Venezuela: War for oil fuels economic crisis

With Venezuela’s inflation rate for May soaring to 6.1%, first quarter growth stagnating at 0.7%, and shortages afflicting a number of basic goods, speculation has been rife regarding the country’s economic future.


Critics from the right and left have argued these are all signs that Chavismo (the name given to the radical project for change spearheaded by former president Hugo Chavez) has reached its limits.

In most cases, economic woes are primarily attributed to bad policies that have led to an excessively centralised economy presided over by a bureaucratic state increasingly dependent on oil revenue.

However, placing the blame solely on the government ignores the neo-colonial economy inherited by Chavismo. It also conceals the ongoing economic war by Venezuela’s elites, who are seeking to regain control over the country’s prize possession ― oil wealth.

This goal requires dismantling Chavismo, which represents an attempt by Venezuela’s historically excluded poor majority to capture the state, stem the flow of oil wealth out of the country and re-orientate it towards meeting their needs.

Oil impacts

The rise of oil production in the 1920s dramatically transformed Venezuela’s economy. Agricultural production slumped as foreign oil companies poured into the country to extract cheap oil and high profits.

Rather than develop local industries, Venezuela’s elites preferred to take part of this oil wealth for themselves. They used some of it to import goods from abroad to sell in the domestic market.

Venezuela’s oil-based economy took the form of neo-colonial capitalism: formally an independent nation, Venezuela’s economy was dominated by and dependent upon the economies of imperialist countries ― especially the United States, the main destination for oil exports and origin of imported basic goods.

This economic set-up also profoundly shaped the state and society in Venezuela.

As oil transnationals extracted the oil, the state took on the role of making sure that, via taxes, royalties and regulations, some of Venezuela’s oil wealth stayed in the country.

Local business elites, however, became increasingly reliant on their connections to the state in order to secure some of this wealth. This led to a fusion of power and wealth within the state. It spawned a parasitic capitalist class that sought to accumulate capital largely through siphoning off the state’s oil-based revenue.

The state also became a vehicle for creating a new middle class, whose position in society was tied to the state bureaucracy.

Further down the ladder were marginalised popular classes, driven from the countryside into the city in search of a livelihood and what they felt was their rightful share of oil wealth. For many, the state was viewed as a means to lift them out of poverty.

This led to a pervasive culture of “clientalism” (whereby access to jobs and services was tied to which political group you supported) and corruption.

An extensive array of legal and illegal channels were established to appropriate and and re-distribute the oil money that remained in the country, with the lion’s share going to the elites.

Various bids to develop other sectors of the economy did little to fundamentally alter this scenario.

Neocolonial economy

Instead, “developmentalist” policies (whether aimed at import substitution or export promotion) served to disguise the deepening of the rentier and neo-colonial nature of Venezuela’s capitalist economy.

Policies such as market protection, overvalued currency, low taxes and access to cheap foreign exchange, which were supposed to promote import substitution, simply became vehicles to bolster the flow of oil rent to the local elites.

One form this took was buying foreign exchange at the overvalued exchange rate and selling imports at inflated prices.

But an overvalued currency made exports expensive, and the limited size of the local economy meant industrial development was dependent on rent transfer.

In both cases, connections to the state, rather than competitiveness, was decisive to economic success. This helped the rise of a few powerful groups of conglomerates with close connections to the state, rather than internal economic development.

The push towards export production fared no better; instead they reflected shifts in the international market.

With some industries proving too expensive to run elsewhere, such as the auto-industry, companies decided to shift production to places such as Venezuela on the proviso that national protection barriers were removed and cheap natural resources made available.

From the start, these new enterprises were to be integrated into globalised production chains, orientated towards exporting goods and profits back to the global North.

One important change that occurred was the state gradually became an important economic agent in its own right. Its presence in the economy grew with the oil nationalisation of 1974 and large investment in heavy industries such as steel and aluminium. The aim was to expand the state bureaucracy’s economic base.

This led to tensions with private capital (which generally appeared to be fights against corruption or for greater state efficiency). It served to heighten conflicts within the state between different fractions of capital over priorities (such as state investment in heavy industry versus subsidies for consumer goods industries).

High oil prices helped dampen these conflicts, all the while funding the steady reproduction of this model.

However, when oil prices tumbled down in the late 1970s and ’80s, the state became completely dependent on foreign loans.

This led to a severe crisis of the state. Foreign capital used the state’s debt and deficit crisis to impose harsh austerity measures against the poor, while squeezing more and more wealth out of the country.

This, along with rising levels of protest and discontent among Venezuela’s fragmented popular classes, was the backdrop to the rise of Chavismo.

Chavez’s platform when first elected in 1998 was far from radical. In some areas, it represented a continuity with the policies of previous neoliberal governments.


However, two features clearly differentiated Chavismo from its predecessors.

The first was the Chavez government’s push to secure majority state control over oil wealth and redistribute it to the benefit of the poor via poverty alleviation programs and the creation of a “social economy”.

The aim was for the “social economy” to co-exist alongside the public and private sector. It was seen as a vehicle to incorporate unemployed and informal workers into the formal economy via promoting cooperatives and small and medium sized social enterprises.

The second was Chavismo’s emphasis on peoples’ participation in all spheres (political, economic, social) as the only means by which to change society.

Unsurprisingly, when the Chavez government began to take serious steps to implement its program, in particular to place state oil company PDVSA under the control of the government, Venezuela’s elites unleashed an all out war.

They tried to bring down Chavez’s government. This included a failed military coup in April 2002 and a two-month management shutdown of PDVSA starting in December that same year.


Both attempts were defeated by the combined mobilisation of the people and the military. Both also ended with the popular classes capturing control over key parts of the state: the military, now purged of reactionary elements aligned with the old elites, and PDVSA, cleansed of its bureaucracy that walked out on strike and was never allowed to return.

Intensified class struggle also led to a radicalisation of Chavismo.

Having secured control over oil money (and imposed strict currency controls to stop capital flight), the Chavez government began re-directing wealth towards meeting peoples’ basic needs.

In real terms, per capita social spending jumped 314% between 1998 and 2006. This fuelled important gains in poverty reduction, wage rises and higher consumption levels among the poor.

Wealth re-distribution was combined with measures beginning to give Chavismo a clear anti-capitalist character.

Rather than relying on the inherited bureaucratic state apparatus, the government circumvented these corrupted institutions by creating “social missions”. These are programs funded by oil wealth that rely on networks of community groups to facilitate access to healthcare, education and subsidised food, among other things.

The social economy was increasingly viewed less as a complement and more as an alternative to the capitalist sector. Policy initiatives in this direction such as promoting worker-run factories and cooperatives relied on a reinvigorated working class.

Socialism of the 21st century

Chavez was re-election at the end of 2006, this time on an explicit platform of pushing forward towards “socialism of the 21st century”. This signaled the start of a new phase of radicalisation.

Confronted with the shortcomings of a strategy of building parallel institutions and simply promoting alternatives to the capitalist sector, Chavez said they needed to dismantle the old capitalist state and directly confront capital.

Over the next six years, the government carried out a wave of nationalisations, alongside creating new companies. This made the state the dominant player across various strategic sectors.

These moves were a response to growing demands by the poor around basic services (electricity, telecommunications), housing (cement, steel) and food (land expropriations, processing companies, supermarket chains).

However, nationalisations alone did not equal socialism. Rather, peoples’ participation in production and distribution was also essential.

Worker participation was encouraged in a number of these newly nationalised companies. These companies were also encouraged to link up with cooperatives and other community-owned enterprises.

Special emphasis was placed on promoting the communal councils. Funded by the state, these councils sought to build on and link up activists from the various community groups and social missions to collectively discuss and resolve the problems facing local communities.

In 2009, the government took a further step by promoting communes, made up of elected representatives of various communal councils to tackle larger-scale problems.

These bodies are also encouraged to create community-owned and -run enterprises, with profits raised going to social projects.

These groups were viewed as the building blocks of a new power built from below.

In sum, Chavismo represented an attempt by Venezuela’s popular class to win control of the state and use this position of power to bring strategic sectors of the economy under its control (in particular oil), and re-socialise the wealth towards meeting their needs.

Central to achieving this has been direct peoples’ participation in the political, social and economic sphere.

Current problems

The current problems have more to do with the successes rather than the failures of Chavismo. The government, nonetheless, still presides over a capitalist economy that is oil-dependent, even if it has been able to reassert a level of economic sovereignty and plant the seeds of a socialist transformation.

Shortages in basic goods, which have contributed to higher inflation, are due less to a “crumbling” economy (which grew 5.6% last year) than to a 10-year long explosion in consumption by the poor due to oil wealth redistribution.

Agricultural production levels have generally risen, but they have not been able to keep pace with demand. This led to a surge in imports.

Nonetheless, Venezuela has maintained a constant trade surplus, which last year totaled US$38 billion.

Venezuela’s economic elites have sought to take advantage of the problems to fuel discontent against the government. They seek to force it to wind back its controls over the flow of oil money or bring it down.

Rather than produce to meet peoples’ needs (something that Venezuelan elites have never done), they preferred to rely on imports, actively hoarded basic goods or sold them on the black market to avoid price controls.

This, together with speculation in black market dollars, has pushed up the sale price for imported goods, leading to a shift of oil wealth out of the pockets of workers into the bank accounts of the capitalists.

These manoeuvers have been helped by an inherited state bureaucracy that reproduces corruption and clientalism.

For example, the newly appointed head of the Central Bank of Venezuela said that in May, about US$15-20 billion worth of dollars granted by the Commission for the Administration of Currency Exchange (CADIVI) had ended up in the black market.

In July, the government exposed an extortion ring operating in the state agency responsible for regulating and monitoring price controls. The ring had links all the way to the top of the institution.

Overcoming the problems will require deepening the Chavismo model.

This means tightening control over the flow of oil wealth to ensure it ends up meeting people’s needs, rather than re-directing it to a private sector more interested in enriching itself rather than producing.

This will require specific measures to beat back the economic war being waged by the economic elites, as well as a war on corruption within the state.

For these measures to be successful, they will need to be guided by Chavismo’s radical vision of development. This vision sees it not just as a question of economic growth achieved through public investment and social spending, but one of greater peoples’ participation in the political, economic and social spheres.