Economic History of Venezuela

1922 – 1964

When oil was discovered at the Maracaibo strike in 1922, Venezuela’s dictator, Juan Vicente Gómez, allowed US oil companies to write Venezuela’s petroleum law. But oil history was made in 1943 when Standard Oil of New Jersey accepted a new agreement in Venezuela based on the 50-50 principle, “a landmark event.” Terms even more favorable to Venezuela were negotiated in 1945, after a coup brought to power a left-leaning government that included Juan Pablo Pérez Alfonzo.

From the 1950s to the early 1980s the Venezuelan economy was the strongest in South America. The continuous growth during that period attracted many immigrants.

In 1958 a new government again included Pérez Alfonso, who devised a plan for the international oil cartel that would become OPEC. In 1973, Venezuela voted to nationalize its oil industry outright — effective 1 Jan. 1976 — with Petróleos de Venezuela (PDVSA) taking over and presiding over a number of holding companies; in subsequent years, Venezuela built a vast refining and marketing system in the U.S. and Europe.

During Pérez Jimenez’ dictatorship from 1952 to 1958, Venezuela enjoyed remarkably high GDP growth, so that by the late 1950s Venezuela’s real GDP per capita almost reached West Germany’s. However, from 1958/1959 onward, Romulo Betancourt (president from 1959 to 1964) inherited an enormous internal and external debt caused by rampant public spending during the dictatorship. Nevertheless, he managed to balance Venezuela’s public budget and initiate a unsuccessful agrarian reform.

1960s – 1990s

Buoyed by a strong oil sector in the 1960s and 1970s, Venezuela’s governments were able to maintain social harmony by spending fairly large amounts on public programs including health care, education, transport, and food subsidies. “Great strides were made in literacy and welfare programs.”
Because of the oil wealth, Venezuelan workers “enjoyed the highest wages in Latin America.”

This situation was reversed when oil prices collapsed during the 1980s. The economy contracted, and the number of people living in poverty rose from 36% in 1984 to 66% in 1995. The country suffered a severe banking crisis (Venezuelan banking crisis of 1994).

As the economy contracted in the 1980s, inflation levels (consumer price inflation) fell, remaining between 6 and 12% from 1982 to 1986. In the late 80s and early 90s inflation rose to around 30 – 40% annually, with a 1989 peak of 84%. The mid-1990s saw annual rates of 50-60% (1993 to 1997) with an exceptional peak in 1996 at 99.88%. Subsequently, inflation has remained in a range of around 15% to 30%.

By 1998, the economic crisis had grown even worse. Per capita GDP was at the same level as 1963, down a third from its 1978 peak — and the purchasing power of the average salary was a third of its 1978 level.

1999 – present

Hugo Chávez was elected president in December 1998 and took office in February 1999. His economic policies have been more socialistic than those of his predecessors. In the first four years of the Chávez presidency, the economy grew at first (1999 – 2001), then contracted from 2001 – 2003 to GDP levels similar to 1997 — at first because of low oil prices, then because of the turmoil caused by the 2002 coup attempt and the 2002-2003 business strike. Other factors in the decline were an exodus of capital from the country, and a sudden reluctance of foreign capitalists to invest there.

Gross Domestic Product was 50.0 trillion bolivares in 1998. At the bottom of the recession, 2003, it was 42.4 trillion bolivares (in constant 1998 bolivares). However, with a calmer political situation in 2004, GDP rebounded 50.1 trillion bolivares and has risen strongly since, to 66.1 trillion bolivares in 2007 (both in constant 1998 bolivares).

Particularly important in the recovery was the defeat of the oppositionist management at PdVSA after the 2002-2003 lockout/strike, which gave the government, for the first time, actual control of the state oil company and allowed the pursuit of a unified economic policy.

In response to the low oil prices at the end of the 1990s, Chavez played a leading role within OPEC to reinvigorate that organisation and obtain members’ adherence to lower production quotas designed to drive up the oil price. Venezuelan oil minister Alí Rodríguez Araque’s announcement in 1999 that his country would respect OPEC production quotas marked “a historic turnaround from the nation’s traditional pro-US oil policy.”

Rising petroleum prices in 2000 took some pressure off the budget and currency. However, with the president’s economic cabinet attempting to reconcile a wide range of views, the country’s economic reform program had largely stalled. Reforms that were undertaken included the reduction or abolition of education, healthcare and nutrition fees to millions of Venezuelans.

The government sought international assistance to finance reconstruction after massive flooding and landslides in December 1999 caused an estimated US$15 billion to $20 billion in damage.

The hardest hit sectors in the worst recession years, 2002–2003, were construction (-55.9%), petroleum (-26.5%), commerce (-23.6%) and manufacturing (-22.5%). The drop in the petroleum sector was caused by adherence to the OPEC quota established in 2002 and the virtual cessation of exports during the PdVSA-led Venezuelan general strike of 2002-2003.

The non-petroleum sector of the economy contracted by 6.5% in 2002. The bolivar, which has been suffering from serious inflation and devaluation relative to international standards since the late 1980s, continued to weaken.

The inflation rate, as measured by consumer price index, was 35.8% in 1998, falling to a low of 12.5% in 2001 and rising to 31.1% in 2003. Historically, the highest yearly inflation was 99.9% in 1996. On 23 January 2003, in an attempt to support the bolivar and bolster the government’s declining level of international reserves, as well as to mitigate the adverse impact from the oil industry work stoppage on the financial system, the Ministry of Finance and the central bank suspended foreign exchange trading.

On 6 February, the government created CADIVI, a currency control board charged with handling foreign exchange procedures. The board set the US dollar exchange rate at 1,596 bolivares to the dollar for purchases and 1,600 to the dollar for sales.

The Venezuelan economy shrank 5.8 percent in the first three months of 2010 compared to the same period last year and now has the highest inflation rate in Latin America — 30.5 percent. President Hugo Chavez has expressed optimism that Venezuela will soon emerge from recession, despite the International Monetary Fund forecasts showing that Venezuela will be the only country in the region to remain in recession this year.