By Rufus Coombe | Venezuela
The tragedy of the Venezuelan economy is as infamous as it is indisputable. However, this is where the agreement on the issue ends. By attempting to explain the economic problems the nation is facing, we can analyze the solutions and compare the current situation to an important historical example, from which we can gain great insight.
There is no unequivocal answer to the question of why Nicolás Maduro’s economy is in such a calamitous state. Some conservatives point to the nationalization of oil and Venezuela’s notoriously restrictive and pernicious effects of leftist economic policy, with Venezuela being rated 179th in economic freedom by the Heritage Foundation. Socialists, on the other hand, are keen to emphasize the large amounts of private activity in the economy the effects of the 2015 collapse in oil prices.
Despite the inconclusiveness of the attempted diagnosis of the problems, the ailing South American nation has become a flagship example for many right-wing speakers, who use it as a paradigm of the failures of socialism. However, we are not here to delve into the rights and wrongs of Maduro’s government, but to espouse a right-wing solution to the crisis and to utilize the lessons of history to help fix a broken country.
The crux of the problem is the issue of inflation; since the oil crisis of 2015, the value of the Bolivar plummeted, with the inflation rate in 2018 reaching 25,000%. In August, the government scrapped the inflation-riddled Bolivar and replaced it with the Sovereign Bolivar, cutting 5 digits off of the note. The inflation crisis, however, does not seem to have abated, with the value of the currency still falling, albeit at a slower rate. Hyperinflation coupled with falling real wages has taken its toll on the population and in 2016, 75% of Venezuelans lost weight; there is a famine ravaging the country and the elected government seems completely overwhelmed by its task of leadership- still running a deficit of 31%.
It is pointless to delve into the often navigated and regularly investigated failures of the planned economy. Instead, we shall draw a comparison between today’s Venezuela and an astonishingly similar set of events in the history of another South American nation: Chile.
Salvador Allende and Socialist Chile
On the third of September 1973, Salvador Allende, a socialist, was elected president of Chile. Just like Maduro, he was a populist inspired by Fidel Castro and Karl Marx. Allende came to power democratically and promised sweeping economic reforms aimed to aid the proletariat. Both Maduro and Allende were democratic socialists, both strove to reform their nations economies and, as we will see, both failed.
The economic impracticalities of socialism became immediately apparent in Chile unlike in Venezuela where they were masked by large oil wealth. Economies do not react instantaneously and there is often a lag time between policy implementation and their effects. However, the effects of a regulated economy and a large welfare state caught up with Venezuela in 2016 when the economy contracted 16.5%.
Crucially, Allende pursued the same economic policies as Maduro. He began the nationalization and collectivization of Chilean industry and of course, inflation was, once again, the bane of his newly reformed economy, with the inflation rate peaking above 300%.
As you can see, the resemblance is uncanny. Maduro and his predecessor, Chavez, managed to do to Venezuela what Allende did to Chile. The “Venezuelan way to socialism” has proved as disastrous as “The Chilean way to socialism”. In both cases wages went through the floor, inflation rates were in the hundreds, unemployment rates were well above average, large deficits were created, and GDP stagnated, despite both nations being endowed with large quantities of valuable natural resources (oil for Venezuela and copper for Chile).
So what happened? Chile now has the highest GDP per capita in South America. How did its crippled economy go from a stagnating, dire and decrepit mess to the envy of its neighbors? The answer comes in the form of a man named General Augusto Pinochet.
Late in 1973 General Pinochet launched a military coup against Allende’s government. The country had enough. He overthrew the democratic government established a military junta. Pinochet was a barbaric man and he is notorious for his human rights abuses. Despite this, he implemented sweeping free-market reforms, which resulted in Chile becoming the economic powerhouse it is today.
During his 17 years in power, wages grew, exports boomed, GDP grew, and Chile got back on its feet. When there was eventually a plebiscite to decide whether he would remain in power, he won 44% of the vote (more than Allende had in 1970). Nevertheless, he stood aside and surrendered power, leaving his beloved Chile one of the most prosperous nations in South America. Due to its economic success, Chile kept the Pinochet economic reforms largely intact. Today Chile is still the 7th freest economy in the world and wage growth has not fallen below inflation since 1990.
Is there a lesson that Venezuela could learn here? One has to hope so. Fresh leadership is needed to take Venezuela out of these dark times. If Maduro is the new Allende, will we see their version of Pinochet rise?
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