Socialism or Economic Mismanagement? Who Is to Blame for Venezuela’s Plight?

The Washington Post had an interesting story yesterday on how Venezuelans are questioning not only their dictator, Nicolás Maduro, but the ideology behind his regime: socialism. Who could blame them? Maduro and his predecessor, Hugo Chavez, explicitly called their revolution “21st Century Socialism” and the result has been the Western Hemisphere’s greatest humanitarian crisis.

However, the Post wonders whether Venezuela’s plight should be blamed exclusively on socialism or whether there are other factors at play, such as economic incompetence. For example, it compares the disaster of Venezuela with “European socialism,” “free Canadian health care or high French taxes.” It also states that the South American country is very different from “communist Cuba or North Korea” since it still has a private sector—and even the random McDonald’s. If that weren’t enough, it quotes one of Venezuela’s leading intellectuals, Moisés Naím, who bluntly claims that he doesn’t “buy the whole ‘socialism caused this’ argument.” He also puts the responsibility on corruption and ineptitude.

Is it too simplistic to blame Venezuela’s collapse on socialism? First, let’s get the concepts right. The standard definition of socialism is a system in which the means of production are owned by the state. Under that characterization, not even Cuba would qualify as socialist since it has a small private sector. Therefore, we should discuss socialism—as well as capitalism—as a matter of degrees. For that, we must first understand that a single policy cannot explain whether a country has a free-market or socialist system. The fact that some European nations have high taxes or that Canada has a free healthcare system doesn’t necessarily qualify them as “socialist.” We must assess the entire scope of economic policy.

This is exactly what the Economic Freedom of the World (EFW) report does. Published since 1996, it ranks 162 countries according to 42 indicators that are grouped in five broad areas of economic freedom: size of government, legal system and property rights, sound money, freedom to trade internationally, and (credit, business and labor) regulations. The higher the grade a country receives in the index, the freer its economy. By the same token, the lower the grade, the farther it is from being considered free market—and thus the closer it is to being one of the many manifestations of statism, including socialism.

The 2018 edition of the EFW ranks Venezuela as the least free economy among the 162 countries studied (there is not enough reliable data to grade Cuba and North Korea). By comparison, Canada is 10, Denmark 17, and France 57. Moreover, the EFW has data for Venezuela that goes back to 1970. We can then asses the real, not just rhetorical, impact that 21st Century Socialism has had on Venezuela’s economic freedom since Hugo Chávez came to power in 1999:

FIGURE 1: Economic Freedom in Venezuela

In this op-ed I document the most emblematic policies implemented in Venezuela since 1999, which include massive expropriations and nationalizations of farms and industries, a dramatic expansion of public spending and the government payroll, the imposition of draconian regulations and mandates on credit, labor, prices and foreign exchange, the debasement of the currency, among others. As we can see below, every single area of economic freedom experienced a dramatic reduction since 2000: 

FIGURE 2: Economic Freedom Index in Venezuela per Category

It is worth noting that a clear rhetorical aim—and a real consequence—of Chavez’s 21st Century Socialism is the confiscation of private property and the destruction of private businesses. For example, the Post notes that “In 1999, there were 490,000 private companies in Venezuela. By last June —the most recent count available— that number had fallen to 280,000.” This distinguishes Venezuela’s economic policies from say fascism, a system under which the government seeks to control, but not eliminate, the private sector.

What about corruption? Even though it’s a worldwide phenomenon, it seems to be more prevalent in certain countries than others. There are certainly cultural factors at play, but if we compare the EFW with Transparency International’s Corruption Perceptions Index, we can see that there is a strong correlation between economic freedom and transparency. This is not surprising. The more control politicians and bureaucrats have over the economy, the greater opportunities for graft and influence peddling:

FIGURE 3: Economic Freedom and Transparency

Finally, it is impossible to analyze Venezuela’s current predicament without considering oil. I briefly discuss it in my op-ed. It must be noted that oil has long played a distorting role in Venezuela’s economy and institutions, as documented by Raul Gallegos in his wonderful book Crude Nation. Venezuela experienced oil booms and busts prior to Hugo Chávez, but the magnitude of the current crisis can only be explained by the extent to which the oil bonanza of 2003-2014 was used to finance Chavez’s socialist (mis)adventures.

Economic management is a misnomer. It is not a coincidence that extensive state control of the economy is inevitably accompanied by gross mismanagement. The real culprit of Venezuela’s plight is socialism.