venezuela economic crisis research paper

The political economy of hyperinflation in Venezuela

• Published: 03 January 2020
• Volume 186 , pages 337–350, ( 2021 )

Cite this article

• Giovanni B. Pittaluga 1 ,
• Elena Seghezza   ORCID: orcid.org/0000-0002-9977-1993 2 &
• Pierluigi Morelli 3  

6191 Accesses

14 Citations

1 Altmetric

Explore all metrics

We study the Venezuelan hyperinflation as a political phenomenon with distributional and efficiency effects. The hyperinflation originated in publicly financed benefits for the government’s low-income supporters and also had a distributional effect in wiping out the value of bonds and other financial assets of the middle and upper classes that opposed the government. We confirm the fiscal origin of the hyperinflation and also show that, with the inflation tax as the government’s principal source of supplementary revenue, policy managers did not avoid moving to the inefficient side of the Laffer curve. The rate of inflation exceeded Cagan’s revenue-maximizing inflation tax rate and therefore also Bailey’s efficient inflation tax rate.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price includes VAT (Russian Federation)

Instant access to the full article PDF.

Rent this article via DeepDyve

Institutional subscriptions

Similar content being viewed by others

Corruption risk and political dynasties: exploring the links using public procurement data in the Philippines

The Philippines: a social structure of corruption

Growth and Fiscal Effects of Insecurity on the Nigerian Economy

In populist regimes, this type of expense is paramount. See Pittaluga and Seghezza ( 2018 ).

The acceleration in the inflation rate that occurred between 2013 and 2017 was accompanied by continual depreciation of the Venezuelan currency, the bolivar, on the black market. Such an exchange rate trend highlights an empirical regularity that Paldam ( 1994 ) called “Bernholz’s Law”. Initially, the black market value of the bolivar depreciated in real terms and then began to appreciate in early 2016 when the inflation rate became explosive. See Bernholz ( 1982 , 1988 ).

The gradual but marked depreciation of the nominal official rate of exchange was accompanied by a substantial increase in the equivalent bolivar value of foreign debt. As shown in Table  1 , the ratio of foreign debt to exports between 2013 and 2016 (latest data available) increased from 142.0 to 385.9%. Much of Venezuela’s foreign debt belongs to state-owned PDVSA. Default on that debt is problematic because PDVSA has to obtain the necessary funding for oil production on the foreign financial market.

As in Montiel ( 1989 ) and in Fischer et al. ( 2002 ). Dornbusch et al. ( 1990 ), instead, used the real monetary base as a proxy for real fiscal deficits.

The null hypothesis is rejected at a level of probability below 0.05.

The function shows how much of the prediction error of each variable can be explained by innovations in the variable under consideration.

The marginal cost of raising revenue through seigniorage is given by \(\frac{\partial W/\partial \pi }{\partial S/\partial \pi }\) , where \(W\) is the welfare loss from inflation and is the area under the money demand curve. The ratio \(\frac{\partial W/\partial \pi }{\partial S/\partial \pi }\) is the marginal cost of inflationary finance, which simplifies to \(\partial W/\partial S\) , that is, to the marginal welfare cost associated with a unit increase in seigniorage. Following Bailey ( 1956 ), \(W = \int_{0}^{\pi } {\left( {e^{ - \alpha x} - e^{ - \alpha \pi } } \right)} dx\) , which leads to \(W = - e^{ - \alpha \pi } \left( {\frac{1}{\alpha } + \pi } \right) + \frac{1}{\alpha }\) . The first derivative of W with respect to inflation is \(\frac{\partial W}{\partial \pi } = e^{ - a\pi } \alpha \left( {\frac{1}{\alpha } + \pi } \right) - e^{ - \alpha \pi }\) . Therefore, the marginal cost of inflationary finance is \(\frac{\partial W/\partial \pi }{\partial S/\partial \pi } = \frac{\alpha \pi }{1 - \alpha \pi }.\) Then, equating the marginal cost of inflationary finance to the marginal cost of raising money through the inflation tax, i.e., \(\frac{\alpha \pi }{1 - \alpha \pi } = \mu ,\) we obtain welfare-maximizing inflation tax \(p^{ * *} = \frac{\mu }{{\alpha \left( {1 + \mu } \right)}}\) .

That is, \(p_{t + 1} = p_{t + 1}^{e} + \varepsilon_{t + 1}\) where ε is a stationary process.

In the case of Venezuela, M2 coincides substantially with M3.

Although we are aware that for various goods prices were capped and therefore that the indicator underestimates Venezuela’s inflation, it is such variation that constitutes the opportunity cost of holding money.

Abel, A., Dornbusch, R., Huizinga, J., & Marcus, A. (1979). Money demand during hyperinflation. Journal of Monetary Economics, 5, 97–104.

Article   Google Scholar  

Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66, 47–78.

Bailey, M. J. (1956). The welfare cost of inflationary finance. Journal of Political Economy, 64, 93–110.

Bernholz, P. (1982). Flexible exchange rates in historical perspective. Princeton Studies in International Finance 49 . International Finance Section, Department of Economics, Princeton University NJ.

Bernholz, P. (1988). Hyperinflation and currency reform in Bolivia: Studied from a general perspective. Journal of Institutional and Theoretical Economics, 144, 747–771.

Google Scholar  

Bernholz, P. (1987). The implementation and maintainance of a monetary constitution, In J. Dorn, & A. J. Scwartz (Eds.), The search for stable money . University of Chicago Press: Chicago.

Bernholz, P. (1989). Currency competition, inflation, Gresham’s law and exchange rate. Journal of Institutional and Theoretical Economics, 145, 465–488.

Bernholz, P. (2003). Monetary regimes and inflation: history, economics and political relationship . Northampton: Edward Elgar.

Book   Google Scholar  

Bernholz, P. (2015). Monetary regimes and inflation: History, economic and political relationships (2nd ed.). Cheltenham: Edward Elgar Publishing.

Bernholz, P. (2017). Totalitarianism, terrorism and supreme values: History and theory . Heidelberg: Springer.

Brennan, H. G., & Buchanan, J. M. (1980). The power to tax . Indianapolis: Liberty Fund.

Brennan, H. G., & Buchanan, J. M. (1981). Monopoly in money and inflation . London: The Institute of Economic Affairs.

Cagan, P. (1956). The monetary dynamics of hyperinflation. In M. Friedman (Ed.), Studies in the quantity theory of money (pp. 25–117). Chicago: University of Chicago Press.

Calvo G. (2012). The price theory of money, Prospero’s liquidity trap and sudden stop. Columbia University.

Corrales, J., & Penfold, M. (2011). Dragon in the tropics: Hugo Chavez and the political economy of revolution in Venezuela . Washington D.C.: Brookings Institution Press.

Dornbusch, R., & Edwards, S. (1991). The macroeconomics of populism in Latin America . Chicago: The University of Chicago Press.

Dornbusch, R., Sturzenegger, F., & Wolf, H. (1990). Extreme inflation: Dynamics and stabilization. Brooking Papers on Economic Activity, 2, 1–64.

Fischer, S., Sahay, R., & Vegh, C. A. (2002). Modern hyper- and high inflations. Journal of Economic Literature, 50, 837–880.

Hillman, A. L. (2019). Public finance and public policy: A political economy perspective on responsibilities and limitations of government (3rd ed.). Cambridge: Cambridge University Press.

Kiguel, M. A., & Liviatan, N. (1988). Inflationary rigidities and orthodox stabilization policies: Lessons from Latin America. World Bank Economic Review, 2, 273–298.

Krugman, P. (1979). A model of balance of payments crises. Journal of Money, Credit and Banking, 11, 311–325.

Kulesza, M. (2017). Inflation and hyperinflation in Venezuela (1970s–2016)—a post-Keynesian interpretation . Working paper no. 93, Institute for International Political Economy, Berlin.

Leon, G. (2014). Strategic redistribution: the political economy of populism in Latin America. European Journal of Political Economy, 34 , 39–51.

Leviathan, N., & Piterman, S. (1986). Accelerating inflation and balance of payment crisis, 1973–1984. In J. Ben-Porath (Ed.), The Israeli Economy (pp. 320–346). Cambridge: Harvard University Press.

McGuirk, E. F. (2013). The illusory leader: natural resources, taxation and accountability. Public Choice, 154, 285–313.

Montiel, P. J. (1989). Empirical analysis of high-inflation episodes in Argentina, Brazil and Israel. IMF Staff Papers, 36, 527–549.

Obstfeld, M. (1986). Rational and self-fulfilling balance of payment crisis. American Economic Review, 76, 72–81.

Paldam, M. (1987). Inflation and political instability in eight Latin American countries, 1946–83. Public Choice, 52, 143–168.

Paldam, M. (1994). The political economy of stopping high inflation. European Journal of Political Economy, 10, 135–168.

Phylaktis, K., & Taylor, M. (1993), Money demand, the Cagan model and the inflation tax: some Latin American evidence. Review of Economics and Statistics, 75 , 32–37.

Pittaluga, G. B., & Seghezza, E. (2018). Resource rents and populism in resource-dependent economies. European Journal of Political Economy, 54, 83–88.

Reinhart, C. N. & Santos, M. A. (2015). From financial repression to external distress . NBER, working paper number 21333, Cambridge MA.

Restuccia, D. (2018). The monetary and fiscal history of Venezuela, 1960 – 2016. University of Chicago, Becker Friedman Institute for Economics, Working Paper, number 2018/59. Chicago IL.

Sargent, T., & Wallace, N. (1973). Rational expectations and the dynamics of hyperinflation. International Economic Review, 14, 328–350.

Sargent, T., & Wallace, N. (1981). Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5 (Fall), 1–17.

Siklos, P. (Ed.). (1995). Great inflations of the 20th century: Theories, policies and evidence . Cheltenham: Edward Elgar.

Taylor, M. P. (1991). The hyperinflation model of money demand revisited. Journal of Money, Credit and Banking, 23, 327–351.

Vera, L. (2015). Venezuela 1999–2014: Macro-policy, oil governance and economic performance. Comparative Economic Studies, 57, 539–568.

Download references

Acknowledgements

We thank anonymous referees, Arye Hillman, and participants at the 28th Silvaplana workshop on political economy for their helpful comments.

Author information

Authors and affiliations.

Department of Economics, University of Genova, Via Vivaldi 5, 16126, Genoa, Italy

Giovanni B. Pittaluga

Department of Political Science, University of Genova, P.le Brignole 3, 16125, Genoa, Italy

Elena Seghezza

Associazione Bancaria Italiana, P.zza del Gesù 49, 00186, Rome, Italy

Pierluigi Morelli

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Elena Seghezza .

Additional information

Publisher's note.

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Pittaluga, G.B., Seghezza, E. & Morelli, P. The political economy of hyperinflation in Venezuela. Public Choice 186 , 337–350 (2021). https://doi.org/10.1007/s11127-019-00766-5

Download citation

Received : 01 September 2019

Accepted : 05 December 2019

Published : 03 January 2020

Issue Date : March 2021

DOI : https://doi.org/10.1007/s11127-019-00766-5

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Hyperinflation
• Political redistribution
• Thiers’ law

JEL Classification

• Find a journal
• Publish with us
• Track your research

Exploring humanitarian frameworks for Venezuela

By A report by the Atlantic Council's Venezuela Working Group

Table of contents

Introduction.

• Why the United Nations Oil-for-Food program in Iraq should not be replicated

Unpacking the Oil for Venezuela proposal

• An assessment of the Boston Group Proposal

Recommendations

Acknowledgments.

The humanitarian crisis in Venezuela reached unprecedented levels in 2021. In state-dependent and oil-dependent Venezuela, mismanagement and corruption in the Nicolás Maduro administration, as well as the loss in income from oil sales, has accelerated the existing economic crisis and deepened humanitarian suffering. According to the latest National Survey of Living Conditions (ENCOVI), 95 percent of Venezuela’s twenty-eight million citizens live in poverty, while 77 percent live in extreme poverty—a 10-percent increase from last year. Despite an increasing dollarization of its economy and multiple currency reconversions by the Maduro administration, Venezuela’s annual inflation reached 1,743 percent.

The health and economic effects of the coronavirus pandemic, compounded by nationwide fuel shortages, continue to worsen the country’s multidimensional crisis, especially for Venezuelans living off a $2.50 minimum monthly wage. According to UNICEF data collected between 2019 and 2020, 32 percent of Venezuelan households are food insufficient, 40 percent of households have recurrent interruptions in water service, 25 percent of households do not have sustainable access to potable water, the under-five mortality rate is 24.2 per thousand live births, and maternal deaths have ballooned to such alarming numbers that statistics are no longer publicly disclosed. Amid such suffering, almost six million Venezuelans have fled the country since 2015.

Efforts by the international community to alleviate Venezuela’s humanitarian crisis—namely, the United Nations Humanitarian Response Plan (HRP)—have been commendable. However, contributions are lacking in both speed and size. Only 29 percent of the $700 million allocated for 2021 under the HRP has been executed (the execution rate was 24 percent in 2020 and 34 percent in 2019). Even a full execution of the allocated funds would be insufficient for a crisis that humanitarian experts say requires multiple billions of dollars in humanitarian aid.

Into this gap enter oil-funded humanitarian frameworks. Such frameworks could provide sustained humanitarian relief without requiring the time-consuming and bureaucratic allocation of funds from the United Nations (UN). An important benefit of an oil-funded program is the continued presence of compliant, accountable, and transparent Western firms in the Venezuelan oil sector. Providing mechanisms for Western and allied operators to remain in Venezuela can also help to maintain and rebuild critical infrastructure for Venezuela’s long-term economic development. In the short term, an oil-funded mechanism could help European gas operators continue supplying natural gas inside Venezuela, guaranteeing reliable electricity, cooking gas, and fuel for medical and goods delivery for the local population.

Before they were paused by Maduro following the extradition of Alex Saab to the United States, the Norway-mediated negotiations between the Venezuelan democratic platform and Maduro representatives in Mexico City offered an opportunity to build political agreements necessary for an oil-funded humanitarian framework. The negotiations are not a permanent space for reaching agreements, but the trust that can be generated among political factions can unlock the political support that a well-structured, transparent, and effective humanitarian mechanism would require.

To date, two public efforts by separate entities have proposed oil-funded humanitarian frameworks leveraging Venezuela’s crude-oil proceeds to purchase aid. Both proposals attempted to mold frameworks for Venezuela taking into account lessons learned from the failed UN-managed Oil-for-Food program in Iraq, another heavily sanctioned country with corruption-related challenges. The first proposal originates from Oil for Venezuela, a foundation led by Venezuelan economist Francisco Rodríguez. The second originates from the Boston Group, a nonpartisan policy platform with members across Venezuela’s political spectrum, oil-industry experts, and civil-society groups.

This policy brief is an effort by the Atlantic Council’s Venezuela Working Group (VWG) to analyze the two existing oil-funded humanitarian proposals on Venezuela, and provide recommendations for future humanitarian proposals’ governance structure, financing mechanisms, transparency controls, political agreements, legal requirements, and multilateral participation to achieve the most optimal possible outcome for the Venezuelan people.

Note from the VWG : The VWG and the Atlantic Council do not seek to sponsor or promote any of the humanitarian programs and proposals under study. The VWG is aware of other private efforts to devise and promote oil-funded frameworks for Venezuela and restore fuel swaps, but for this publication, the VWG considered only the two public humanitarian proposals. As part of this process, the VWG held multiple meetings and consultations with the US government, members of Venezuela’s democratic opposition, international and multilateral organizations, and private-sector actors in Venezuela. The authors also note that further analysis is required, especially surrounding the nuances of international humanitarian agencies’ and nongovernmental organizations’ administration and distribution of humanitarian aid in Venezuela. This analysis will be considered for future VWG programming.

Why the United Nations Oil-for-Food program in Iraq should not be replicated: Lessons for Venezuela

In 1995, the adverse humanitarian effects of the UN Security Council (UNSC) sanctions on Iraq led to the implementation of exceptions to authorize oil exports to fund humanitarian aid, particularly food, in a program known as Oil-for-Food.

The implementation of the Oil-for-Food Programme in Iraq was based on the UNSC’s authority. UNSC Resolution 986 (995), authorized “the import of petroleum and petroleum products originating in Iraq, including financial and other essential transactions directly relating thereto. For that purpose, after years of negotiations, the UNSC and Saddam Hussein’s government signed a memorandum of understanding (MOU) in 1996. The two main components of the MOU were that the UNSC would oversee the oil imports, procurement of goods to satisfy humanitarian needs, and the distribution of those goods; and that the Iraqi government would conduct all the transactions related to oil purchase agreements, procurement, and distribution.

According to the UN, some 3.4 “billion barrels of Iraqi oil valued at about $65 billion were exported under the Program between December 1996 and 20 March 2003. Of this amount, 72 per cent of the total was allocated towards humanitarian needs nationwide after December 2000 (…) about $31 billion worth of humanitarian supplies and equipment were delivered to Iraq under the Oil-for-Food Program between 20 March 1997 and 21 November 2003, including $1.6 billion worth of oil industry spare parts and equipment.

Since 2004, investigations revealed fraudulent schemes within the program that boosted corruption in Iraq and abroad. The Independent Inquiry Committee (IIC), appointed in 2004 by then UN Secretary-General Kofi Annan, conducted an independent investigation, which concluded that the Iraqi government “manipulated the Program to dispense contracts based on political preferences and deliver illicit payment from companies that obtained oil and humanitarian goods contracts.” The estimate of total illicit income—including oil surcharges and humanitarian kickbacks—was $1.8 billion, plus billions of dollars smuggled in oil and humanitarian goods that were rerouted. Despite those deviations, the Oil-for-Food Programme had positive—but still limited—humanitarian impacts. While exact numbers are unavailable, a 2005 IIC report concluded the program helped to mitigate the severe food crisis in Iraq, especially during the 1999–2001 drought.

Even though the roots of the program’s pitfalls are varied and long-standing, including the systemic corruption in Iraq, our analysis identifies the following five design failures that created incentives for rent-seeking behaviors and illicit payments.

• The program was too dependent on the government of Iraq, which had incentives to increase political support by distributing economic gains through the illicit rerouting of resources.
• The UN-executed oversight mechanisms lacked enforcement capacity against the Iraqi government’s opportunistic and illicit behaviors. As a result, the program’s accountability was flawed, even when the MOU established sophisticated oversight institutions on paper.
• The tasks that the UN assumed surpassed its institutional capabilities, and revealed inconsistent procurement practices. The Iraq experience demonstrated that the humanitarian intervention of international organizations could fail due to the limited oversight and enforcement capacity of those organizations.
• The program was conceived as temporary relief, but lasted almost eight years. This overextended timeline for a program designed with shorter time horizons allowed for increasing governance challenges, the gradual weakening of the program’s oversight mechanisms, and graft.
• The pressure to alleviate the humanitarian relief created incentives to tolerate the program’s failures as the “lesser evil.”

Based on this experience, any proposal for Venezuela that leverages oil revenues to purchase humanitarian aid should consider these main guidelines.

• Humanitarian programs require complex political negotiations. The Iraqi government initially rejected the implementation of the humanitarian program, calling it a violation of Iraq’s sovereignty. After years of negotiations, in 1995, Iraq finally agreed to implement the program. In the Venezuela case, it is necessary to consider the incentives of the different stakeholders related to the Venezuela program, mainly the Maduro administration and the interim government.
• While US sanctions routinely contain humanitarian exemptions for basic food or medical transfers, such as in the case of Cuba, an additional exemption would be required in an oil-for-food context given that US-governed actors would be engaging with the Maduro administration.“ From that perspective, any humanitarian framework for Venezuela should be part of a broader humanitarian strategy, and not simply part of private-public partnerships. Private-public partnerships are designed exclusively on economic incentives, while humanitarian programs should be based on four basic principles that are not economic driven: humanitarian perspective, impartiality, neutrality, and independence. The recent failures of some public-private agreements to implement oil-for-food programs in Venezuela demonstrate the relevance of the humanitarian framework.
• Given Maduro’s sanctioned administration, any humanitarian framework will require special arrangements between Maduro and the US-backed democratic forces to overcome legal and transparency hurdles. Otherwise, the Maduro administration would seize any opportunity for illicit behavior in the implementation of a humanitarian program.
• The failures of the Iraq program can be explained, in part, by its eight-year duration despite evidence of stakeholders’ malpractice. Humanitarian programs should be designed as temporary mechanisms with an incremental scope, subject to scrutiny and conditional renewal. Therefore, they should have specific content that allows for a gradual expansion as the program’s capabilities are built.
• In the Venezuela case, there is another difference: the crisis has not been addressed by the UNSC. The UNSC adopted the Iraq sanctions program, but Venezuelan’s was adopted by the US government. Therefore, any program aimed to allow oil sales in the United States or as compensation to Western operators—currently prohibited by sanctions—should be authorized by the US Treasury Department Office of Foreign Assets Control (OFAC). The involvement of an international organization is not necessary to authorize prohibited transactions, although it could improve the program’s accountability.
• Special permissions must be granted for local gas production in Venezuela. Most of the natural gas from those operations is used for the generation of electricity in the country, therefore playing a critical humanitarian role. As the Western investors managing the key productive assets were paid in kind with crude oil, they have received no compensation during the last twelve months due to the sanctions imposed on the oil sector. Should the Western operators of natural-gas projects continue to be banned from receiving in-kind debt payments for past and ongoing natural-gas output, this could lead to the shutdown of the operations. Shuttered operations would have significant humanitarian consequences, such as a lack of cooking gas or domestic fuel.

The Iraq experience shows that to avoid incentives for opportunistic or corrupt behaviors, any humanitarian framework for Venezuela involving oil should consider the following: the duties that derive from international humanitarian law; the constraints derived from Maduro’s mismanagement and corruption, and international recognition of the interim government; the design of a simple and specific humanitarian program with a narrow scope; and the limited capacity of international organizations to assume broad oversight duties.

Note from the VWG on next section: In considering the analysis of the two humanitarian proposals below, the reader should note that any proposal design should have at least four characteristics, including • the US government, the Maduro administration, and the Venezuelan democratic opposition must be parties to the agreement; •the Maduro administration must have incentives to participate, and has to be an active participant given that it controls the territory and infrastructure, but the other parties must be guaranteed that revenues will be used transparently for appropriate humanitarian purposes; • if the Maduro administration controls the sale of oil, or the procurement or distribution of imports, the previous objective would not be achieved given the lack of transparency, corruption, and limited capacities of the state; and • any increase in oil investment and production that results from the revenues made possible by the program should not lead to revenues used outside the program.

In 2019, the organization Oil for Venezuela, led by Venezuelan economist Francisco Rodríguez, presented a proposal to create an oil-for-humanitarian-imports program. The purpose was to create a mechanism allowing some oil exports from Venezuela to the United States, guaranteeing that the revenues generated would be used toward imports with humanitarian purposes. The plan would require that the Maduro administration and the interim government negotiate an agreement to create an institutional framework for its implementation, and that the US government agrees to provide a general license allowing some Venezuelan oil exports to the US market. The program would be governed by an administrative board with equal memberships from both political sides and some additional members appointed by the international community (e.g., the UN Security Council). The board would have three subcommittees to oversee oil sales, import procurement, and food distribution. Export proceeds would be deposited in escrow accounts, under the control and supervision of the US government.

The administrative board would have the power to determine the type of humanitarian assistance included in the mechanism, which could also include investments to recover infrastructure for clean water supply and stable power generation that are deemed critical for mitigating the humanitarian crisis. Energy infrastructure is also included among the most critical areas for humanitarian assistance. Addressing the lack of maintenance on gas pipelines and its negative impacts on electricity production is among the suggested priorities in Rodríguez’s proposal.

Petróleos de Venezuela (PDVSA) and the joint ventures with foreign partners would participate in the program in one of two ways: partial participation , which would require allocating only some of their exports to the program, or full participation , by which they commit all the sales revenue to the program. For the exporting entities to be able to use some of the revenues to import capital goods or intermediate goods for their projects in Venezuela, full participation would be required.

In their proposal, Rodríguez and his team explicitly discuss how to avoid some of the pitfalls of the Iraqi experience. A contribution of their work has been identifying some of the problematic features of the UN Oil-for-Food Programme in Iraq, and proposing some alternative institutional designs to mitigate them in the context of the Venezuelan case. For example, the Iraqi government oversaw oil sales and used the discretional allocation of oil to buyers to obtain significant side payments and kickbacks. In addition, Iraqi authorities seized kickbacks from providers of humanitarian goods, while smuggling a significant amount of oil outside the program—thanks, in part, to the increased production capacity that the program made possible. To mitigate these problems, Rodríguez’s proposal requires that the oil be auctioned by a technical subcommittee of the administrative board. It also requires that projects must fully commit to the program in order to use part of the revenue to reinvest in oil projects. Any humanitarian framework or proposal for Venezuela would benefit from Rodríguez’s assessment of the risks and opportunities from Iraq’s program.

Expert analysis

One of the stated objectives of Oil for Venezuela is to streamline the mechanism used in Iraq to safeguard against excessive bureaucracy and implementation delays while, at the same time, reduce corruption. However, the proposal would require the creation of a complex institutional structure if it is to handle a large program that can have nationwide impact and reach the humanitarian needs of Venezuela’s most vulnerable populations. Rodríguez convincingly argues that, without an administrative board with checks and balances—like the one he proposes—the program could be undermined by corruption practices like those seen in the Iraqi case. For example, if PDVSA or the joint ventures that it controls are authorized to sell oil under their own discretion, the Maduro administration could find opportunities to line its pockets through on-the-side fees.

The ambitious and complex features of the Oil for Venezuela proposal are both a virtue and a major handicap. While the proposal unambiguously seeks to avoid being considered a replica of the failed UN program in Iraq, critics will inevitably draw negative comparisons, and perhaps disregard some of the proposal’s technical merits that could be adjusted to make the mechanism more viable.

Comparisons with the Iraq program could prove politically costly for members of the Joseph Biden administration and the US Congress who support the proposal, particularly during a midterm election year in which swing states with Hispanic and Venezuelan constituencies will have an influential role. The Venezuela interim government would also have a hard time persuading its domestic constituents and its partners in the international community if the proposal is unable to guarantee full transparency and accountability. Another complicating factor is the diverging viewpoints on sanctions adjustments within Venezuela’s broader democratic coalition.

Rather than unrolling a massive, time-consuming humanitarian proposal that would require broad political capital and trust among all participating actors, it seems more appropriate to devise a program that is more limited in scope and uses existing governance structures, including: OFAC’s license regulations; the inclusion of international oil companies that are already present in Venezuela and subject to anticorruption compliance mechanisms; and the use of established procurement and distribution channels like the UN World Food Programme (WFP).

For example, a well-crafted OFAC authorization might permit some exports from private partners of joint ventures in Venezuela to finance ongoing humanitarian programs administered by reliable international entities like COVAX and the WFP. To avoid overreliance on international multilateral organizations, other OFAC-blessed organizations, specialized by sector, should also play a role in the administration. And, as discussed above, local gas production in Venezuela plays a key humanitarian function. It does not generate revenue for the government and, therefore, is not subject to secondary sanctions restrictions. A specific program should be adopted to allow payment in kind for this critical activity, for the needs of the Venezuelan people and to ensure a basic standard of humanitarian assistance.

An assessment of the Boston Group proposal

The Boston Group was founded in 2002 by parliamentarians from the United States and Venezuela, and served as a venue for members to reflect on topics critical to the advancement of Venezuelan society. Over time, the participation of elected leaders waned. Today, the Boston Group is composed of Maduro government officials, regulators, oil-industry practitioners, lawyers, economists, and political advisers representing both the democratic opposition and the Maduro administration. While the current group composition could weaken its ability to ensure policy implementation, the participation of influential government and opposition supporters could lead to consensus and, therefore, reasonable political viability of the group’s humanitarian-aid proposal at a time when solutions-oriented dialogue with actors from across the political spectrum has faltered.

The Boston Group has worked on its oil-for-humanitarian-aid proposal for Venezuela’s social and economic recovery since 2020. The proposal is divided into two phases, and includes a general set of guidelines for the use of proceeds from the sale of certain volumes of Venezuelan oil to fund humanitarian aid. It also includes guidance on the establishment of an escrow account to manage said proceeds, and the creation of an oversight committee.

The Boston Group proposal considers the sale of 2–3.5 million barrels of oil per month. The oil would come from joint ventures that produce synthetic crude by upgrading extra-heavy oil, such as the Petropiar operation in the Orinoco Oil Belt in eastern Venezuela.

The proposal suggests that 50 percent of the revenue generated from the sale of each cargo shipment be deposited in an escrow account. The other 50 percent would be earmarked for the joint-venture minority partner. OFAC would need to issue a specific license to allow for the sale of the oil. The proposal aims to execute a one-year supply contract, with an option for extension.

While it is generally assumed that the 50 percent of oil sales earmarked for the escrow account would include payment to the government for royalties, income tax, and other fiscal liabilities, it would be useful if the plan specified how the distribution would break out. It would also be helpful if the document clarified how the eventual declaration of PDVSA dividends would be managed. There is no suggestion of the mechanism by which the Maduro administration would formally cede its revenue. This clarification is fundamental to understanding the role of the US government in the flow of the dividends and securing unified support and trust from the interim Venezuelan government. In practice, these issues should be relatively easy to define in an agreement executed by the parties, including the Maduro administration, the US government, PDVSA, and the joint-venture private interests involved in the transaction.

Similarly, it would be useful to disclose a breakdown of how revenue would be distributed to minority partners. It is expected that this allowance would go to the repayment of debt that the joint venture has accrued, along with capital and operating expenditures needed to maintain operations. Additional details would clarify how the proposal may impact crude-oil production. This additional level of detail can help to galvanize trust and support from all involved parties, by detailing how transparency and accountability will be ensured throughout the transactions between PDVSA and the minority partner.

In addition, other oil-producing joint ventures in which Western companies are present (like PetroQuiriquire, or PetroCarabobo) should participate in the program, and the crude oil could have a final destination in countries other than the United States, as long as the shipment can be traced to places such as Spain, Italy, and India.

The Boston Group proposes that Venezuelan legislation and sanctions restrict exports to synthetic crude alone, as natural crude can only be marketed by a state-owned company (per articles 27 and 57 of the Organic Hydrocarbon Law). This synthetic crude restriction could pose serious challenge to the rest of the proposal given how little synthetic crude is being produced due to significantly deteriorated upgraders and lack of diluents. It should be noted as well that if the Maduro government wants to assign all non-synthetic crude oil from a joint venture to the foreign operator for marketing, they can do so, per the Hydrocarbon Law.

An effort to ensure the proposal’s compatibility with local legislation, while simultaneously broadening participation to all private investors—including joint ventures that do not directly export their production—would be useful. If applied more broadly, the program could eventually support increased transparency of 25–35 percent of Venezuelan exports. Such a shift would support the US government’s effort to improve accountability, and its general preferences regarding sanctions and equitable treatment for US and non-US persons.

The second phase of the Boston Group proposal focuses primarily on the creation of a consultative board to interact with a multilateral organization (the group expresses a clear preference for the United Nations). The board would be composed of three representatives each from the Maduro administration and the democratic opposition; two representatives from the Boston Group; and one additional representative jointly selected by the other eight representatives. In a hyper-polarized environment with a lack of trust among players, the board should prioritize technical expertise, reputation, and credibility of the members over political affiliation. It would be beneficial to limit the number of political players, and to include representatives from competent and reputable local nongovernmental organizations.

Following expert review and analysis of the two humanitarian proposals, and the failed Iraq experience to fund humanitarian aid through oil proceedings, the Atlantic Council’s VWG sees six key considerations that could be incorporated in a potential humanitarian framework for Venezuela: participating actors, governance, transparency, multilateral agencies, a legal framework, and US licenses. While humanitarian-specific considerations such as procurement, administration, and distribution of aid are beyond the scope of this publication, the VWG members recognize the importance of studying them in the future. The recommendations below are a result of multiple meetings and consultations that the VWG held with the US government, members of Venezuela’s democratic opposition, international and multilateral organizations, and private-sector actors in Venezuela.

The VWG is fully aware of the potential pitfalls in any humanitarian framework for Venezuela that includes participation from the Maduro administration. The VWG also recognizes the limited capabilities of the United Nations and other multilateral institutions to ensure full oversight and transparency in a humanitarian program, especially in Venezuela’s protracted multidimensional crisis. Nonetheless, VWG members and the key stakeholders agree that the considerations below can stimulate constructive debate and forward-looking analysis for out-of-the-box mechanisms to alleviate Venezuela’s humanitarian crisis—the most severe in the modern history of the Western Hemisphere.

A political agreement between Venezuelan democratic forces and the Maduro administration is required for any oil-funded humanitarian framework. While currently suspended, the Norway-mediated negotiations in Mexico offer a unique consensus-building space to achieve such agreement. A political agreement that includes a majority of Venezuela’s political factions is a necessary first step to avoiding or reducing partisan interference across the humanitarian mechanism, especially in the selection of beneficiary programs and the agreement’s execution. The humanitarian framework, including its specific details around the design of governance structure, transparency mechanisms, and roles of participating actors, should be made public as part of a Venezuelan-led agreement to support the Venezuelan people—and not as an achievement of one of the political factions.

Any oil-funded humanitarian framework for Venezuela should be framed under internationally recognized humanitarian principles. The program would seek to finance humanitarian aid with oil proceeds, as part of the relief that Venezuela’s complex humanitarian emergency requires. Top areas of focus for immediate aid should be the water supply, as well as power generation and transmission. As a result, all program transactions—from oil sales to the distribution of humanitarian aid—must meet general humanitarian principles such as neutrality, impartiality, and independence. Importantly, an initial humanitarian program should not aim to address structural challenges in Venezuela’s oil industry or broader economy, or facilitate public-private agreements with the Maduro administration that fail to comply with humanitarian principles and could result in malpractice.

This does not mean, however, that future programs cannot have a broader focus that helps to rebuild key sectors of the Venezuelan economy. In fact, an initial humanitarian program can help to establish a precedent of trust among participating actors, transparency, and legal frameworks for additional programs to operate successfully in Venezuela. Rather, this approach is a short-term endeavor to invest in basic service provision, which can hopefully help to restart a longer-term recovery process for the country.

Avoid political interference and corruption by ensuring a balanced governance structure that includes equal representation from actors across the political spectrum, civil society, and the international community. Based on the neutrality principle, the program must have a transparent and plural governance body with specific ethical requirements for its members. All members of this body—including representatives from the interim government, the Maduro administration, nongovernmental organizations, and the international community—should be held accountable for their decisions as part of this program, and should undergo continuous mandatory training on governance, transparency, ethics, and humanitarian-aid best practices. Independent and experienced organizations such as Transparency International could provide these mandatory trainings.

Rely on existing humanitarian organizations to design and disburse humanitarian aid according to best practices. The broad spending categories of the humanitarian aid to be disbursed under any program should be defined ex ante. The program’s governance structure should not define the specific humanitarian projects that will receive funding; rather, areas of expenditure should be defined based on the United Nations’ Office for the Coordination of Humanitarian Affairs (OCHA) diagnosis of the financing needs of Venezuela’s humanitarian crisis. The governing body should then deliberate and decide the allocation of funds into those broad categories, including health, food and water assistance, fuel, and infrastructure. That allocation should follow guidance from national and international humanitarian experts—rather than politicians—who understand Venezuela’s humanitarian needs, based on population groups and geography. Ongoing beneficiary programs that could be considered for funding include: the COVAX facility and traditional immunization programs, the Humanitarian Response Plan (HRP) 2021, and programs directed to water sanitation and hospital infrastructure. International humanitarian organizations such as World Food Programme, Pan-American Health Organization, UNICEF, and the International Federation of the Red Cross should have a central role in the administration and distribution of both existing and new beneficiary programs, especially considering Venezuela’s fragile infrastructure and weak administrative capacity. Importantly, these organizations must work in tandem with independent and reputable civil-society groups to provide monitoring and evaluation that can be reported back to the governing body.

An oil-funded humanitarian framework should have a specific scope, timeline, and outcome. Less complex programs could be more acceptable to all potential participants, especially the United States, the United Nations, and other multilateral organizations. The program can then be scaled by learning from its successes and avoiding its pitfalls. At the current price, limited oil volumes—at the level that current joint ventures can produce in the short term—could yield large revenues for Venezuela. These revenues could then benefit a significant portion of the population through targeted humanitarian-aid programs. Finally, humanitarian relief must be considered just a temporary solution. To solve the root cause of Venezuela’s complex humanitarian emergency, it is necessary to implement deep economic and social reforms that are outside the scope of this proposal.

An optimal humanitarian framework should include the open and transparent participation of compliant US and non-US oil and gas operators. As stated above, an initial humanitarian program would not seek to solve the long-standing economic constraints in Venezuela’s oil industry but, rather, to finance humanitarian aid with oil proceeds. Therefore, the program should allow the open and equal participation of compliant US and non-US oil-industry operators.

For example, a PDVSA-Western-based oil venture can be established for the humanitarian program, but the oil company must maintain control over the flow of money. This is a crucial requirement to avoid potential malpractice from PDVSA and the Maduro administration. The oil company would be allowed to use a portion of the oil-sale proceeds for operational and financial expenditures, including servicing debt. In exchange, the oil company would be required to pay taxes, royalties, and dividends into the escrow account to fund the humanitarian program.

To guarantee the continued supply of much-needed gas—a basic resource needed to avoid further deepening the country’s humanitarian crisis—any humanitarian program should consider allocating a portion of the escrow-account expenditures to pay for gas operations of firms such as Eni, Repsol, and Total, or otherwise allow them to receive direct payments in kind. International oil and gas companies can play a crucial role in ensuring that energy exports from Venezuela are carried out with respect for OFAC compliance standards and in full transparency. Moreover, allowing foreign partners to get paid has the advantage of keeping them in the country, making possible a faster recovery of the oil sector over the long term, which would be crucial for any economic-recovery plan.

Provide open and transparent information throughout the program. To be eligible, oil companies participating in this program must be willing to provide information about how much oil was extracted, how much oil was sold and at what price, how much oil revenue was reinvested to sustain operations, and verifiable calculations of the royalties, taxes, and dividends deposited in escrow. It is of critical importance to have mechanisms for monitoring payments, transparency, accountability, and civil-society inclusion before, during, and after the execution of the program. OFAC should serve as the oversight body to enforce standards of compliance and transparency across oil exports, and sale transactions across the framework.

The US Treasury Department should consider issuing a special authorization. Currently, US executive orders prohibit hydrocarbon exports from PDVSA to the United States. All US-destined oil exports would require a license issued by OFAC. Other countries with similar approaches to Venezuela would likely need to issue their own special authorizations as well.

OFAC´s 2019 humanitarian guidance provides the framework for granting a license to use oil revenues for humanitarian purposes. A critical component to facilitate the issuance of this license is the transparency and credibility of the humanitarian program. Sound institutional mechanisms that reduce the risk of malpractice in terms of resource deviation or politicization will increase the viability of granting a humanitarian license. If it is issued, the license should at least authorize

• corporations operating in Venezuela, such as joint ventures or private partners, to export oil to the United States and to other allied countries—such as Spain, Italy, or India—where the traceability of the shipment is guaranteed to any reputable oil buyer or destination approved by OFAC;
• US and Western corporations to operate in Venezuela, and to buy and pay for permitted Venezuelan oil exports;
• the distribution of oil payments related to payments of taxes, royalties, and dividends to be deposited in an escrow account, with the remaining balance used for operational and capital expenditures necessary to keep up production;
• the use of proceeds deposited in the escrow account for humanitarian purposes through accredited humanitarian organizations; and
• a governance mechanism to ensure transparent and effective accounting of all funds deposited in escrow; the OFAC license cannot be used to cover private-public agreements not based on humanitarian principles, and should include a snapback provision that is triggered if any of the parties involved fail to comply with the special authorization.

A humanitarian program should not move forward without all of the conditions for its transparent and effective execution being met. An oil-for-aid program should not go forward if distribution, transparency, and related issues are not resolved. To avoid repeating structural issues identified with the Oil-for-Food Programme in Iraq and potential malpractices from the Maduro administration, any of the following conditions should be considered grounds for program suspension, including

• attempts to alter the impartial, multiparty composition of the governance structure;
• attempts to modify or conceal data relating to the quantity of oil extracted, the quantity sold, and the price at which it was sold;
• attempts to modify or conceal data relating to the quantity of humanitarian-aid items purchased and the price at which they were obtained;
• attempts to funnel funding into specific humanitarian projects that align with one or more actors’ personal benefits;
• failure to establish and follow a specific timeline for winding down what should be a temporary program; and
• revocation or expiration of the US Treasury Department’s special authorization.

Entering 2022, Venezuela finds itself at a crucial crossroads. While the interim government’s mandate has been renewed, opposition fractures are evident, the Maduro government remains entrenched, and the country’s humanitarian crisis drags on with no end in sight.

Against this backdrop, it is particularly urgent for the international community to leverage the legal, financial, and diplomatic resources at its disposal to provide relief to the most vulnerable Venezuelans. While the policy recommendations in this publication are not meant to be fully exhaustive, taken together, they present possible avenues for designing, developing, and executing an out-of-the-box humanitarian-relief framework that places the needs of the Venezuelan people first. But, to do so, political actors in Venezuela and the United States should foster the conditions for trust, consensus building, and unity among diverse stakeholders, which can open pathways for sustainable and transparent humanitarian agreements.

The Adrienne Arsht Latin America Center of the Atlantic Council would like to thank the Venezuela Working Group members for their invaluable input and expertise. In particular, the Center would like to thank Jose Ignacio Hernandez, Francisco Monaldi, and Patricia Ventura for leading the research and writing of this report. The Center would also like to thank Diego Area and Domingo Sadurni for leading the six month-long effort of individual consultations and research that were critical for the report’s analysis and recommendations. Thank you to Isabel Bernhard for her research and editing support. As well, thank you to Jason Marczak for his leadership in making this publication possible.

Atlantic Council’s Venezuela Working Group

Venezuela Working Group members provided critical insight and ideas as part of the drafting of this report. Findings and recommendations of this publication, however, do not necessarily reflect the personal opinions of the individuals listed below or the organizations to which they are affiliated.

*Endnotes are accessible by downloading the PDF

The Adrienne Arsht Latin America Center broadens understanding of regional transformations and delivers constructive, results-oriented solutions to inform how the public and private sectors can advance hemispheric prosperity.

Related content

Blog Post Jan 5, 2022

Infographic: What’s ahead for Venezuela after January 5, 2022

Three years since the interim government came to be, Venezuela’s political crisis remains unresolved. Opposition forces continue to face deep challenges – both internal and external – to restore democratic institutions. The Adrienne Arsht Latin America Center at the Atlantic Council created an infographic that looks back at the interim government’s trajectory since 2019 and […]

New Atlanticist Jan 4, 2022

Venezuela’s youth have a long-term strategy for building democracy. Biden should listen.

By Willow Fortunoff

An entire generation of Venezuelans have grown up in a failed state, which is why they’ll be crucial to the future of the country’s democracy.

EconoGraphics Feb 6, 2022

Global Sanctions Dashboard: Groundhog edition

By Julia Friedlander, Michael Albanese, Maia Nikoladze and Castellum.AI

Who sanctions Russia and why, Colombia’s narcotics trafficking, Iran’s balancing act, and Chinese military sanctions.

Image: People, permitted for humanitarian reasons, cross the Simon Bolivar International bridge from Cucuta, Colombia, after it was reopened, as seen from in San Antonio del Tachira, Venezuela October 4, 2021. REUTERS/Carlos Eduardo Ramirez

An official website of the United States government

The .gov means it’s official. Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you’re on a federal government site.

The site is secure. The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely.

• Publications
• Account settings

Preview improvements coming to the PMC website in October 2024. Learn More or Try it out now .

• Advanced Search
• Journal List
• Surg Neurol Int

The devastating Venezuelan crisis

The Venezuelan crisis is filling the headlines and truly deserves the world’s attention. It is a wake-up call to all as it holds relevant lessons for both developing and developed countries. The country suffers a severe humanitarian crisis. Its economy has declined at a faster pace than any other peacetime economy worldwide. Hardship and repression have led millions to flee the country creating a refugee crisis in Colombia and other neighboring countries, and millions more are expected to flee unless conditions improve. It raises serious security concerns in the whole Western Hemisphere. The country of Venezuela sits on and owns the largest oil reserves in the world. Oil helps explain the “rent-seeking” behavior that is at the root of this crisis. (“Rent-seeking” is simply getting money from the government for the oil it sells and giving little or nothing back to the government in return. -EEd) However, oil cannot be blamed for this crisis – it helped Venezuela get out of the poverty trap and become a modern democratic society in the 20 th century. This crisis comes from the perverse combination of bad politics, bad policy, and corruption that besieged the country over the last 20 years. Since he was elected in 1998, Hugo Chávez paved the way to authoritarianism while making the economy more vulnerable to the ups and downs of oil prices. Chávez died in early 2013. When Nicolás Maduro, his anointed heir, was elected to succeed him, the economy was in bad shape and institutions were already weak, but problems had been papered over thanks to high oil prices and the money the government made from its sale. When oil prices were high worldwide, Venezuelan governments did not save money for possible future economic losses. When oil prices began falling in 2014 and threatened the money from “rent-seeking” by many Venezuelans, Maduro chose the road to overt authoritarianism instead of seeking to restore the basics of an open society and a prosperous economy: the rule of law, property rights, transparency, prudent fiscal and monetary policy, and essential public goods such as education, health, housing, transportation, and infrastructure. This paper is a brief history of how the present Crisis in Venezuela developed and how it can be reasonably resolved. The Venezuelan people are suffering. There are lessons here for everyone in the world (A Venezuelan and James Ausman).

Emeritus Editor-In-Chief note

Surgical Neurology International (SNI) received this paper from A. Venezuelan who left Venezuela and now lives in South America. The person was recommended to SNI as highly reliable. The person is nameless to SNI. The text has been checked as factual. Miguel A. Faria, MD has described this article as “better than I have read in the American and international media, including the BBC.”

This Editorial is followed by comments made by Miguel A. Faria, M.D., an SNI Associate Editor- in-Chief in socioeconomics, politics, medicine, and world affairs of SNI. He is the author of Cuba in Revolution: Escape from a Lost Paradise (2002). His upcoming book is America, Guns, and Freedom: A Journey into Politics and the Public Health and Gun Control Movements (2019). His website is https://haciendapublishing.com . Dr. Faria escaped from Cuba in the 1960s in its transition to a Castro controlled Communist country. He was educated as a neurosurgeon in the USA and has been the Editor of two American medical journals.

INTRODUCTION

Without having gone through a war or a natural catastrophe, Venezuela suffers a grave humanitarian crisis and the worst economic performance in the world, perhaps one of the most serious in recent times. It comes from bad politics, bad policy, and corruption. Chávez and Maduro managed $1 trillion in oil revenues over two decades, and the country is in shambles.

Venezuela’s crisis is political, economic, and social. It worsens at a dizzying speed and threatens to drag the country into a failed state chaos. Bold reforms are needed to steer the country out of its morass. Citizens must be empowered through education and jobs instead of being kept subservient to government handouts. The government’s footprint in the economy must shrink, and the administration must focus on essential public goods: health care, education, security, and infrastructure. The country must open the doors to private investment with clear rules and legal protection, and embrace modernity instead of trying to live off its hydrocarbon resources with a short-term vision. Reforms can succeed, if implemented by new leadership with stable political standing, conviction, and strong international support.

Under Chávez, elected president in 1998, Venezuela came to experience one of the worst cases of Dutch disease in the world. (“Dutch disease is the rapid increase in the production of raw materials [like oil and gas] causing a decline in other sectors of the economy. When the raw materials run out [or are not produced-EEd], the economy can be in a worse position than before. T. Pittenger “Dutch Disease;” economicshelp.org; November 15, 2017) other countries in the world have undergone Dutch disease in the past.

The current crisis is rooted in Venezuela’s society’s effort to maintain its way of life with a short-term vision of easy money. Venezuelans gave all the power to one man, Hugo Chávez, who generated the illusion of prosperity through short-sighted populism and sank the country into communism and lawlessness by abolishing property rights and the rule of law, by expanding the government’s footprint in the economy, by over-regulating whatever is left of a private sector, by destroying all institutions that are key to a civilized society, and by allowing corruption to contaminate all government’s functions. It is also the story of the rise and decline of a revolution that went from being applauded by many in the world to becoming an illegitimate dictatorship.

Some analysts find a parallel between Venezuela’s bankruptcy today and the Spanish bankruptcy of the 16 th century. Spain wasted the gold and silver brought from the Americas on an unsuccessful imperial policy, on droves of entitled noblemen, and on the importation of manufactured goods. Venezuelan petrodollars were spent similarly.

AN OIL STORY

Venezuela has a century-long oil history and the largest oil reserves in the world: 360 billion barrels. Saudi Arabia is the second with 270 billion barrels. An unprecedented bonanza due to high oil prices in 2004-2008 brought a windfall of $300 billion to the country. The money was spent on consumption and on building international support for the “Bolivarian Revolution” instead of investing in health, education, infrastructure and modernization, and saving for future generations. After the oil price boom, Venezuela emerged more vulnerable to the ups and downs of oil.

Hugo Chávez died in early 2013 and his anointed heir, Nicolás Maduro, took office. The collapse of oil prices in 2014 shed light on the weaknesses of an economy where private investment had been systematically destroyed. Maduro’s political footing eroded as living standards lavishly subsidized for over a decade turned into hardship. He chose the road to overt authoritarianism instead of seeking to restore the basics of an open society and a prosperous economy: the rule of law, property rights, transparency, prudent fiscal and monetary policy, and essential public goods such as education, health, housing, transportation, and infrastructure.

Short-termism and ignorance killed the golden goose. Oil production fell from 3 million barrels a day in 1998 – 1.5 million in 2017 and continues plunging. It may close at 600,000 barrels a day by year-end. The depression in Venezuela has lasted for 5 years, its gross domestic product loss exceeds 50%, and the end is not yet in sight. In the Great Depression, the U.S. economy shrank by 30% and lasted only 3 years. Intense hyperinflation has impoverished Venezuelan society since 2018: the annual inflation rate heads toward 500,000% this year. In the past 20 years, 60% of the companies that existed in 1999 closed. The minimum wage is $3/month, 90% of the population is poor, and 15% of children are at risk of dying from malnutrition.

About 85% of medicines are scarce or utterly unavailable, while the number of people at risk rises. The vulnerable population includes over 140,000 cancer patients, 300,000 with cardiological diseases, 300,000 chronic patients (i.e., Parkinson’s and hemophilia), and 79,000 people with HIV, who stopped receiving treatment since 2016 or receive it intermittently. More than one million cases of malaria were reported in 2018, a disease eradicated in Venezuela in the 1940s. The shortage of medicines stems from foreign exchange controls and corruption, and $6 billion owed by the government to pharmaceutical companies. Quality control rules on medicines also eroded over time, allowing poor quality medicines to enter the country. The lack of food makes things worse.

Venezuela suffers one of the worst peacetime migratory crises known in modern times, with 3 million migrants around the world according to the United Nations High Commissioner for Refugees and the World Organization for Migration. Many have left on foot to neighboring countries, where they live in shelters or on the streets. This figure is in the ranks of Afghanistan (2.5 million refugees), Syria (6 million), and Colombia (almost 7 million internally displaced persons).

The most recent electricity crisis is another example of the failure of central control. The national electricity system collapsed on March 7, 2019, after 15 years of mismanagement, underinvestment, and corruption. Successive nationwide blackouts began on March 7 and left the country without electricity, water, functioning hospitals, public transportation, and communications critical for payment system operations. The government officially began to ration electricity a month later, limiting service everywhere except Caracas, the capital, where it fears social unrest. Power outages are frequent and unpredictable, suggesting that the system is incapable of generating and distributing enough power to meet even post-rationing needs. The “new normal” implies electricity with interruptions, irregular supply of water, partial and unstable connectivity, lack of perishable food, reduced working hours, schools and businesses closed on and off by government decree, and a worsening health crisis.

WHAT WENT WRONG?

Venezuela was the second largest oil producer in the world until 1960 when the Soviet Union displaced it, and the first world exporter until the early 1970s, when Saudi Arabia occupied that place. In the 1950s and 1960s, Venezuela was one of the 20 wealthiest countries in the world measured in per capita income. The state provided cheap loans, subsidies, numerous jobs, and free public services, and made sure that an overvalued currency made imported goods accessible. Everyone got a little of what they wanted. Venezuela became a society of rent seekers living in an ideal world with lots of oil rent distributed by the government, making politicians powerful.

Democracy was instituted in 1958 when Marcos Pérez Jiménez (a military dictatorship) was ousted. A broad social consensus helped fight right-wing military coups and secure a fast victory over leftist guerrillas. People felt well despite inequality (the top 20% captured 80% of the income) and 90% of the voters supported the two-party system that allowed 70% of Venezuelans to be broadly considered middle class.

Prudent fiscal and monetary policies prevalent in the first half of the 20 th century gradually gave way to macroeconomic populism. The outcomes left people unhappy and distrustful. The decline of rent-seeking capitalism in the 1980s was traumatic. Incomplete market reforms in the 1990s failed for lack of popular support. The people did not understand that it was impossible to get back the bonanza of the old days. A military organization, the Bolivarian Movement 200 created by a group of military officers in 1983, decided to strike a blow and launched two military coups in 1992. They failed to gain access to power, but Hugo Chávez, one of its most visible leaders, won considerable support.

Chávez won elections in 1998 offering the typical program of a reformist nationalist military. In a carefully planned sequence, between 1999 and 2006 he changed the constitution, reformed institutions, and got full control of the government and the media. He displaced the old political class and replaced a watered-down version of “neoliberalism” with controls and multiple forms of state interventionism.

Initially, Chavismo was an alliance of left- and right-wing politicians and intellectuals who shared “anti-system” views since 1958, shunned neo-liberalism and, to varying degrees, opposed representative democracy. The Chavista alliance quickly moved to the left. The Cuba-Venezuela agreement was forged in 2000. A close friendship between Chávez and Fidel Castro led to the arrival of thousands of Cuban advisors who took over strategic government functions and ended up providing critical intelligence support to the government. In 2001, Chávez was granted special powers to legislate by decree. The land and oil reforms he enacted heralded problems. The economy was far from improving, and people felt disappointed. In late 2002, Chávez’s popularity had fallen to <30%. Two things came to his aid: the failed 2002 coup against him, and the boom in oil prices that began in 2004. He rebuilt his political footing as an “invincible hero.”

In early 2003, Chávez took control of PDVSA, the national oil company, after firing 20,000 of its highly skilled managers and workers. PDVSA morphed from being a professionally- run oil company to becoming the source of petty cash for the government. He purged the Army and turned it into another of his supporting pillars, and also sought to build up his international standing as a righteous revolutionary that successfully confronted conservative elites, a partial truth. In any case, the old system died in 2002 when many of its key players were defeated including the two traditional parties, the trade unions linked to them, oil industry managers, and businesspeople who, until then, had shared power in a consensus-based oil rent distribution mechanism.

Then came another oil boom. Oil prices rose steadily to over $100 a barrel in mid-2008 from the low $20s in 2001- 2003. Venezuelan oil exports added $300 billion to the government’s coffers in 2004-2008. The world financial crisis brought prices down precipitously in the second half of 2008 and caught Venezuela unprepared.

Nevertheless, the oil windfall had boosted Chávez’s standing. Along with higher revenues came a surge in public spending, with multiple subsidies and welfare policies known as “missions.” These were programs to massify access to education and health, subsidized food, free housing and direct aid in money, seeking to take Venezuela to “zero poverty” in 2021. Strict foreign exchange control was put in place in 2003 for political reasons: it allowed the government to rein in the private sector which was (and is) dependent on foreign currency generated by oil – private exports that have traditionally been minimal. The Bolivar was artificially overvalued, to allow for cheap imports.

The government showed encouraging results to the world: the poorest doubled their consumption capacity, poverty dropped from 70% in 1999 to 30% in 2013, and the United Nations Development Program noted that the human development index had risen to 0.764, ranking Venezuela in 67 th place out of 187 countries. It was Chavismo’s golden age.

Venezuela sought to become a regional power by helping left- wing governments rise in many Latin American countries and by providing them strong financial support to stay in power. The goal was to create an alternative axis to the United States. The Bolivarian Alliance for the Peoples of Our America was born in 2004 and Petrocaribe, a scheme geared to subsidize imports of Venezuelan oil for other countries was begun in 2005. Petrodollar diplomacy secured for Chávez (and more recently, Maduro) the votes needed to survive challenges in the international forums. Billions of dollars went to fulfill this goal. According to some calculations, facilities granted to Petrocaribe countries cost Venezuela $50 billion between 2000 and 2017.

THE DECLINE

In 2007, Venezuela officially became a “socialist state.” The government began by purchasing companies privatized in the early 1990s such as the National Telephone Company (Cantv) in 2007, the Orinoco Steel Company (Sidor) in 2008, and Banco de Venezuela, the largest commercial bank in the country in 2009. Subsequently, the government moved to expropriate property without compensation, as attested by billions of dollars in lawsuits filed at the International Center for Settlement of Investment Disputes (ICSID) attest. In large farms, the process began earlier by fostering, or at least tolerating, invasions of these farmlands by peasants.

About 1000 companies were nationalized between 2005 and 2017. The plan was to put all the fundamentals of the economy in the hands of the government, leaving a small space for the private sector. Companies became subject to rigorous controls on prices, and their access to foreign currency, extending even to their ability to choose to whom to sell. Companies were often forced to sell at a loss and also to sell at least half of their production to the government.

Non-oil output fell, while oil output was also trending down. Rice production fell to 405,000 tons in 2017 from 900,000 in 2007; corn production went down to 1 million tons in 2017 from 2.4 million in 2007, and sugarcane, dropped to 3.5 million tons in 2017 from 8 million in 2006. From 170,000 vehicles produced in 2007, the automotive industry production dropped to only 2768 in 2017. Liquid steel manufacture went from 4 million tons in 2008 to 270,000 in 2017, and aluminum went from 600,000 tons in 2007 to 400,000 10 years later. No sector escaped the destruction.

While oil prices were high, massive imports masked the effect of declining production of local goods. When oil exports began to shrink, imports fell, and shortages soared. By 2017, imports were already at a quarter of their peak 2012 level, when Chávez was campaigning for reelection. Rationing became a fact of everyday life. Black market flourished.

THE ROAD TO OUTRIGHT DICTATORSHIP

Personalism in leadership and corruption drove many Venezuelans away from Chávez. The poor results of “socialism” with low oil revenues drove away more. The political erosion of chavismo without both petrodollars and Chávez became evident. Nicolás Maduro, Chávez’s political heir, has managed to hold on to power thanks to the support of the military and, increasingly, of paramilitary groups serving as his “Republican Guard.”

Maduro called elections for a National Constituent Assembly in 2017 without abiding by the constitution. Those elections were not recognized as legitimate by the opposition and by foreign governments, including the United States and several members of the European Union. He then called for sham presidential elections in May 2018 also rejected as unfair and illegal by the opposition and by the international community. Several parties had been made illegal, and many opposition leaders were prevented from running for office, pushed to exile, or jailed.

The opposition considers Maduro’s new 6-year term (2019- 2025) illegitimate. It declared an absolute vacancy of the Presidency of the Republic and, according to the constitution, appointed Juan Guaidó as Interim President. Sixty countries recognized Guaidó and are working to support a solution to the political crisis through free and fair elections as soon as possible. They agree that these changes can only happen after Maduro steps down. The United States government is the strongest and most assertive opponent of the Maduro regime and has been applying major sanctions since 2017.

WHAT’S NEXT?

The road to recovery starts with politics. Maduro’s departure is the prerequisite for free and fair elections that bring new leaders to power. Reforms can only succeed if they are carried out by new leadership, with a robust political standing so that reforms can take place democratically, and with conviction, because these changes will neither be quick nor easy. Decision-making will have to be inclusive, with buy-in from critical constituencies. Strong international support is also essential. In the economy, it must be back to basics: the rule of law, property rights, practical beliefs for expectations, and a social safety net for all. Three key institutions need to be rebuilt quickly: the judiciary, to restore the rule of law; PDVSA, to feed the country; and the central bank, to restore confidence in the currency.

A reform plan called “Plan País” has been crafted and approved by the opposition. It is a sensible blueprint. It foresees humanitarian assistance (food, medicines, and health care), macroeconomic stabilization, structural reforms, fiscal reforms, imports to fill the shelves early on, and direct subsidies to support the most vulnerable population. It contains policies geared to reactivate the oil industry and to attract foreign investment. Agriculture and industry need to get back on their feet, along with programs to generate quality jobs. All of this is to be driven by the private sector.

Security challenges include the pressing need to regain control over the territory, now plagued by illicit drugs and arms businesses and multiple paramilitary groups. The Armed Forces, law enforcement agencies, and the public administration all need to be rebuilt. A complex debt restructuring also awaits, with over $160 billion in foreign debt in default. All of this means that Venezuela’s recovery will require substantial upfront funding from the International Monetary Fund, multilateral institutions, bilateral export financing agencies, foreign donations, and the debt restructuring process. Private capital will follow, once the dust settles.

(I want to express my gratitude to the author of this paper for allowing Surgical Neurology International (SNI) to bring this objective information to our readers that is not easily obtainable elsewhere. Its value is in showing how corruption, the desire for power and money in a country can affect its government leaders, and ruin the lives of the people of the country who are the patients of our colleagues there and elsewhere. James I. Ausman, MD, PhD-EEd) .

COMMENTS BY MIGUEL A. FARIA, MD

Sni associate editor in chief: socioeconomics, politics, medicine, and would affairs.

This is an excellent review article/editorial for which the author(s) should be congratulated. It describes perceptibly and accurately developments in Venezuela from the time the socialist, revolutionary-turned military dictator, Hugo Chávez, came to power in 1998 promising prosperity to the present age under his successor Nicolás Maduro, bringing full devastation and disaster whose seeds had been planted with the advent of socialism in the 1990s. All this is well recounted in this article, better than I have read in the American and International Media, including the BBC.

The author(s) describe how Venezuela was afflicted with the Dutch disease, a disease that also afflicted Mexico with the same commodity, oil, during the presidency of José López Portillo in the early 1980s. Likewise, it was a disaster for Mexico. However, unlike in Venezuela, the citizens of our neighbor to the south eventually voted out the progressive and corrupt Institutional Revolutionary Party, and voted in the more accountable, free-market oriented, conservative National Action Party (PAN), bringing and consolidating relative prosperity and stability in Mexico.

The tragic story of Cuba in the past 60 years is even more apropos. The heart-rending story of Venezuela cannot but bring to mind the even more disastrous events that took place on the Caribbean island since the Cuban Revolution of 1959. This was exactly 40 years before the advent of dictator Hugo Chávez in Venezuela. One cannot help but draw social, economic, and political parallels between the two nations.

Cuba, like Venezuela, was a prosperous country, despite the much-touted ruthlessness and corruption of President Fulgencio Batista. Even with the turbulent years of revolutionary violence in the 1950s preceding the Castro revolution, Cuba’s prosperity was unparalleled. This was true for education, standard of living, and health care. The Cuban socialist revolution ended all of that – and most importantly, it extinguished freedom.

The author(s) write: “Venezuela was the second largest oil producer in the world until 1960 when the Soviet Union displaced it, and the first world exporter until the early 1970s when Saudi Arabia occupied that place. In the 1950s and 1960s, Venezuela was one of the 20 wealthiest countries in the world measured in per capita income. The state provided cheap loans, subsidies, numerous jobs, and free public services, and made sure that an overvalued currency made imported goods accessible. Everyone got a little of what they wanted. Venezuela became a society of rent seekers living in an ideal world with lots of oil rent distributed by the government, making politicians powerful. Democracy was instituted in 1958 when Marcos Pérez Jiménez (a military dictatorship) was ousted…”

Indeed, a great future was squandered by mismanagement, and eventually the formation of a corrupt socialist dictatorship, the same as in Cuba. In my book, “ Cuba in Revolution: Escape From a Lost Paradise” (2002) , I wrote: “In 1958, just prior to the revolution, Cuba had three times as many doctors as all of the Central American countries combined, but there was no oversupply because freedom and the ordered liberty of the free market reigned.” Public health was a la par with the United States. Life expectancy in Cuba in 1958 was rising at the same pace as those of industrialized European countries. Cuba had the lowest infant mortality rate in Latin America. In education, Cuba also ranked at the top and had the third highest literacy rate in Latin America. Just before the Revolution, prosperity reigned, and the standard of living was comparable to those in many European countries. Even without oil, the economy was thriving, the same as with Venezuela in the decade of the 2000s, but all of this ended in both countries with the advent of socialism and the loss of freedom.

The decline and eventual devastation of the two countries began in earnestness once they openly declared themselves socialist States: Cuba in 1961, immediately after the travesty of the Bay of Pigs, and Venezuela in 2007, after Chavez, like Fidel, had fully consolidated power. Both proceeded with nationalization and expropriation of private property. Freedom of the press and private education ended, and full socialist dictatorship became the order of the day.

In Cuba, communist dictatorship and misery still reigns due to the police state totalitarianism enforced in an island by the evil genius of Fidel Castro. However, neither Chávez nor Maduro had the genius component, and the Venezuelan situation, which can only be characterized as anarcho-tyranny in the political spectrum, will not last much longer. In fact, Maduro has lasted this long not only due to the support of the top military ranks led by the corrupt henchmen of Chávez and Maduro, who fear prosecution for corruption and war crimes but also due to the bolstering of four authoritarian nations: Russia, China, Iran, and Cuba.

Juan Guaidó, the President of the National Assembly, has already been recognized as the legitimate President of Venezuela by the US and most of Latin America. The dictatorship will soon collapse, and it is only a matter of time before freedom returns to the long-suffering South American nation, the proud country of Simón Bolívar, the great Liberator. I want to thank the author(s) again for bringing the issue of Venezuela eloquently and incisively to the intelligent readers of SNI.

COMMENTS BY RUSSELL L. BLAYLOCK, MD

Sni associate editor-in-chief, neuroinflammation section.

The paper on Venezuela demonstrates, quite well, a repeated methodology by the revolutionary left. First come, the promises and extensive use of propaganda – painting a picture of a coming utopia, should the people be wise enough to elect the leftist “progressive.” Then follows the welfare state, which initially grows and the plight of the poor seems to actually improve. This gives the new leftist president time to consolidate his power and build his police state. Of course, the money is created out of nothing – mere entries in a ledger of the state or from the wealth built by the previous free enterprise government. Once the police state is completed, then the initial utopian illusion is dropped. Rapidly, the totalitarian state rises and all references to the utopia fade into the distance. Elections are then rigged and true democracy disappears. Enemies are arrested and removed from positions that might endanger the new totalitarians. At this stage, the economy begins to collapse, as it was built on fiat (fake) money. The stage of hyperinflation rises, international investment dries up, banks are taken over by the government, and commerce is destroyed. Starvation is close behind. Store shelves are empty, food lines grow, people migrate in mass numbers to other countries to avoid this devastation of the economy; and to keep their power, the government becomes increasingly violent and oppressive. At that stage, we have full communism. All pretense of this being a revolution for the “little people” continues to be believed only by the simple minded and those benefiting from the new bureaucracy and/ or the enforcers of the police state.

Miguel’s comments are beautifully crafted and poignant. With his addition, all should understand this process and the enormous value of the private property, the rule of law based on transcended natural law, a constitutional system that guarantees liberty and an economic system that recognizes private contracts and negotiations outside the state. The evil of collectivism is contained in this wonderful paper.

SNI receives papers on socioeconomics and politics from around the world due to its devotion to Freedom of the Press, its desire to enlighten our readers everywhere with the truth in its concern about the health and welfare of people, who are our Patients everywhere. (James I. Ausman, MD, PhD, Emeritus Editor, SNI, an operational part of a charitable foundation, The James I and Carolyn R Ausman Educational Foundation) .

These Editorials may not necessarily reflect on the opinions of the members of the SNI Board and publishers .

Comments from SNI’s readers are welcomed and will be published if appropriate to this subject .

How to cite this article: Venezuelan A, Ausman J. The devastating Venezuelan crisis. Surg Neurol Int 2019;10:145.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Journal or its management.