16 August 2017

Socialism – not oil prices – is to blame for Venezuela’s woes

By Kristian Niemietz

So the Left is finally talking about Venezuela again. That is a good thing. For about a decade, large sections of the Left were in the grip of Venezuelamania. We would not hear the end of it. Venezuela’s version of socialism was their shining example, the model which the rest of the world should emulate.

When the country’s meltdown could no longer be denied, they dropped it like a hot potato. And a long period of silence ensued. But recent events have forced the issue back on the agenda again.

The responses vary. Commentators on the Stalinist Left now sound like a copy of the Pravda from the 1930s, fabulating about saboteurs and counter-revolutionaries undermining the economy. The more media-savvy sections of the Left, however, realise that they are unlikely to win many people over if they sound too much like the villain in a Cold War movie.

So they have adopted a more innocuous-sounding line, blaming Venezuela’s woes primarily on the decline in oil prices. Of course, Venezuela is doing badly, they argue. Any economy that is so dependent on commodity prices would do badly under those circumstances. It has nothing to do with socialism.

It sounds superficially plausible. But do you remember which prominent Chavista said this during the oil price boom:

“Of course Venezuela is doing well. Any economy that is so dependent on commodity prices would do well under those circumstances. It has nothing to do with socialism.”

You guessed right: none of them. Oil prices lead a double life in the Chavista-Corbynista mindset. When oil prices skyrocket, the ensuing boom is proof that social works, but when they fall again, the ensuing decline has nothing to do with socialism.

It is true that low oil prices would hurt Venezuela’s economy. But here’s the thing: we don’t currently have low oil prices. We had abnormally high oil prices in the decade leading up to 2014/15. Oil prices have not “collapsed”. They have merely reverted to a level which is more in line with the long-term average. More precisely, they are back (in real terms) to where they were in 2004, about the time when Venezuelamania started. And they are still noticeably higher than they were in the two decades before then.

Perhaps more important, though, the problems that we commonly associate with Venezuela, especially shortages of basic essentials like food and medicine, predate the drop in oil prices. Take this description:

“…of milk, eggs, sugar and cooking oil there was no sign. Where were they? … Welcome to Venezuela, a booming economy with a difference. Food shortages are plaguing the country at the same time that oil revenues are driving a spending splurge … Milk has all but vanished from shops… eggs and sugar are also a memory.”

This is from a Guardian article, published in 2007 – when oil prices were about to reach their historic all-time peak. Or this one, from a year before the drop in oil prices:

“…food shortages in Venezuela have not only peaked but they have lasted longer than ever. … Venezuela’s central bank … has been publishing a scarcity index … [It] puts this year’s figure at [a level which] is similar to countries undergoing civil strife or war-like conditions.”

There are a handful of alternative history novels in which the fall of the Berlin Wall never happens, and the German Democratic Republic still exists today. It is a fascinating thought experiment, but the authors all face a problem in creating that backdrop: when the Wall fell, the GDR was not just politically, but also economically finished. How do you get around this, if you want your alternative history to be at least somewhat plausible?

Two authors have found a simple, but seemingly effective solution: in their version, the GDR regime discovers oil reserves just off the Baltic coast. The GDR is soon swamped with petrodollars; it becomes a socialist, Northern European version of Saudi Arabia.

The authors’ thinking must have been: “Let’s just give them oil reserves. Surely oil revenue can make any economy work, even a socialist one.”

I like the idea. But Venezuela’s experience shows that the authors were over-optimistic.

Socialists have always argued that socialism will eventually work, it just needs the right circumstances. They are now effectively saying:

“Of course socialism works. All you need is the world’s largest proven oil reserves, the longest oil price boom in history, and the highest oil price level ever recorded in history. That boom must obviously go on forever. Even then, you will have constant shortages of food, medicines and other basic essentials. But on the plus side, you will have Western intellectuals lining up to tell you how lucky you are.”

It doesn’t quite cut the mustard, does it?

Kristian Niemietz is Head of Health and Welfare at the Institute of Economic Affairs