Economic Collapse, Coups, and Dutch Disease: Venezuela’s Political Crisis Explained

Theo Brandt, ‘22

February 2019

Nobody really knows who is president of Venezuela. In May 2018, President Nicolás Maduro of Venezuela “won” a fraudulent election in which most opposition candidates were either barred from running, forced into exile, or boycotted the race. Even after the race, the Lima Group (a coalition of 12 Latin American nations plus Canada formed in 2017 which pledged to peacefully bring democracy to Venezuela. How they planned to do that without including Venezuela in their organization is a mystery.) didn’t accept the results of the election. Venezuela’s legislature also refused to accept the results of the election. After being sworn in as President of the National Assembly, Juan Guaidó declared the results of the election illegitimate and enacted Article 233 of the Venezuelan constitution which states that if there is no legitimate, functioning president, the leader of the legislature (Juan Guaidó) takes over as interim president. Elections are supposed to take place thirty days after the President of the National Assembly becomes President of the Republic. But Maduro hasn’t stepped down and his officials are still in office. President Trump official recognized Guaidó as President of Venezuela via Twitter, and a slew of Latin American nations including Brazil, Colombia, Argentina, and Chile as well as the Organization of American States did the same. Russia, China, Cuba, Iran, and Turkey have all said that it was a coup against Maduro. How did such a crisis come to be? Why are so many countries rushing to pick sides?

To understand the current crisis, it is important to understand that Venezuela is a petrostate. This means that most of the income is from oil and that this causes widespread corruption. According to the Council on Foreign Relations, an American think tank, Venezuela is an archetypal petrostate as 50% of its GDP is from oil. Its focus on the oil sector has sucked the diversity out of the economy, a process known as Dutch Disease. Paradoxically, the country’s incredibly large oil reserves are toxic to the economy of the nation. This is because oil, which was discovered in Venezuela in 1922, predates democratic political structures. Venezuela’s first stable democratic government began in 1958. By 1935, 90% of the country’s exports were oil, and the Hydrocarbons Law of 1943, which stated that foreign oil companies had to give half of their revenue to the government, caused the budget to grow sixfold in five years. By the time the country turned democratic, oil was in its DNA and none of the country’s heads of state tried to diversify the economy. This wasn’t apparently problematic until the 1980s, after Venezuela was a founding member of OPEC (1960), quadrupled its oil prices adding $10 billion dollars to the budget in two years during the 1973 OPEC embargo, and nationalized oil in 1976. Because of the prosperity prosperity, $100 billion had been embezzled between 1972 and 1997.

Oil prices fell in the 1980s, causing inflation in the country. In 1989, President Carlos Andrés Pérez asked for a bailout from the International Monetary Fund, provoking deadly riots. In 1992, Hugo Chávez, then a general, attempted a coup. Maduro, an ambitious union leader at the time who was keen on entering politics, met Chávez in 1993 after tirelessly attempting to help him gain his freedom. Chávez was democratically elected in 1998 to the presidency and spent a great deal of money on imported household goods--which were in shortage due to his mismanagement of the economy--during election years (2006 and 2012). This was another time of apparent prosperity. According to Javier Corrales, a professor of political science at Amherst College, Venezuela funded political groups throughout Latin America during Chávez’s and Maduro’s leadership. Furthermore, Chávez’s opposition, an ununited coalition of smaller parties, was unpopular in Venezuela and abroad after the 2006 elections. Chávez became more authoritarian, passing a constitutional reform in 2009 abolishing term limits. In the light of this constitutional crisis, Guaidó entered politics and joined the Popular Will party, founded by his mentor Leopoldo López. At this time, the Venezuelan opposition improved its image. They networked with other countries (often through secret meetings) and took more democratic stances. The price of oil dropped in 2014, a year after Maduro took over the presidency after Chávez’s death. The price of oil went from $100 in 2014 to $30 per barrel in early 2016 (Council on Foreign Relations). Maduro’s regime with hyperinflation and protests. Normally, a country in this situation could go to the IMF, but as Venezuela left the IMF in 2007, that was not an option. According to a 2015 report by Columbia University’s Center for Global Energy Policy, Venezuela would need to sell $170 per barrel. The report also predicted massive debt, hyperinflation, political turmoil, and the opposition coming to power in the legislature. All four of these predictions have come true.

Meanwhile, Guaidó’s mentor had been banned from politics and put in house arrest after protesting Maduor in 2014. Guaidó joined the National Assembly in 2015. That year, President Obama passed Executive Order 13692, declaring Venezuela in a state of emergency and calling for sanctions on culpable politicians, effectively fueling the opposition. This delegitimized Maduro in the eyes of the international community and the political opposition was instrumental at using this to make themselves more appealing and gain support from abroad. Maduro’s response to the economic unrest has been political oppression. Because the National Assembly opposed him, he made the National Constituent Assembly in 2017 and filled it with his supporters. That year, the opposition’s international efforts had paid off and the Lima Group was founded specifically to fix the crisis in Venezuela. While the opposition lost the May 2018 elections–they were rigged–47 countries refused to accept the results. Guaidó, in particular, travelled abroad visiting the Organization of American States in Washington D.C., Colombia, and Brazil. On January 4th of this year, a day before Guaidó took power, these countries refused to accept Maduro as the legitimate ruler.

The international community’s rush to support a particular leader is lethal. Russia and China’s support of Maduro is dangerous because Maduro’s election wasn’t democratic. But it is equally dangerous for the U.S. and the Lima Group to immediately support Guaidó, because he wasn’t democratically elected, either. Constitutionally, he is only the interim president and new elections should take place thirty days after removal of the president. By declaring Guaidó president, the international community ignored the Venezuelan constitution.