Topic B: Venezuelan Economic Crisis

Security Council

By: Conrad Smith

Introduction

While Venezuela possessed one of South America’s strongest economies in the late 1900s, Venezuela is currently suffering from one of the worst economic downturns of the modern era, and the situation has shown no signs of improving. Ever since the price of oil tanked from $100 USD to $40 USD in the year 2014, Venezuela as a whole has become increasingly unstable due to its over-reliance on the resource for exports, with unmanageable amounts of political and social unrest, soaring inflation rates, by at least 800% as of July 2017,1 and shortages on everything from crucial medical supplies to toilet paper. The crisis has reached such a point that an increasing percentage of Venezuelans now resort to hunting rodents and strays in the streets for food, and the average Venezuelan has lost 19 pounds from malnourishment.2President Nicolás Maduro and his administration have tried to maintain control of the situation by fixing the prices of certain goods, setting the conversion rate of Bolivarian dollars to US dollars, and using the military as riot/protest control, among other things. Democratic Unity Roundtable (or MUD), which is a coalition of smaller political parties that aim to reverse the policies of former president Hugo Chavez and currently oppose the Maduro administration, gained a majority control of the National Assembly (which is Venezuela’s legislative branch) in 2015. However, in March of 2017, the legislative powers of the National Assembly were stripped and given to the Judicial Branch, which supports the Maduro administration. This was reversed one day later after widespread protests encouraged Maduro to ask the Supreme Court to reinstate these powers. Clearly this is a multi-faceted issue with wide-reaching effects into the hearts of the political, social, and economic aspects of Venezuela.

Image result for map of venezuela History

The land which Venezuela currently occupies was first settled in the year 1522 by Spanish colonizers. The nation first secured its independence from Spain in 1821 (and then again from the colonial region of Gran Columbia in 1830) but did not secure its current political system until much later.Civil wars between regional military leaders were frequent until the administration of Guzman Blanco (1870-1888), succeeded in ending them. The 20th century saw the reign of multiple dictatorships, starting with the rule of Juan Vicente Gómez from 1908-1935, which only ended after his death.

In the early 1900’s, Venezuela experienced an economic boom after extremely rich deposits of oil were discovered. Ever since 1927, oil has been Venezuela’s number one export, and even today, the Venezuelan territory still contains the largest proven deposits of oil.3 The massive petroleum fields attracted many foreign investors; throughout the 1920’s and 1930’s, huge land concessions were given to investors from around the globe, and the amount of oil being exported increased by nearly fifty-fold. This sudden increase shifted the balance of the economy, from farming and development areas to oil exportation. Venezuela’s agricultural and manufacturing sectors would never quite fully recover, as the government’s reliance on oil income steadily increased throughout the century.

In 1945, the first democratic administration, which was named “El Trienio Adeco”, was formed via a coup d’état against President Angarita by the Democratic Action (AD) party and was then put in control of the government. Although another bloodless coup saw the end of their three-year rule,democracy in Venezuela was no longer just an idea. Pérez Jiménez assumed control of the presidency in 1952, after a brief series of military leaders produced unsatisfying results for the government and the populace. His reign is remembered by his administrations misusage of oil income, executions, and the jailing of his political opposition members, and the general restriction of human rights within the country.4A popular rebellion was held on January 23rd, 1958, and successfully ousted Jiménez from office. The fall of Jiménez also started a 40-year political struggle between AD and the Christian Democratic Party (or Copei). The Organization of Petroleum Exporting Countries, or OPEC, was founded in 1960 to protect the interests of leading oil exporters across the globe and to control the price of oil. The founding members consisted of the Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, all of these nations having immense access to oil. This organization has had a profound impact on the global economy since its installment; in 1973, in retaliation to the US’s involvement in the Yom Kippur war, most of the Arab oil producers imposed an embargo on the US and other industrialized nations. This caused the price of oil to quadruple from $2.90 to $11.65 per barrel,5 which caused a greater interest in alternative fuel sources among the affected nations and the questioning of the reliability of Arab countries as a stable source of oil. Nonetheless, Venezuela enjoyed a large spike in oil revenue during this period and quickly became one of Latin America’s most developed countries under the administration of Carlos Andrés Pérez. During Pérez’s first presidency from 1974-1979, he fully nationalized the oil industry and made use of the boost of income: “Huge public works were started, at a cost of $53 billion: housing projects, industrial parks, a subway in Caracas and El Sistema, a music-teaching programme for the poor”.6 Under his presidency, Pérez earned the country the nickname “Saudi Venezuela” due to the vast amount of wealth the country had produced via oil revenue, much like Saudi Arabia. However, by the end of his presidency, his vast amount of expenditures had disrupted the Venezuelan economy, and increased allegations of government corruption in accordance to the national debt skyrocketing,even though oil prices had reached highs not seensince the beginning of its production.

Figure 2: Crude Oil Prices from 1861-2015

Pérez’s first successor was Luis Herrera Campíns (1979-1984), who attempted to employ policies aimed at reducing the large amounts of capital flightoccurring in the country, as well as addressing the debt issue. He failed to solve either issue, despite his efforts. In 1983, he was forced to apply a fixed exchange rate to the bolivar.7 Campín’s successor, Jaime Lusinchi (1984-1989), also failed to address the issues plaguing the country at the time, and by the end of that presidency, Venezuela was nearly bankrupt. As soon as Carlos Pérez (1989-1994) was reelected in 1989, he introduced drastic changes to the Venezuelan economy by privatizing numerous state companies and lessening the role of the government in the economy overall; these adjustments broke many of his campaign promises.One of his changes led to a dramatic rise in domestic gas prices (by nearly 100%), which caused general transportation costs in Venezuela to rise by 30% in occurrence. This led to the “Caracazo”, a massive protest/riot throughout Caracas which caused the deaths of as many as 2000 people and damages of around $120m USD.8 This event triggered the end of the back-and-forth struggle between AD and Copei for power, and the beginning of the rise of Hugo Chavez, a former high- ranked military officer who staged a failed coup in 1992. He was imprisoned but later pardoned by Rafael Caldera (1994-1999) during his second term. After Caldera and his administration failed to make any notable improvements to the economy, Chavez won the presidency and launched the socialist-oriented “Bolivarian Revolution” (named after Simon Bolivar, the liberator of Gran Columbia in 1821), which sought to implement social welfare programs using oil revenue and opposes most liberal economic policies. This set of policies forced the government to become even more reliant on oil as a source of income, and failed to account for any falls in oil prices or recessions that may occur unexpectedly. The people of Venezuela voted in favor of a referendum in 1999 regarding the drafting of a new constitution giving Chavez the power to rule by decree, and a name-change of the country from the “Republic of Venezuela” to the “Bolivarian Republic of Venezuela”. These sweeping changes stirred dissatisfaction within the population shortly after, and in 2002, a coup against Chavez’s administration forced him to step down from the presidency for just 48 hours. However, with the assistance of the military, his rule was reinstated. Later in the same year, a massive workers strike was called by multiple organizations, political parties, and the state-run oil company named Petroleos de Venezuela (PDVSA). Almost half of the workers and seven of the executives at PDVSA were laid off when the strike was called off in early 2003, which seriously damaged the country’s economy, and forced the Chavez administration to cut back on government spending on social programs. Official reports claim that nearly $14 billion dollars were lost during the two-month strike period.9

After the country regained some of its economic momentum in 2003, Chavez was finally able to implement some of his promised social welfare programs, or “Bolivarian Missions”. One of the first missions to be launched, “Barrio Adentro I”, focused on the development of health services in communities around the nation. Much like many of the other missions, Barrio Adentro had several “phases”, ending with Barrio Adentro IV, which was launched in October 2006. Other such missions, aimed at improving areas in regards to housing, employment, science, the environment, and other political/economic fields, were implemented throughout the 2000s.10 Whether or not these missions achieved their goals, however, is debatable. While the government claims that these programs and have improved the standards of living for most Venezuelans during the time that the serviceswere active, there is a lack of evidence that supports these claims, and any such improvements could also be contributed to the economic growth that occurred during that time period.11

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Figure 3: Revenue vs. Expenditure of Venezuela

Starting in 2004, Chavez began acting against the “private media dictatorship”, and laid out plans in 2005 to create Telesur, a state-backed broadcasting station founded with other Latin American countries.12In 2006, Chavez was reelected for another six-year term (the serving term was changed from five to six years after the creation of the new constitution). Shortly after his election, he merged all political parties that were in favor of the government, creating the United Socialist Party of Venezuela (or PSUV).In the same year, government spending started to exceed the GDP per capita of the country (refer to figure 3). Venezuela formally exited the International Monetary Fund (or IMF) in May 2007, citing its opposition with the US. The government’s debts to the IMF were also paid off “five years ahead of schedule”, following “10 consecutive quarters of sustained high growth”.13 More companies, industries, and utilities were becoming nationalized, such as telecommunications company CANTV and Electricidad de Caracas. Multiple referendums and changes to the constitution occurred in 2009, which also led to protests in Caracas, resulting in theelimination of presidential term limits and further enforced the cooperation of the judicial branch with Chavez’s administration.14The military’s participation in civil affairs began to increase, but political division also began to rise within. Chavez was reelected in October 2012, dominating the opposition candidate Henri Capriles, who was backed by MUD. However, Chavez died a year later after succumbing to an unknown type of cancer. Before his death, he appointed Nicolas Maduro as his successor. Immediately after the presidency was secured, Maduro implemented currency control policies and used the military to seize stores and disperse protests across the country.15Murder rates also hit an unprecedented high in 2013, reaching an estimated 79 homicides per 100,000 people.16 This, coupled along with soaring inflation rates, a drastic decrease in oil prices beginning in 2014, and political instability following the death of Chavez, has caused general disruption in normal life for most Venezuelans.The National Assembly, the main legislative body of Venezuela, became controlled by the opposition party coalition The Democratic Unity Roundtable (or MUD) following the 2015 elections. Recently, on March 30th, 2017, the lawmaking powers of the National Assembly were temporarily stripped and the Supreme Court was designated as the main legislative power of Venezuela, which placed nearly all political power in the hands of PSUV until protests across the country forced Maduroto nullify the decision a day later.17

Current Situation

Due to price controls of the current Maduro administration and the overspending of the former administration under Chavez, a widespread shortage of basic goods such as toilet paper, medicines, raw cooking materials (eggs, flour, milk, etc.) and other necessities have been reported by numerous third party sources, as the government has made their economic statistics unavailable to the public as of 2015.18 Citizens wait in long lines for goods that aren’t guaranteed to be in stock by the time they get to the front of the queue. As of January 2017, the inflation rate is estimated to be around 800%, and the bolivar is essentially hyperinflated.1 The official exchange rate for bolivars to US dollars, as detailed in Venezuela’s exchange rate, is about 10 to 1; however, this rate is nearly useless, because there is such a small number of US dollars to be given out. As of July 28th, the black-market price of US dollars is 10,389.79 bolivars for one. A mere 20 days earlier, one could buy a US dollar for just 7,672.81 bolivars.1 Armed militias are rampant across the country, and the police being ill-equipped to handle the mass amount of crime that can occur daily makes them to be of little to no help. Most of the militias offer protection to business and neighborhoods in exchange for money or goods. Some of them support the current administration, while others are vehemently against it.19Protests also take place almost daily; on July 29th, opponents of Maduro called for protests around the nation against the election of a new national assembly, which will have the power to rewrite the constitution as it wishes. Many pro-Maduro candidates are running for the 545 seat positions available, which would give Maduro more edge in policy making. A rogue police helicopter attacked the Supreme Court building on June 28th with grenades, testifying to the absurdity of the current situation.20

Oil production has dropped significantly along with the value, and “while it produces 1.9 million barrels per day, it’s only getting paid for about 700,000 to 800,000 barrels per day”.21 This is largely due to how much is being given away to allied and friendly nations, either as a sign of gratitude or to pay back loans. The central bank reserves only amount to $10 billion,22 and over $7 billion USD is owed in loan payments for this year. This, along with the vast amount of money being spent on imports and the dismal oil revenue, spells disaster for the Venezuelan economy.

Conclusion

While the United Nations has not passed any legislation concerning the situation in Venezuela, it has expressed its worries over the democratic practices of the country and is actively encouraging President Maduro to not resort to violence in order to maintain legitimate rule over the country. The UN Security Council also convened on May 17, 2017 to “discuss the deteriorating situation in Venezuela”,23 although no further actions have been taken to improve it. Maduro has, however, requested that the UN provides aid to the country in regards to the shortages of basic medicines. As a delegate in the Security Council, your goal while discussing this topic is to pass a decisive resolution that can aid in resolving of the rising violence in the nation. As well as resolving the still current causes behind the turmoil, including but not limited to the economic crisis without impeding any nations sovereignty.

Guiding Questions:

Has your country made any statements or taken any actions regarding the current situation?
Is your country allied to or a major trading partner of Venezuela? If so, is your country’s support for the current administration waning, and why?
What can be done to protect or aid the citizens of Venezuela? How can your country contribute?
Is there any way to improve the economy in its current state? How can Venezuela correct its falling production of oil?
What can be done to prevent a crisis similar to this one in the future?

Works Cited

"Venezuela Live Economic Data."Venezuela Live Economic Data. N.p., n.d. Web. 29 July 2017.

Hernandez, Osmary. "Venezuelan Food Crisis Reflected in Skipped Meals, Weight Loss."CNN. Cable News Network, 21 Feb. 2017. Web. 16 July 2017.

"The World's Largest Oil Reserves By Country."WorldAtlas. N.p., 16 Oct. 2015. Web. 30 July 2017.

"Marcos Pérez Jiménez."Encyclopædia Britannica. Encyclopædia Britannica, Inc., n.d. Web. 30 July 2017.

Amadeo, Kimberly. "The Truth About the 1973 Arab Oil Embargo."The Balance. N.p., n.d. Web. 30 July 2017.

"Carlos Andrés Pérez."The Economist. The Economist Newspaper, 08 Jan. 2011. Web. 30 July 2017.

"Several Venezuelan Businessmen and Politicians Tuesday Came out In..."UPI. UPI, 22 Feb. 1983. Web. 30 July 2017.

TeleSUR ENGLISH , March 1st 2016. "Venezuela's Caracazo: State Repression and Neoliberal Misrule."Venezuelanalysis.com. N.p., n.d. Web. 30 July 2017.

News, Bloomberg Business. "Venezuela Totals Losses from 2002-2003 Oil Strike."The Globe and Mail. From Wednesday's Globe and Mail, 17 Mar. 2009. Web. 27 July 2017.

"Social Missions in Venezuela."Venezuela-us.org. Venezuelan Embassy, n.d. Web. 27 July 2017.

"The Social Policy of the Bolivarian Revolution (English Version)."ReVista. Harvard University, n.d. Web. 27 July 2017.

"History of Telesur."TelesurTV. N.p., n.d. Web. 27 July 2017.

Tran, Mark. "Venezuela Quits IMF and World Bank."The Guardian. Guardian News and Media, 01 May 2007. Web. 27 July 2017.