With oil revenues accounting for about 95% of its export earnings, Venezuela’s economy has been among the hardest hit as the global oil price has fallen almost 20% over the past 12 months. The economic contraction has produced the most severe humanitarian crisis in the country’s history, with citizens now reportedly streaming across national borders seeking food and other basic provisions. Venezuela’s government desperately needs to forge a new economic pathway.
As recently discussed at the World Economic Forum on Latin America and a summit hosted by Concordia, Venezuela must adapt to evolving energy dynamics to maintain growth and development, including through accessing new markets in renewable energy and natural gas. The underlying causes of its crisis are the growth in global oil supply and a decline in demand for the country’s output. An excess of two million barrels of Venezuelan oil are being produced daily, significantly exceeding demand. Investors have increasingly been drawn to opportunities in more stable countries such as Canada and the United States, which have benefited from the fracking revolution.
As these dynamics have evolved over the past several years, the regime of Nicolás Maduro did little to diversify the Venezuelan economy and continued to put capital into costly and economically ineffective oil subsidies. Domestic oil prices have not changed in the past 20 years as a result. Until recently, a liter of gasoline cost the equivalent of about one penny at the pump. These public expenditures have not yielded any positive financial return and certainly haven’t helped curb the economic downturn or made Venezuela less vulnerable to global oil price volatility.
A better strategy would discontinue oil subsidies and diversify the Venezuelan economy to expand its sources of revenue. This could take advantage of the economic opportunity—and environmental benefits—of renewable energy. Other large oil producers such as Saudi Arabia, Iran, Kuwait, and the United Arab Emirates have already taken measures to diversify their energy dynamics by, for instance, encouraging homeowners to install solar energy panels. Kuwait, Qatar, Jordan, and Egypt aim to source between 15-30% of their electricity from renewable sources, particularly wind and solar, by 2030. Redirecting government funds currently allocated toward oil subsidies would create fertile grounds to attract investment and bring renewable energy sources to the market, with the caveat that investments need to be made in line with consumer behavior. Lower prices combined with government incentives such as federal tax credits could nonetheless drive demand in this direction.
Venezuela’s new path could see adoption of more free markets principles, in combination with smart government regulations and a strong legal framework, to create a new era in energy. A completely deregulated free energy market could otherwise result in substantial price and volume fluctuations, which might deter investors from directing capital into emerging markets. For example, American Electric Power, a utility in the US state of Ohio—which has operated a deregulated energy market since 1999—has recently called for the state government to re-regulate to guard against price spikes and help preserve jobs. The Venezuelan government must set standards that foster growth and innovation on the one hand and mitigate risk and enable investment opportunities on the other. This balance is difficult to strike and the political landscape makes it particularly challenging.
Until now, Maduro’s socialist government has continued to perpetuate the failing policies that gave way to the current humanitarian crisis. Even as oil prices collapsed, strategic intra-party opposition to free market solutions and diversification manipulated the market to no avail. Consequently, 70% of basic food products are missing from supermarket shelves, just one tenth of pharmaceuticals required by consumers are available, and looting is rife. Venezuelans are waiting in lines for hours to enter grocery stores, hospitals have little or no resources to treat their patients, and the death rate among newborn babies increased from 0.02% in 2012 to just over 2% in 2015. The worsening economic conditions have undermined the regime’s authority and the regulatory mechanisms it uses to assert its legitimacy.
Venezuela is a prime example of how socialist policies can, in practice, not only pose challenges to economic development but also violate basic democratic principles. The lynching of 74 members of the political opposition in the first four months of 2016 is a clear indication that the system is broken. The country has descended into something resembling anarchy, with Caracas earning the title of the most violent city in the world. The ongoing crisis has left the regime undeterred yet vigilant against political opposition who are calling for a referendum to recall Maduro. A democratic process such as this might nonetheless be necessary to exact the changes in government that will allow a return to economic growth.
As a gatekeeper of order in the region, the Organization of American States (OAS) could be especially beneficial in promoting democracy and economic prosperity for Venezuela. May’s OAS General Assembly reaffirmed the organization’s key role in ensuring policy coordination and coherence geared at increasing sustainable development and diplomacy. Secretary-General Luis Almagro invoked the OAS’s Democratic Charter over the issue. As Almagro stated at Concordia’s May summit, this provides strategies to attempt to change Venezuela’s electoral system and the country’s fundamental rights as a member state of the OAS. It could potentially result in Venezuela’s suspension from the organization, putting further pressure on the Maduro government to reverse course.
Almagro’s strong stance on addressing the humanitarian crisis in Venezuela was unprecedented and controversial, and contrasts with other international leaders who are hesitant to risk their political capital to echo his concerns. The OAS needs to act tactfully to promote democratic ideals, address diplomatic concerns, and forge partnerships that foster economic growth. Respect for democratic principles will be necessary to allow the Venezuelan people to gain leaders that provide hope for the economic future of their country. With a legitimate government and the support of the people, Venezuela’s economy can begin to recover and its humanitarian crisis be eased.
Matthew A. Swift is an independent policy analyst and an Advisory Council Member of the Millennium Leadership Program at the Atlantic Council.