With the May 20 election fast approaching, Venezuelans are dealing with one of the worst economic depressions in Latin American history. President Nicolás Maduro claims the U.S., European Union and Canadian sanctions over democracy and human rights abuses have left Venezuela the victim of an “economic war.”
Venezuela’s woes have much deeper roots, however. Hyperinflation has made the status quo unsustainable and Venezuelans face long lines for scarce food and critical medicine supplies. Regardless of who wins on election day, the country will need to adopt economic reforms.
Venezuela’s democracy has eroded sharply
Chavistas have governed the country since President Hugo Chávez’s 1998 election. The opposition is divided between supporters of former Chavista Henri Falcón — and election boycotters who doubt that Sunday’s elections will be democratic.
The region’s longest-standing democracy during the second half of the 20th century, Venezuela descended into autocracy following Chávez’s successful 2009 constitutional referendum abolishing term limits. The Polity IV project, which codifies regime characteristics across an autocracy-democracy spectrum, officially labeled Venezuela an autocracy that year.
The Venezuelan constitution defines the country as a democratic state, but the executive branch steadily consolidated its power in the last decade by eliminating checks and balances and repressing individual freedoms. Maduro has also banned political parties, jailed opposition leaders and dissolved the opposition-controlled National Assembly.
The Maduro regime has also used food shortages to its political advantage. About a quarter of Venezuela’s population eats two or fewer meals a day. The government has linked electoral participation to the allocation of food subsidies — government-issued electronic ‘Fatherland cards’ entitle voters to subsidized rations but must be renewed near polling stations on election day.
Michael Penfold, a Wilson Center Global Fellow, finds that these clientelistic mechanisms make it difficult for the opposition to compete electorally. Opinion polls seem to suggest that Falcón would win a presidential election against Maduro. However, accounting for boycott abstentions and the ability of Maduro’s food subsidies to capture opposition voters, Maduro instead becomes likely to win.
Why did Venezuela’s economy collapse?
Dependent on oil for 95 percent of its foreign currency earnings, the Venezuelan economy booms when oil gushes above the surface and busts when the well runs dry. Oil production has plummeted to 1.41 million barrels per day, less than half the average 2013 output of 3.02 million barrels per day. The historic collapse reflects a variety of factors, including the 2014 oil price crash, stunted investment, a loss of public managerial expertise, and the government’s long-standing practice of redirecting oil revenue toward social spending.
During previous oil crises, Venezuelan leaders reluctantly opted for austerity. However, the Maduro government continues to spend like it’s 2013, and simply prints more money. This opened the door to hyperinflation — when prices spiral out of control and populations struggle to afford basic commodities, such as food and medicine.
Prices in Venezuela have risen by more than 50 percent per month since September 2017, well above inflation rates among Venezuela’s regional peers. The government raised the minimum wage three times this year. However, a package of basic groceries now costs about 60 times the minimum wage, catapulting nine out of 10 citizens into poverty. Venezuela’s hospitals struggle to survive amid electricity shortages, an exodus of doctors and a 90 percent deficit in medical supplies.
Hyperinflation can be a catalyst for economic reform
My research shows that hyperinflation tends to catalyze and sustain economic reform in Latin America. These income shocks pulverize living standards and destroy the price system, leaving the economy and society in shambles.
Citizens then demand economic stability, and press their political leaders to respond to these traumatic events. In crisis-scarred countries, protecting voters from future negative price shocks can be as politically rewarding as padding their earnings with government spending. Politicians thus become more likely to appoint inflation-fighting technocrats, who anchor inflation with fiscal austerity and tight credit, to their economic teams.
This pattern is in line with research showing that high inflation increases public tolerance for reforms. Historically, successful stabilizations have tended to feature economic reform and budget austerity, which have helped, on average, bring an end to the world’s 56 historic hyperinflation episodes in just under one year. For example, Bolivia’s monthly inflation rate remained above 50 percent from mid-1984 to mid-1985, but led to the early ouster of its president and eventual stabilization by late 1985.
Venezuelans today are demanding reform. According to the Venezuelan Observatory of Social Conflict, there were 1,106 public demonstrations in March 2018 — a steep increase from 594 in January 2018 and 714 demonstrations in February 2018.
Runaway inflation has eroded Maduro’s popularity, which stood at just 21.7 percent in March 2018, compared to a recent pre-hyperinflation peak above 30 percent in January 2016. The Latin American Public Opinion Project corroborates these findings, showing that four out of five Venezuelans, including those who support the Maduro government, view inflation as a “very serious” problem.
Remarkably, in a country where the government tends to heavily subsidize its citizens’ livelihoods, a majority of the population now favors reform. According to a Johns Hopkins poll, 62 percent of Venezuelans support a dollarized economy (a remedy Falcón has proposed) and 59 percent support installing an orthodox currency board. Both measures would involve lofty budget cuts.
History suggests voters will gravitate toward economic stability
The Maduro regime may try to manufacture a win at the ballot box, but it is losing the battle for hearts and minds in the streets. All but one of Latin America’s hyperinflation episodes have ended in political change. Brazil provides the exception only because the incumbent coalition was able to stabilize the economy and win its 1994 elections. Even the region’s longest hyperinflation in Nicaragua eventually led to political turnover.
Venezuela, with its authoritarian regime, has been a regional outlier. In the long run, economic stability is needed to contain popular discontent. With current sanctions impeding creditors from refinancing Venezuela’s debt, the government lacks new financing options outside of the printing press, which would further accelerate inflation. This means it’s unlikely Venezuela will be able to pay more than $10 billion in foreign debt obligations coming due this year — the equivalent of the country’s reserves.
Maduro may well end up the victor in Sunday’s presidential election, but he will find it very difficult, if not impossible, to stabilize the economy and end hyperinflation. Sooner rather than later, Venezuela’s government will face the reality that only austere economics — not spendthrift politics — can end hyperinflation.
Stephen B. Kaplan is a fellow with the Latin American Program at the Wilson Center and an associate professor of political science and international affairs at George Washington University. He is the author of Globalization and Austerity Politics in Latin America (Cambridge University Press, 2013).