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Chapman’s News & Ideas Venezuela’s Economic Crisis; Political Crisis to Follow?

Leftist Venezuela is joining leftist Argentina in a downward economic spiral brought on largely by the government. Economic mismanagement does tend to lead to economic distress, then to social and political turmoil. Two Harvard professors expect a Venezuela default on its debts.

Unlike Argentina, Venezuela is oil rich. But free-spenders have boosted inflation to about 65 percent. The government-run oil industry pumps two million barrels a day. But its spending habit needs world prices of $200 per barrel, while actual prices are declining toward the low 80’s.

The weakening global economy, combined with U.S. fracking and other oil development, are responsible for the falling oil prices. North Dakota and Texas will slow production, most likely, as will sheikdoms in the Middle East. Iran and Nigeria will feel the pain. But the countries that will hurt the most include Russia, whose economy is dominated by fossil fuels, and Venezuela, a nation that is falling deeper and deeper into the inflation trap and experiencing consumer scarcities brought on by government price controls and reckless spending.

President Maduro lacks charisma and is not as successful as the late Hugo Chavez at blaming the Yanquis for Venezuela’s ills. Moreover, even the poor and dependent classes on which Maduro counts eventually may get impatient with bad government after a while–and won’t settle for the old excuses. Cuba, of course, gets free or cheap oil from its fraternal ally, and provides doctors and intelligence agents in return. When the oil eventually gets cut off, Cuba’s day of reckoning also will arrive. If Maduro has to stop paying his Army, one may expect riots and government paralysis.

Meanwhile, Carmen Reinhart and Kenneth Rogoff of Harvard, in an article this week, predict a Venezuela default on its debts. “Given that the government is defaulting in numerous ways on its domestic residents already, the historical cross-country probability of an external default is close to” 100 percent, they wrote.

Russia is anxious, too, as post-Ukraine invasion sanctions bite and petrol revenues drop. But Putin is still popular, and the Kremlin still has large gold reserves and European customers that rely on Russia’s gas monopoly. No such luck for Venezuela.