The Venezuelan economy has suffered from decades of disastrous economic policies – and more recently, from economic sanctions. The country has seen the largest ever decline in living standards outside war, revolution or the collapse of the state.
Living standards in oil-rich Venezuela plummeted by a staggering 74% between 2013 and 2023. This is the fifth largest fall in living standards in modern economic history.
The country’s economy collapsed under a single government during peacetime. But this economic implosion is comparable to those seen in Iraq, Lebanon and Liberia – countries that have been ravaged by war or civil war – or Georgia, Moldova and Tajikistan after the Soviet Union fell and brought down the state and entire economic system.
Figure 1: Major economic collapses, post-1900
Source: Maddison Project Database, Bolt and van Zanden, 2024; World Development Indicators, World Bank; author’s calculations.
Note: Total economic losses measured in years of pre-collapse GDP per capita are on the x-axis. The maximum peak-to-trough drops in GDP per capita are on the y-axis. The size of the bubble is proportionate to the recovery time in years (so far).
Venezuela’s demise was largely driven by domestic economic policies, although sanctions have played a role more recently. Here, we explore the various factors that have contributed to the dramatic impoverishment of a country that was the richest in Latin America as recently as the 1970s.
Before the collapse (1999 to 2013): bad macroeconomic policy
Presidents Hugo Chavez (1999-2013) and Nicolas Maduro (2013-present) implemented exactly the wrong kind of macroeconomic policy during the 2000s and early 2010s when Venezuela’s economy was booming due to the global commodity ‘supercycle’ – a prolonged period of high and rising prices of grain, metal, oil and gas.
Government spending was deeply pro-cyclical. Instead of saving at least some money for bad times during the good times – as Norway, Saudi Arabia and virtually all other oil exporters have done – the Venezuelan government ran double-digit fiscal deficits as the economy boomed. Government spending far outpaced income from taxes and other revenues.
To finance these unnecessary shortfalls, they raised the external debt sixfold by saddling the state-owned oil company and government with over $100 billion in obligations.
The country also became increasingly reliant on the central bank printing money after gutting its independence, a dangerous monetary policy. A central bank printing money to finance government deficits is highly inflationary. It works as a tax on savings and wages via higher consumer prices, disproportionately affecting the poor.
Government spending during the oil boom was extremely inefficient. Subsidised gasoline in Venezuela was not just the cheapest in the world but often virtually free. This led to an estimated 100,000 barrels of petrol worth over $10 billion per year being smuggled across the border to Brazil and Colombia each day, where it could be resold at a profit.
Electricity subsidies were also vast, leading to losses and underinvestment in the sector. In total, subsidies are estimated to have cost over 10% of GDP in some years, accounting for over half of the fiscal deficits.
At the same time, the all-important oil industry was starved of investment funds and badly mismanaged as technical experts were replaced with political allies. Oil production in fields with high-quality crudes operated by the national oil company, Petróleos de Venezuela, S.A. (PDVSA), fell rapidly.
These losses were masked by production gains in lower-quality fields operated by joint ventures with foreign oil companies. As such, the profits and sustainability of the country’s largest export were undermined, with overall production falling from around three million barrels per day (mbpd) at the turn of the century to 2.3 mbpd before the crisis began in 2014.
Before the collapse (1999 to 2013): bad microeconomic policy
Presidents Chavez and Maduro also championed extremely destructive microeconomic policies. Their governments asserted heavy-handed control over the economy and were overtly hostile to private markets and private property. Government intervention was meant to spread prosperity and lower living costs, but instead it crippled the domestic non-oil economy.
From 1999 onwards, the government expropriated broad swathes of the economy, often without compensation and on national TV broadcasts, crushing business confidence and investment.
Over a thousand firms and several million hectares of land were nationalised in the agriculture, banking, cement, iron, oil, manufacturing, retail and telecommunications sectors. Most of these businesses have closed and those that haven’t closed operate at fractions of their peak output.
In 2003, Venezuela also imposed capital controls and a byzantine system for foreign currency purchases. There were one or more official exchange rates where the government subsidised dollar purchases and demand vastly outstripped supply, as well as a black market with its own free-floating exchange rate determined by market forces.
The system was deeply distortionary. An entire industry of non-productive ghost companies cropped up to lobby the government for subsidised dollars (to resell them on the black market for an immediate profit).
At the same time, legitimate value-adding businesses were unable to get reliable access to the foreign currency needed to operate. Many genuine businesses also specialised away from productive activities towards securing cheap dollars.
Worse yet, the government set prices for thousands of retail goods by decree: from rice and chicken to soap and toilet paper. Price caps were often too low, so producers could not cover their costs, leading to shortages, smuggling and bankruptcies.
The government also capped profits in 2011 and enforced the caps with draconian inventory seizures and jail time for workers and executives. Punitive labour regulations also made firing employees extremely risky, costly and time consuming.
Taken together, this web of anti-market measures hamstrung domestic production, making the country extremely reliant on imports, even for products that Venezuela had previously exported, such as rice. The country also lost an estimated $300 billion to corruption through its foreign currency system and other schemes, which it could have instead saved for periods of lower oil prices.
The collapse (2014 to the present): denial, emigration and hyperinflation
Oil prices are volatile and when they plummeted from $100 to $40 per barrel in the summer of 2014, Venezuela was drastically unprepared. Due to the aggressively pro-cyclical fiscal policy during the prior decade, the government was highly indebted and did not have meaningful savings. As result, the shock was amplified rather than cushioned.
To continue paying down the $100 billion plus in debt incurred during the boom, the government was forced to cut foreign exchange allocations for imports more aggressively than the fall in export revenues. It was all for nothing, as the country defaulted on its debt a few years later anyway.
As oil prices sagged, Maduro ignored calls to repeal currency, price and profit controls. Instead, he doubled down on intervention. The government continued to assign dollars at subsidised exchange rates to cronies and political allies, even though the country barely had any dollars and could not afford the vastly inefficient system.
Venezuela had become extremely dependent on imports, so when they collapsed from over $80 billion in 2012 to around $10 billion in 2017, the recession became a depression.
Even as GDP contracted for the third and fourth consecutive year (by a colossal 17% in 2016 and 16% in 2017), Maduro refused to rationalise economic policy. The fiscal deficit widened to record levels as taxes and the oil industry collapsed.
Instead of cutting spending, the government began to finance an ever-greater share of the budget with money printing from the central bank. The money supply was regularly expanded by 20-30% per month, pushing Venezuela into a hyperinflationary spiral.
To maintain inflation-adjusted spending as inflation climbed, the government decided to print more and more local currency to pay for it. As it did so, inflation accelerated even faster in a vicious cycle. Prices rose 50% per month by November 2017, marking the formal start of hyperinflation.
Over the next four years, as inflation torched what was left of domestic industry, an untold number of businesses were forced to close and millions of Venezuelans left the country. The majority of emigrants went to Chile, Colombia, Peru and the United States, mostly on foot. Estimates suggest that over 7.7 million people have left the country since the start of the crisis.
By the end of the decade, the Venezuelan economy had contracted 61% in per capita terms. This was already the 15th largest economic crisis in modern history and the largest outside war, revolution or state collapse.
The collapse (2019 to the present): sanctions
In 2019, the United States led an international effort to oust Maduro from power after his six-year term expired. The ‘maximum pressure’ campaign involved recognising congressman Juan Guaidó as Venezuela’s legitimate president and imposing sanctions on Venezuela and its national oil company, PDVSA.
The primary sanctions from 2019 froze the country’s assets in the United States and cut it off from the US oil market. These were serious but more significantly, US President Donald Trump imposed secondary sanctions on PDVSA a year later, subjecting any othercountry or company that did business with PDVSA to US sanctions.
Secondary sanctions cut Venezuela off from formal global oil markets and forced PDVSA to sell its products on the black market to partners that charge high mark-ups in exchange for ‘laundering’ the sanctioned oil.
The impact of these secondary sanctions was immediate. Venezuela’s oil production – which was already down 50% after years of underinvestment – plummeted further. Headline oil production fell from 1,500 thousand barrels per day (kbpd) before primary sanctions to a low of 337 kbpd in June 2020 after secondary sanctions. This has since recovered to 850 kbpd today.
GDP per capita bottomed in 2020 once the economy had contracted 73% from the start of the crisis and has been flat or up slightly on the recovery of the oil sector and emigration.
Politics and economics
Venezuela’s self-destructive economic framework led to the largest ever economic decline outside war, revolution or state collapse. In most countries, the judiciary or legislature would have contained the damage long before by stopping policies like uncompensated expropriations, price controls, profit controls, central bank money printing and extra-budgetary spending – but Venezuela did not have such checks and balances.
Presidents Chavez and Maduro had captured and hollowed out the country’s democratic institutions, from the electoral authority to the military to the media. There was nothing and nobody to stop terrible policy by the time that the country had become authoritarian.
Meanwhile, the policies that caused the collapse remain in place. While they do, it is unlikely that Venezuela will recover in any meaningful way.
Where can I find out more?
- A look to the future of Venezuela: A comprehensive diagnostic of Venezuela’s economic decline and an outline of the policies required to restart the economy, by Emmanuel Abuelafia and José Luis Saboin for the Inter-American Development Bank (IDB).
- Venezuela: The rise and fall of a petrostate: A background piece that highlights the role of oil in the country’s politics, policy and collapse, by Diana Roy and Amelia Cheatham for the Council on Foreign Relations.
- Bertelsmann Stiftung’s Transformation Index (BTI) 2024 Venezuela country report: A report on the economic, political, legal and human rights developments in the country, by Sabine Donner, Hauke Hartmann and Sabine Steinkamp from Bertelsmann Stiftung.
