The U.S. is perhaps the most ardent supporter of Guaidó, having witnessed human rights violations and economic squalor in Venezuela since the Maduro administration took control. The U.S. was hoping the last election would oust Maduro, but after election fraud led to another victory, new elections have been called for.
Guaidó won the support of the U.S. after successfully rallying thousands of Venezuelan citizens to protest on Jan. 23. The U.S. then issued new sanctions on the Venezuelan state-run oil sector to cut government revenues and promote new elections for president.
“Today I am officially recognizing the president of the Venezuelan National Assembly, Juan Guaidó, as the interim president of Venezuela,” Trump said on Jan. 23. “In its role as the only legitimate branch of government duly elected by the Venezuelan people, the National Assembly invoked the country’s constitution to declare Nicolás Maduro illegitimate and the office of the presidency therefore vacant.”
The list of countries backing Interim President Guaidó is impressive, but Maduro is temporarily able to cling to power with the support of Russia, China, Turkey and Cuba.
Russia is the strongest supporter of the Maduro administration and has loaned about $17 billion to Venezuela, according to Reuters. Russia does not expect a significant return on investment and instead will focus on political influence near the U.S. If the Guaidó administration were to take power, Russia could see its political influence greatly diminished.
With international countries vying for political influence, it is important to highlight why the Venezuela economy imploded in the first place and why it needed loans from the Russian and Chinese governments.
The Venezuelan economy has been almost entirely dependent upon the energy sector since 1928, when it became the world’s leading exporter of oil. Venezuela’s early success in the oil industry attracted foreign direct investment, and by 1977, its gross domestic product (GDP) per capita was $15,557, according to the World Bank. In comparison, the U.S. had a GDP per capita of $27,286 in 1977.
Unfortunately, the Venezuelan government made an economic blunder right before its GDP per capita peaked in 1977. In 1976, President Carlos Andrés Pérez decided to nationalize the Venezuelan oil industry and replace foreign companies with domestic companies that were ran by the state government. This new nationalization policy caused several problems that would impede Venezuelan economic growth.
The first problem that arose from nationalization was a lack of capital. Foreign companies were willing to invest in Venezuela with the anticipation of a return on investment. When foreign direct investment (FDI) ceded, Venezuelans were forced to finance projects themselves.
The third problem was a brain drain. Educated foreign individuals possessed advanced skills that were essential for the complex engineering involved in oil extraction, while Venezuela had a subpar university system, which made it more difficult to have qualified experts working in the oil fields.
The final problem was mismanagement. Large state-operated enterprises experience difficulties competing with a series of smaller privately owned companies. When a small private company is mismanaged, it will go bankrupt and a competing more efficient private company can take over. When a large state-operated company is mismanaged, it will run inefficiently and become a drag on economic growth.
In hindsight, it is easy to see why the Venezuelan economy would falter, but at the time, countries like the U.S.S.R. showed that state-owned companies could potentially be successful. The fall of the U.S.S.R. questioned this theory, but unfortunately, Venezuela has not been able to pivot its economy to a free market system.
The issues nationalization caused in 1976 are still relevant today in Venezuela. In 2014, GDP per capita for Venezuela was $13,709, according to the World Bank, while GDP per capita for the U.S. was $50.871. More recent figures are unavailable, since Venezuela is no longer reporting economic data to the World Bank.
With the International Maritime Organization’s 2020 sulfur cap deadline nearing, international shipping companies are scrambling to combat against rising bunker prices. Venezuela could ease these concerns by increasing oil production with the help of strategic business alliances.
The U.S. is currently the largest producer of oil in the world and provides ample foreign direct investment (FDI) when incentivized. A business relationship with the U.S. would benefit Venezuela and help to establish a stable economy.
The many problems associated with nationalization could be eradicated by allowing FDI in Venezuela. Foreign firms would bring in labor that would consume Venezuelan goods. Consumption of goods would allow Venezuela to diversify its economy and not be as reliant on oil revenue. Trade would also increase with FDI and would allow the economy to further diversify. The current lack of trade can be illustrated using BlueWater Reporting applications.
Using the Bluewater Reporting Country to Country Transit Analysis application, we can see that only eight liner services call Venezuela and connect it to regions outside the North Coast of South America. Of these services, five deploy fully cellular containerships, two deploy multi-purpose vessels, and one deploys pure car/truck carriers. The first chart below illustrates the fully cellular container services, while the second chart shows the other three services.
If Venezuela can successfully remove Maduro and elect a more business-friendly regime, it has the potential to transform into an established economy. A partnership with the U.S. would expedite this process and allow for oil revenues and trade to increase. Venezuela is a perfect example of how closing an economy to foreign firms can result in economic calamity.