Venezuela’s Going Bust

With many ongoing events in the Middle East and at home in the presidential election, Latin American countries such as Venezuela have been out of mind for most Americans. However, for the citizens of Venezuela, the current economic crisis is certainly important and is an example of the sometimes tragic interactions between domestic economics and international relations.

The current situation in Venezuela is grim. Due to both extremely low oil prices and the government’s ruinous economic policies, Venezuela’s economy shrank 7.1% in the last quarter and has been in decline since the beginning of 2014. Inflation is over 100% and consumers face critical shortages of necessary goods that the regime is unable to buy from abroad. Venezuela’s economic problems are multi-faceted and complicated, but they stem from a few main factors.

The Venezuelan government maintains extremely expensive subsidies on gasoline, food, and other commodities. Most prices in Venezuela are controlled by the government, with gas prices at an extreme low of $0.02 per liter. In addition, Venezuela’s complicated system of exchange rates, with two official rates used for imports and the black market rate, creates pressure on the currency, which has become much less valuable. Moreover, the government’s increasing authoritarianism and habit of nationalizing private businesses has discouraged foreign investment. Lastly, the price of oil has greatly declined, tanking government revenue and making it difficult to pay interest on the debt. The situation is so bad that most financial analysts expect Venezuela to default on its debt this year.

Venezuelan voters have taken steps to show their displeasure with the ruling United Socialist Party of Venezuela, headed by President Nicolas Maduro. In recent elections voters handed the party their worst defeat since the accession of Hugo Chavez and an opposition coalition in control of the Parliament with a large enough majority to fire cabinet ministers and pass new laws. Maduro has responded by appointing new judges to the Supreme Court who may veto new legislation, but has openly respected the democratic process so far.

Venezuela is heavily reliant on oil prices to maintain its economy, since revenues for oil sales account for over 50% of GDP and 95% of exports. Its dependence on oil is paired with the use of its natural resources for foreign policy goals. For example, Venezuela has provided generously subsidized gasoline to nearby Caribbean countries including Jamaica, Haiti, and Belize. These programs have seen cuts in the face of Venezuela’s unprecedented recession, even though they are an important policy tool used to counter American influence in the region and improve Venezuela’s clout. The political capital gained has become especially valuable at a time when many countries, including Argentina and its new president have criticized the government’s human rights abuses, signaling a major drop in international sympathy for the socialist country.

Venezuela’s actions represent an unusual version of a common approach to foreign relations. Economic actions by countries, both positive (aid or subsidized goods) and negative (blockades and sanctions) are common economic tools in foreign policy. U.S. sanctions on Russia and those previously on Iran had major effects on those countries’ domestic economies while positive steps including free trade agreements are the rewards of good diplomacy with other countries. In short, while the economy is usually a domestic concern for voters, including Venezuelan voters, economic calculations are also important on the international stage.