Venezuela grapples with economic collapse

The inauguration of Nicolás Maduro last Friday ushers in a new chapter for Venezuela, marked by deep socioeconomic wounds. The ongoing financial crisis — arguably the population’s greatest source of discontent — persists despite a modest reactivation of consumption. Crisis and political conflict remain intertwined, and after a decade of catastrophic governance and escalating tensions between the ruling party and the opposition, the Maduro government now faces an especially turbulent period.

The evidence of electoral fraud, which Maduro has been unable to convincingly refute, have heightened international pressure. Both the United States and the European Union have stepped up sanctions, and Maduro is bracing for a new wave of isolation. As in the past, this isolation is likely to exacerbate the nation’s economic struggles.

The start of Maduro’s new mandate follows three years of moderate economic recovery, a relative improvement considering the depths from which Venezuela has emerged. This recovery was preceded by a historic economic contraction that drastically altered the nation’s landscape over the past decade. Amid this unprecedented economic crisis — exacerbated by the political isolation of Chavismo — in 2020, the Maduro government began to distance itself from the statist orthodoxy outlined in the Plan de la Patria, its flagship economic program. Instead, it adopted a series of market-oriented reforms in an effort to stabilize the economy.

The partial dollarization of the monetary system, the introduction of new exchange and fiscal policies, a more business-friendly stance, and a shift in the treatment of international capital have led to a reduction in year-on-year inflation, a recovery in purchasing power, and some improvement in trade. However, the damage to Venezuela’s productive and social fabric had already been done. The socioeconomic collapse experienced between 2014 and 2020, during Maduro’s presidency, delivered a devastating blow to the nation’s economic framework. This trauma has left many Venezuelans struggling to fully recover from its far-reaching effects.

During the years of strict economic controls, company takeovers, conflicts with capital, and excessive bureaucratization, Venezuela’s economy contracted by more than 80%. The local industrial sector was decimated, and now operates at just 30% of its capacity. Thousands of businesses went bankrupt. A wave of nationalizations severely undermined the country’s ability to respond to economic challenges. Hyperinflation, which peaked at an astronomical 9,500% in 2019, wreaked havoc on the economy, devastating the financial stability of millions. Meanwhile, the oil industry, once the backbone of Venezuela’s economy, collapsed under the weight of a fixed exchange rate policy and pervasive corruption in the state-owned oil company Petróleos de Venezuela (PDVSA). Income poverty doubled, and now affects an estimated 80% of the population, according to the Venezuelan Academy of Economic Sciences (ANCE).

According to the ANCE, the current level of income poverty in Venezuela is 2.6 times higher than the Latin American average. Income distribution is also among the most unequal in the region, with the wealthiest 10% controlling 37% of the nation’s income.

The crisis of the past decade left profound scars: wages were decimated, prices soared, shortages of essential goods became widespread, and public services deteriorated dramatically. This collapse triggered a mass exodus of millions of Venezuelans, many of whom fled the country on foot, seeking refuge across South America.

In 2015, the Central Bank of Venezuela, under Maduro’s control, stopped publishing monthly economic data. Media censorship also worsened. The ruling party’s popularity, which began to decline in 2014, has not recovered since. In 2019 and 2020, the national economy displayed metrics comparable to those of a war-torn nation, with GDP contracting by a staggering 30 percentage points, according to estimates from private consulting firms.

The popular social assistance programs created by the Chavista government — such as the Barrio Adentro preventive health initiative, the Mi Casa Bien Equipada goods transfer program, Mercal’s cheap food markets, and the Cuban-assisted Comprehensive Diagnostic Centers — collapsed during the crisis, largely due to widespread corruption among government officials.

The minimum monthly wage, traditionally around $400, has dropped to just $3. The government provides periodic bonuses every four weeks, but without retroactive benefits, these only raise the effective minimum wage to $150 per month.

International sanctions, particularly from the United States, were introduced in 2016 in response to the political crisis driven by popular discontent. These sanctions significantly restricted Maduro’s ability to explore alternative trade options or revitalize the oil industry. The global search for new markets, spurred by Russia’s war in Ukraine, fostered a period of cautious détente between Caracas and Washington, leading to a modest revival in the oil sector. However, with the return of Donald Trump to the White House, it is likely that sanctions on Venezuelan oil will tighten further.

National revenues, heavily reliant on crude oil extraction, hit a critical low point in the last decade, with production dropping from nearly 3 million barrels per day to just 300,000 in 2019. Today, after significant challenges, production is slowly approaching the 1 million mark again.

Since 2016, for the first time in its history, remittances from emigrants have become a significant source of Venezuelan tax revenues. The exodus of between seven and eight million people, according to United Nations estimates, represents an unprecedented event in recent Latin American history, highlighting the severity of Venezuela’s economic collapse and the erosion of its citizens’ political rights. Despite implementing measures like food rationing based on the last digit of each citizen’s identity card, the Maduro government has refused to acknowledge its responsibility for the crisis or the existence of a Venezuelan diaspora.

The disastrous performance of the Chavista administration triggered a political shift. In December 2015, the Venezuelan opposition achieved a decisive victory in the parliamentary elections, sending shockwaves through Chavismo. In response, Chavismo moved quickly to consolidate control over all state institutions. This led to the absolute concentration of power in the hands of Maduro and a select group of loyalists, while the government implemented social programs aimed at maintaining Chavista support and building networks of loyalty.

Maduro introduced the Carné de la Patria, a document offering access to a range of digital subsidies, though the contributions are now minimal, along with the CLAP food bags, which are part of the Local Supply and Production Committees. While the population continues to accept these initiatives, surveys consistently show a sharp decline in popularity. However, any assistance remains inadequate given the collapse of the country’s productive activity. In the meantime, Venezuelans are facing a period marked by political uncertainty and looming economic instability.

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