Saudi Arabia could be reduced to poverty, this is the answer. The regimes of Chávez and Maduro wasted and misspent the money made in the oil boom, while extending the reach of government control. With nationalisation came price controls, which fixed the costs of basic goods like fuel and flour at well below market rate. Simple economics kicked in. When the mandated price of something is lower than it costs to produce, people stop producing it. And when they can make more selling it outside official channels, a lively black market springs up as supermarket shelves remain empty.
It isn’t long until you’re left with a full-blown smuggling crisis, with armed gangs exporting staple goods into Colombia, where they can sell them at the market rate.
In short, Venezuela has been a tragic test case for how extreme state intervention can destroy an affluent nation.
On the other side of the world, there’s a politician who doesn’t seem to have got the message. As has been documented, Labour leader Jeremy Corbyn is a lifelong fan of Venezuela. Even as it has become increasingly clear that Maduro’s policies have made a bad situation devastating, Corbyn’s support has not faltered. As recently as June 2015, just before he announced his bid for the Labour leadership, he said:
“When we celebrate, and it is a cause for celebration, the achievements of Venezuela, in jobs, in housing , in health, in education, but above all its role in the whole world as a completely different place, then we do that because we recognise what they have achieved.”
What they have “achieved” is the ruin of a country that could have been a global success story with proper management. And Corbyn’s policies, if he ever had the opportunity to enact them, would set Britain on a similar course. His original platform included plans to nationalise the UK’s energy sector, and though he finally dropped this policy at the end of September, he still supports the nationalisation of Britain’s railways. In November, the Labour leader’s response to the decline of steel prices was to propose nationalising Britain’s failing steel industry. And while Corbyn has never gone as far as to suggest price caps for supermarket goods, he has advocated for both rent controls and a cap on energy prices.
There are valid arguments for certain left-wing policies – a strong social safety net, investment in infrastructure and education, sturdy health-and-safety standards, and protection from monopolies. Venezuela’s demise does not prove that all state intervention is, by definition, detrimental. What is does show, overwhelmingly, is that it is easy to go too far, that private enterprise cannot thrive under heavy state control, and that governments with too much power fail to act in the best interests of their citizens.
Today, Venezuela faces $10 billion in foreign debt and has a current deficit of $5.05 billion. Corruption taints its judges, police forces and government officials. And after an electoral defeat, its President has found a way to cement his control. Even the most optimistic supporter of socialism must acknowledge that the ideology has failed the country. But the leader of Britain’s opposition refuses to change his mind, which leads one to wonder: how disastrously must Venezuela implode before Jeremy Corbyn admits he might have been wrong?