Economic Theory

Socialism – not oil prices – is to blame for Venezuela’s woes

So the Left is finally talking about Venezuela again. That is a good thing. For about a decade, large sections of the Left were in the grip of VenezuelamaniaWe would not hear the end of it. Venezuela’s version of socialism was their shining example, the model which the rest of the world should emulate.

When the country’s meltdown could no longer be denied, they dropped it like a hot potato. And a long period of silence ensued. But recent events have forced the issue back on the agenda again.

The responses vary. Commentators on the Stalinist Left now sound like a copy of the Pravda from the 1930s, fabulating about saboteurs and counter-revolutionaries undermining the economy. The more media-savvy sections of the Left, however, realise that they are unlikely to win many people over if they sound too much like the villain in a Cold War movie.

So they have adopted a more innocuous-sounding line, blaming Venezuela’s woes primarily on the decline in oil prices. Of course, Venezuela is doing badly, they argue. Any economy that is so dependent on commodity prices would do badly under those circumstances. It has nothing to do with socialism.

It sounds superficially plausible. But do you remember which prominent Chavista said this during the oil price boom:

“Of course Venezuela is doing well. Any economy that is so dependent on commodity prices would do well under those circumstances. It has nothing to do with socialism.”

You guessed right: none of them. Oil prices lead a double life in the Chavista-Corbynista mindset. When oil prices skyrocket, the ensuing boom is proof that social works, but when they fall again, the ensuing decline has nothing to do with socialism.

It is true that low oil prices would hurt Venezuela’s economy. But here’s the thing: we don’t currently have low oil prices. We had abnormally high oil prices in the decade leading up to 2014/15. Oil prices have not “collapsed”. They have merely reverted to a level which is more in line with the long-term average. More precisely, they are back (in real terms) to where they were in 2004, about the time when Venezuelamania started. And they are still noticeably higher than they were in the two decades before then.

Perhaps more important, though, the problems that we commonly associate with Venezuela, especially shortages of basic essentials like food and medicine, predate the drop in oil prices. Take this description:

“…of milk, eggs, sugar and cooking oil there was no sign. Where were they? … Welcome to Venezuela, a booming economy with a difference. Food shortages are plaguing the country at the same time that oil revenues are driving a spending splurge … Milk has all but vanished from shops… eggs and sugar are also a memory.”

This is from a Guardian article, published in 2007 – when oil prices were about to reach their historic all-time peak. Or this one, from a year before the drop in oil prices:

“…food shortages in Venezuela have not only peaked but they have lasted longer than ever. … Venezuela’s central bank … has been publishing a scarcity index … [It] puts this year’s figure at [a level which] is similar to countries undergoing civil strife or war-like conditions.”

There are a handful of alternative history novels in which the fall of the Berlin Wall never happens, and the German Democratic Republic still exists today. It is a fascinating thought experiment, but the authors all face a problem in creating that backdrop: when the Wall fell, the GDR was not just politically, but also economically finished. How do you get around this, if you want your alternative history to be at least somewhat plausible?

Two authors have found a simple, but seemingly effective solution: in their version, the GDR regime discovers oil reserves just off the Baltic coast. The GDR is soon swamped with petrodollars; it becomes a socialist, Northern European version of Saudi Arabia.

The authors’ thinking must have been: “Let’s just give them oil reserves. Surely oil revenue can make any economy work, even a socialist one.”

I like the idea. But Venezuela’s experience shows that the authors were over-optimistic.

Socialists have always argued that socialism will eventually work, it just needs the right circumstances. They are now effectively saying:

“Of course socialism works. All you need is the world’s largest proven oil reserves, the longest oil price boom in history, and the highest oil price level ever recorded in history. That boom must obviously go on forever. Even then, you will have constant shortages of food, medicines and other basic essentials. But on the plus side, you will have Western intellectuals lining up to tell you how lucky you are.”

It doesn’t quite cut the mustard, does it?


This article was first published on CapX.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

5 thoughts on “Socialism – not oil prices – is to blame for Venezuela’s woes”

  1. Posted 17/08/2017 at 22:37 | Permalink

    Has anyone ever considered that the reason that Socialism doesn’t work (I don’t actually agree with that statement, but won’t go into that for now) is because of money. Perhaps with the abolition of money it could work. After all, money is easy to horde and it takes on a meaning and life of its own where people chase the money itself, rather than using it as a means to make trade easier, which is something that it was never meant to be.

  2. Posted 17/08/2017 at 22:39 | Permalink

    God damn it who wrote that comment? It’s meant to be hoard not horde…

  3. Posted 18/08/2017 at 14:19 | Permalink

    A friend of mine posted a response to this article yesterday and I don’t see it today. Come to think of it, the only responses I ever see on here agree with the author. Have you ever thought that you lot are living in an echo chamber?

  4. Posted 21/08/2017 at 19:15 | Permalink

    @Johna Thon Ludlow – the accusation that any one group of people are living in an echo chamber can be applied across the board. Is a reader of the Guardian who accuses a reader of the Telegraph of living in an echo chamber any different? Or a regular reader of the Momentum website who accuses a regular reader of the IEA website? Unfortunately most people tend to confine themselves to literature which supports views they already hold. I do agree with you that all sides need to be more open to listening to the theories and views from the alternative. However that both sides are as guilty of that accusation as the other.

    If the IEA has removed a response to this article (which I find it hard to believe as there are plenty of alternative comments on this website) then it should be reinstated asap as I’d love to read a persuasive article as to the reasons for the volte-face by the Left in relation to Venezuela.

  5. Posted 17/03/2023 at 19:22 | Permalink

    I find it interesting that you think socialists picked and chose when to accredit successes and failures to socialism, but then do the exact same thing! By your own logic you can’t say that oil is the cause of the boom but not the cause of the crash.

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