By the beginning of 1989, Venezuela was facing the consequences of more than a decade of economic mismanagement. There were severe economic imbalances on both the internal and the external front; the country was struggling to pay its debts abroad and its expenses at home. The economy was isolated, and choked with every type of controls. Problems had burst the banks of economic statistics: there were shortages, long lines, rationing, and hoarding both by merchants and consumers. Poverty had increased significantly by every measure.

And oil revenue was not coming to the rescue.

While the need for structural reforms dated back to well before 1989, the governments of Luis Herrera Campins and Jaime Lusinchi worked hard to avoid any real change. Controls were the answer to most problems: Herrera rolled out foreign exchange controls in 1983, and Lusinchi expanded price controls to hundreds of products, from milk to dry cleaners to funerals.

Lusinchi’s economic policy was particularly irresponsible. In 1986 public spending increased by 10%, even though revenue from oil had dropped by around 40% due to a similarly sized drop in oil prices. Oil revenue didn’t recover, but he kept the fiscal party going until 1988. Between 1986 and 1988, the economy grew on average 5.3%, fueled by debt, with the fiscal deficit averaging -7.6% in those three years. The high deficit in turn fueled inflation, which averaged 23%, and set records in both 1987 and 1988.

With elections scheduled for the end of 1988, the government went far out of its way to avoid any unpopular changes, especially increases in official prices. As Moíses Naím puts it in his book Paper Tigers and Minotaurs, during that year “decisionmakers in government were repeatedly told to adopt what was half-jokingly referred as “the x-ray exam” stance –don’t move, hold your breath, and wait for the election.”

When the government of Carlos Andrés Pérez took over in February of 1989, years of pent-up bad news came out all at once: the fiscal deficit was at a record-high — 9.4% of GDP. There was no money, and all prices would have to increase.

But as bad as the pre-Caracazo Venezuela was, today is worse by any objective measure.

The external balance was the worst of the dumpster fires. Foreign reserves (excluding gold) stood at around $6.6 billion. But the government was behind on a rash of payments: there were $6.3 billion worth of expired letters of credit issued for 1988 imports and private foreign debt. So once you discounted that private debt from reserves, there was only $300 million left. But the country had to pay $4 billion in public foreign debt during 1989. Perez’ government was forced to declare a moratorium on payments, and negotiate a restructuring of the foreign debt — largely with creditor banks though, not bondholders.

The country had become inordinately dependent on imports, due to the unrealistic exchange rate at the heart of the multiple-exchange rate regime. RECADI, as it was known, was the source of the same kind of perverse incentives and corruption that we have witnessed with CADIVI.

As for the private sector, it had become a stunted sloth. Fed a steady diet of subsidies, controls, and protected from foreign competition by trade barriers, it had grown complacent and inefficient.  The mix of bad incentives and extreme protection took its toll: Productivity decreased, on average, by 1.4% per year between 1983 and 1988. Yet in 1989 the number of industrial companies was the same as ten years earlier: the industrial sector was top-heavy with Zombie Companies who survived entirely through protection.

Instead of looking to improve or grow, the main concern was to extract rents from the public sector and game the system. In 1988, with everyone expecting a devaluation after the election, the best game in town was importing using cheap RECADI dollars, stockpile goods and wait until after the devaluation to sell. Big fortunes were made playing this game.

The most worrisome statistics were those living in poverty. According to Naím, in the eight years prior to 1989, the percentage of households living in poverty had increased from 32%, to 53%. A fifth of all households could not afford their daily food needs. The price controls and the expected devaluation combined to make 1988 a year of long lines, shortages and rationing.

* * *

It’s easy to see parallels between 1989 and 2016: a highly controlled and isolated economy, a worsening social situation, a government on the brink of default, and terrible policy decisions. But as bad as the pre-Caracazo Venezuela was, today is worse by any objective measure.

The shortages and lines was something new and shocking in 1988 and 1989 but they were by far less severe that the dystopian devastation we see today.

Probably the biggest difference is in attitudes to the private sector: whereas Maduro has been enormously hostile and persecutorial towards the business sector, Lusinchi ran a crony capitalist regime, only too happy to acquiesce to its friends’ demands for rents. Yet whether with a smiling face (then) or a snarling face (now), the results have been the same: businesses that face no incentives to produce don’t produce, not because you’re nasty to them, but because it’s not in their interest to produce.

The most striking similarity between the two moments is how they were both born of government inaction —not to say catatonia. Lusinchi, whether by luck or design, masterfully dumped the mess he had made on the next government: a feat of timing. The current government has also been in “wait until the election” mode, but for far longer.

Since at least 2011, they have been postponing reforms until the next election. After three elections between October 2012 and December 2013, they wasted 2014, and went back into the hold-it stance in 2015.

Today they are doing the bare minimum changes, aimed squarely at avoiding a foreign debt default and nothing else. The deeper reforms will have to wait, until the next election. Which election that might be, no one knows.

27 COMMENTS

  1. Rent seeking is crony capitalism but, the real problem both times was socialism [capital control and price fixing—command economy] Don’t be afraid to call it by it’s name. Venezuela has been in a constant bankruptcy cycle since 76′, the direct result of having nationalized the oil industry, this never gets any play when analyzing Venezuela’s chronic illness.

    • This is going to be an informative series for me. This article is packed with new information.

      I’m noticing how many young people are posting comments (hehe). If I may try to give some perspective, I had left Venezuela as an adult many years before the Caracazo. I had been in Caracas as a child when Perez Jimenez was overthrown. Taxistas sawed broom handles short, then tied the brooms to the bumpers of their taxis in front of the wheels, to sweep tacks that had been thrown on the streets out of the way, avoiding punctured tires. The city was under blackout, theoretically to reduce the threat that Larrazabal out of Maracay might bomb it. There had been gunshots! I was a little kid, and thought it was great fun!

      I left Venezuela around 1980, an adult. To me, and to many others, the whole thing started downhill with the nationalization of oil in 1976, under Caldera. To me, it was all over at that point. The notorious long-long-term communist propaganda wars blaming “the rich” for the “uniformly miserable poor” that had been going on for decades had made its insidious path into the minds of government, and the insanity had been planted like a virus. The scoreboard: Venezuela v. Communism, 0-8 in the seventh inning. It was a long game, begun in the 1920’s. Promises, promises … riches, houses, appliances, independence from the Yanquis – that enemy who stole from the pockets of the poor. Equitable redistribution of wealth.

      Over the next few years, I saw Americans selling homes they had lived in for decades, saying goodbye to life-long friends, packing bags and leaving, leaving works and lifetimes cut in half. I saw Venezuelans leave, saying goodbye to friends and family. It was like the fall of Saigon in peaceful slow motion. Not everyone had been deceived by the propaganda of blame and hatred for “Any Enemy That Is Plausible”. I talked to native Venezuelans who were trying to bring order to the administrative chaos Esso and Mobil had become. It was not as good as my optimism had hoped.

      I’m an American. I could not vote in Venezuela, I had no political influence, it was not my country. I choose my own country, first. Apparently, in the Venezuelan government’s eye, the tables had “finally(!) been turned” against los invasores. Invaders??! We were just trying to run profitable businesses, employ workers, educate and show them how to run a business correctly, pay decently, allow and encourage equity participation in capital of the company, provide pensions, promote a company spirit of a productive group working together. A true middle class was growing all on its own as Venezuelan businesses sprung up to supply and support the growing economy, using their own capital and their own initiative. To the communists, all that is evil.

      I just left it all behind. And the chapters of my youth had closed. I heard only of Presidential elections, major events, but did not hear of the Caracazo. I heard of Chavez (of course – everyone heard that braying), a communist military dictator. Only when abusive, megalomaniacal, Chavez was clearly dying did I look again, hoping that maybe that was the turning point of the disease, and the signs of a recovery.

      Surprisingly, now in the bottom of the ninth, the scoreboard reads: Venezuela v. Communists, 12-11.

      GO VENEZUELA!!

        • Nonsense. Socialism requires the ownership of the means of production by workers. Socialism is not an interventionist state with progressive taxation and/or government provided services/programs. That is a welfare state, which can exist within a capitalist framework. Otherwise the UK’s healthcare system makes it “socialist” or Nixon’s wage and price controls of the 1970s or U.S. bailing out its financial sector in 2008 were “socialist” moves since it involves state intervention. I’d like to see you advance those arguments.

          With that said, ask yourself, what percentage of the Venezuelan economy is worker controlled à la New Era Windows in Chicago or Hotel Bauen in Buenos Aires or Vio.Me in Greece? I’m willing to bet that number is not that high, but the number of state expropriations with some bureaucratic stooge as the new manager is more common than we would like it to be though.

          Regardless, the point is the problem in both crises were (are) low oil prices combined with state controls in foreign exchange markets and in the pricing of consumer products.

          • Nonsense. Socialism requires the ownership of the means of
            production by workers.

            Not according to the Merriam-Webster dictionary.

            Simple Definition of socialism: a way of organizing a society in which major industries are owned and controlled by the government rather than by individual people and companies.

            Venezuela both in 1989 and in 2016 is replete with government-owned enterprises, hence socialism.

            A government which owns substantial parts of the economy is more likely to intervene in the economy than a government which does not own substantial parts of the economy. Consider such government intervention an attempt to protect its “investment.”

          • My proof is: Seventeen and half years of population and freedom crushing socialism, the cold, hard FACTS of what’s happened in Venezuela.

            My proof is chavismo itself: A collection of monopolies controlled by the criminal-stuffed party-government which serves to maintain their true master, the Castros in Cuba.

            Besides, what is socialism? Castro himself answered it:

  2. I share the anti-communist sentiments of most of the comments in this page.

    However, in my opinion, Venezuela’s failures are more deeply rooted in the country’s culture and in the Venezuelans’ mindset.

    Venezuela’s failures are an extreme form of display of the ailment affecting catholic countries in general (form Latin America to Southern Europe). Little or no rule of law, indifference toward the state of public affairs, lack of respect for government assets and public wealth, which are only seen as an opportunity to foster individual profit, the belief that personal wealth is only achievable through greed and sins unless it’s inherited, an instinctive aversion toward social mobility and competition, and the list goes on.

    Venezuelan masses did not convert to socialism or communism in the blink of an eye. As a matter of fact they are emotionally and culturally deeply entangled in consumerism, genuine expression of a market economy.

    Deep down however they’re permeated of Catholicism, which is genetically incompatible with a functioning market economy. And education do not provide them with the cultural tools to overcome this debilitating condition.

    • Then the Northern Italians must be protestant. They built Venice, invented espresso and made a lot of money selling leather shoes and dry pasta. They can’t be catholic!

  3. Speaking of history repeating itself, I am reminded of a book I purchased when I was working in Venezuela in the late 1970s. The author of the book was a leftist- M.A.S.? The theme of the book was that in the wake of the post 1973 oil price bonanza, Venezuela was spending money at an unsustainable rate, which would lead to big problems. Sound familiar?

    It turned out that the crisis was delayed by some years when the price of oil jumped again in 1979. But just as the book predicted, the crisis did come.

    • If you predict that a crisis will come at any location in the world at an unspecified date, eventually, you will always be correct.

    • Boludo Tejano. For some reason, it won’t let me reply to you directly underneath the comment you directed towards me. But for the record, dictionaries are not unbiased nor are they even an authoritative source for the meanings of words, ESPECIALLY sociopolitical-economic terms with long complex histories. Dictionaries are simply a convenient reference point. So your Merriam-Webster definition is flawed, especially since I can go to another dictionary source, like dictionary.com, and find a definition that does not even mention the government/state.

      Socialism: a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

      What explains this discrepancy?

      Again, the issue in both crises were/are the controls imposed by the government. And for the record, there is nothing inherently socialist about state intervention in markets. States intervene in markets for a variety of reasons, including ensuring their integrity so capitalists can continue to profit off of them. So stop with this nonsense, please.

      Lastly, how much of the economy did the Venezuelan state own in 1989? And how much of it does it own now?

      • “Lastly, how much of the economy did the Venezuelan state own in 1989? And how much of it does it own now?”

        About 85% then and like 98% now?

        When it rains, the water falls from the sky to the ground?

          • Just one example: What percentage of the media is OWNED, NOT “operated” (Don’t go by the tangent) by NON-CHAVISTA private folks? About one percent? 0,5%? RCR, El Nacional, Tal Cual and which other newspaper or news TV channel or radio stations? Chavistas own them all, man, and thus have made possible the crushing censorship that blinds the country today. Internet pages don’t count for that, because they don’t reach even half of the population in the country.

            Another example: How many food processing factories are OWNED by non chavista private people? Polar and which other one? The government owns the REST of them, and because that monopoly is one of the reasons that the scarcity is about 80%.

            And another example: How much of the foreign currency is owned and FREELY managed by non chavista private people? Foreign currency is the oil that feeds and moves the economy, because Chávez and chavismo DESTROYED the very few productive apparatus that was in Venezuela and made it even more dependant in imports. Oh, true, chavismo made a little thing called this law that PUNISHES you with prison time for the only “crime” of possessing foreign currency.

            Or are you one of those ridiculous zealots that believe the absurd lie that 98% of EVERYTHING is owned and operated by the pro-gringo right-wing snob oligarchy that wants to topple the poor little Chávez then and the poor little Maduro now?

            In that case, let me have a little laugh:

      • Yes, dictionaries can vary. I can find numerous examples which illustrate the definition of socialism as being government ownership, such as Venezuela in 2016. What examples can you find to illustrate YOUR definition of socialism?

        • @ Boludo Tejano. This has nothing to do with MY definition per se. What I attempt to do is compact socialism’s history and theoretical literature. “Worker or social ownership of the means of production” is a common thread that exists between all of the sectarian splits within socialism – from Charles Fourier to Pierre-Joseph Proudhon to Karl Marx to Antonio Gramsci to Murray Bookchin.

          Example: New Era Windows in Chicago. It was previously a window manufacturing factory that was privately owned. After the financial crisis of 2008, the owners experienced financial difficulties and decided to close the factory in 2012. The factory workers pooled together their resources and purchased the plant, and it is now a worker-cooperative. That is, the business is owned and self-managed by the workers themselves. THIS IS SOCIALISM. There’s no state involvement here.

          Now perhaps the reason why people associate state intervention as socialism is because of the Soviet Union. The Soviets belonged to the Marxist-Leninist branch of socialism where they believe in a one-party state, led by a vanguard party, and complete state dominance of the economy, which is then planned. Chavez established the PSUV as a form of vanguard party, but Venezuela is yet to be a one-party state nor does it have a planned economy yet, though the PSUV does create a suffocating environment for private business and I’m sure they want to move towards this disastrous direction of having a planned economy.

          Also, Ulamog provided NO evidence that 98% of the economy is state-owned.

          With that said, my point is, there is nothing inherently socialist about state intervention or state controls, and actors across the political spectrum have historically intervened and/or implemented them. Egypt, for example, has not been “socialist” for 46 years, has been pro-neoliberalism in the last 20, yet it imposes capital and foreign exchange controls.

          Below is some additional reading if you’d like with regards to socialism, New Era Windows and controls in non-socialist Egypt. Happy reading:

          https://en.wikipedia.org/wiki/Socialism

          http://newerawindows.com/about-us/our-story

          http://www.truth-out.org/news/item/9500-republic-windows-and-doors-serious-materials-workers-form-cooperative

          http://www.ft.com/cms/s/0/be7ab092-6136-11e5-97e9-7f0bf5e7177b.html#axzz4GHYgy45K

  4. The Caracazo was caused by the Communists. For much less than what is happening today in Venezuela , President Carlos Andres Perez was removed from the presidency. if today happens a caracazo it would be unmanageable by FANB since there is not a General Italo Del Valle Aliegro willing to stop it and defend private property .

  5. “whereas Maduro has been enormously hostile and persecutorial towards the business sector, Lusinchi ran a crony capitalist regime, only too happy to acquiesce to its friends’ demands for rents.”

    The chavernment has been crony-capitalist all along – note the fortunes accumulated by the boliburguese.

    The difference is that the chavernment has also attacked the private sector, other than its friends.

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