Let Them Eat Oil: Venezuela’s Food Crisis

Background

Despite its agricultural roots, fertile farmland, and growing population, Venezuela has long since abandoned cultivating its soils in favor of exploiting the Earth’s treasures that lie much deeper. With the world’s largest oil reserves, Venezuela has built up an economy entirely reliant upon hydrocarbons, at the expense of every other sector. 

In 1913, for example, some estimates pegged the proportion of export earnings from agriculture at 93 percent, much of which came from coffee, but also from cocoa, indigo, cotton, tobacco, and cattle. Once Venezuela began producing oil on a large scale in the following decade, the higher-salaried opportunities in the sector (and in related sectors, like construction) began luring many agricultural workers away from farms—a trend that would continue for the subsequent decades.

But perhaps more importantly, corrupt governments throughout the 20th century failed to diversify the economy or make it more resilient to potential oil shocks. And soon, there was the onset of Dutch Disease—an oil export boom encouraged an influx of foreign currency, driving up the value of the bolivar, as well as the costs of Venezuela’s other exports, making them uncompetitive. Thanks to Dutch Disease, it became cheaper to import food into Venezuela rather than to grow it. And Venezuela did just that. 

Still, oil prices were high enough to sustain the country and keep its citizens content: In 1970, Venezuela’s per capita GDP was equal to that that of its former colonizer, Spain. And the international oil crisis of the early 1970s was yet another boon, after which point Venezuela nationalized its oil industry and began a spending spree; instituting food subsidies, initiating new infrastructure projects, and building aluminum and steel plants. At the same time, the government expanded the public sector and cancelled the debts of its farmers. Venezuela had overspent, promising its future oil as collateral for payments, but failed to do the sort of spending that could have made the economy more diverse or resilient, and less reliant upon food imports. 

And while the good times continued at the start of the next decade, by 1986, international oil prices began to plummet. So much so that by 1988 revenues were less than half what they were in 1980. In the latter half of the decade, public debt swelled, and by 1989 the Venezuelan president, previously critical of international financial institutions, took a loan from the IMF and began to implement an associated structural adjustment package. The reforms included a reduction in the number of public sector employees, a reduction in tariffs, changes to wage regulations, privatization, and eventually an increase to the price of gasoline (and therefore transportation). The results were catastrophic: Venezuelans took to the streets in protests and riots, to which the government responded violently, killing hundreds or potentially thousands of people. 

In 1981, Venezuela’s per capita GDP stood at $4,790, but by 1990 had dropped to $2,367 (in current terms). The economy continued to flounder through the 1990s, and the country was only able to once again achieve the per capita GDP it had in 1981 in 2000. One year earlier, Hugo Chavez had come to power, promising to battle poverty, redistribute wealth, and of course, re-nationalize industries and transform Venezuela into a socialist state. 

The Chavez government passed a new constitution in 1999, which is one of the few in the world to specifically discuss food. In Article 305 of the new document, the government states that it will develop and prioritize food production, promote sustainable agriculture, and guarantee its citizens an adequate supply of food. The government goes on to promise that it will support such efforts financially, commercially, technologically, or in ways related to infrastructure or land. 

Chavez frequently reiterated his government’s commitment to agriculture, using the same phrase that several of his predecessors did—that the Venezuelan government would “sow the oil,” and use the earnings from the commodity to diversify the economy. Historically, the promise has been about investing oil revenues into infrastructure, power, and construction, as opposed to agriculture. And while Chavez was outspoken about his desire to apply these revenues to support agriculture, and initiated some grandiose projects in the hopes of transforming the sector, his success was limited. 

Sowing the (s)oil 

Venezuela’s growing reliance upon oil revenues throughout the 20th century naturally pushed its citizens into its cities, and away from rural areas. Venezuela’s urban population, as a percentage of its total population (which is roughly 30.5 million people), is currently a steep 89 percent. Nearly 20 percent of all Venezuelans live in the metropolitan area of Caracas alone. 

A high level of urbanization does not necessarily imply inadequate food production; take Venezuela’s neighbor Brazil, for example—the proportion of its citizens living in urban areas is a similarly high 85 percent. But Brazil, unlike Venezuela, has highly productive and industrialized commercial farms, which do not require a lot of people to run them. Also unlike Brazil, Venezuela has relatively little permanent cropland. According the United Nations Food and Agriculture Organization (FAO), Venezuela only has about 700,000 hectares of permanent cropland—that’s roughly equivalent to that of Papua New Guinea, a country of 7.3 million, and less than 40 percent of that of neighbor Colombia. 

In the 19th and 20th century in Venezuela, huge portions of prime agricultural land were frequently distributed by politicians to friends, family, and political supporters, while average Venezuelans were left to eke out a living off of small sections suboptimal land. As land-grabbing dictators were toppled, their huge land holdings fell into the hands of the government, which did not always know what to do with it. And while some of this elite- and government-owned land was productive, vast portions of many holdings were used as grazing areas; other portions were held for speculative reasons, or lay idle. After all, the incentives to produce agricultural goods were small, given the strength of the Venezuelan currency and the ease with which the country could buy cheap agricultural products from abroad. 

The first real attempt at land reform came in 1960, with the appropriation of land and its redistribution to poor Venezuelans, but the program was only somewhat successful: As Dutch Disease continued to intensify, farming remained bad business, while opportunities for urban employment flourished. 

When Chavez came to power, it was little surprise that one of his first major pieces of legislation was about land. The 2001 Ley de Tierras (Law of Lands) gave the government the power to confiscate and redistribute land whose ownership was unclear, land that was technically owned by the government, or that was lying idle, while also limiting the size of land holdings. The law enabled certain Venezuelans to move to confiscated land. Implicitly, the legislation arguably empowered squatters to illegally settle into private land that was still inhabited and being farmed and had not been confiscated. 

Production of staples like corn and rice has increased modestly since the turn of the century, but the factor by which production increased depends on who you ask. What is clear is that production for both seems to have peaked by 2009, dropping precipitously by 2010. While the reasons behind the production drop are many, it’s worth noting that Chavez tightened food price controls, including those on corn and rice, in March 2009. The tightening may have pushed down production, with some producers effectively being asked to operate at a loss. Nationalization of companies, intimidation, and excessive bureaucracy are also likely to have played a role in diminished production.

In the chart above, production figures for corn and rice are compared from two different sources—the Food and Agriculture Organization of the UN (FAO) and the United States Department of Agriculture (USDA). The lines indicate the same general trends, but suggest very different scales of production. Given that the FAO’s data here comes from the Venezuelan government, which has been criticized for producing bad, sometimes exaggerated figures, it can be difficult to take them as fact. Moreover, figures from the International Grains Council (IGC), for corn at least, are more in line with those of the USDA than those produced by the Venezuelan government via the FAO. 

Similarly, production of cocoa seems to have increased over the past 15 years, but again, it’s difficult to discern by exactly how much. Chuao in Northern Venezuela produces some of the most prized cocoa in the world, used by the finest (and priciest) chocolatiers globally. Cocoa exports have been falling since 2007, however, ostensibly because of the government’s drive to increase domestic cocoa processing and keep cocoa prices low within the country. 

Keeping food prices low for consumers has been a priority for Venezuela’s “Bolivarian” government. Following a 2003 oil strike that devastated production and seriously wounded the Venezuelan economy, Chavez announced extensive price controls on basic foodstuffs. The regulations required companies to produce food at regulated prices, which has disincentivized production of many goods, with producers arguing that the system makes it impossible for them to earn a profit, and fails to take into account factors like inflation. 

And indeed, inflation was already a major issue in the country, thanks to persistent Dutch Disease; in the 1990s, the average rate of consumer price inflation was over 47 percent, and in 2003, when the price controls were instituted, inflation was at 31 percent. 

The Venezuelan government, in an attempt to address these inflation fears (as well as capital flight), also announced sweeping changes to currency policy in 2003, pegging Venezuela’s currency, the bolivar, to the US Dollar and proceeded to institute an exceedingly complex currency exchange system. 

The present situation

It can be tricky to understand how much something in Venezuela actually costs. That’s because until March of this year, there wasn’t just one exchange rate. Not even two. Venezuela had three official exchange rates, and on top of that, a fourth “black market” rate that’s important to mention given its widespread use. And the applicable exchange rate depends on who is making the transaction and what it’s for. 

The government and importers of vital goods—including many foodstuffs—are able to make use of the most favorable exchange rate, which in January 2016 was 6.3 bolivars for $1. Then there was the SICAD 1 rate, that importers of less pressing products could auction, which was 12 bolivars for a dollar in January. And in March 2014, Chavez successor President Maduro instituted the SICAD 2 rate of 50 bolivars to the dollar, also awarded via auction. And finally, there was the SIMADI rate for all others, which is a drastically higher 200 bolivars for $1. Still, securing dollars using one of these official exchange rates is bureaucratic, difficult, or can be downright impossible—forcing many to resort to the black market, in which a dollar is worth a whopping 900 bolivars. 

The currency exchange and price control systems are both playing parts in the ongoing food crisis, which has featured heavily in headlines since at least 2010 (though with peaks and troughs throughout). There have been numerous allegations that cheap price controlled food, intended for Venezuelans, is being sold across borders where smugglers can get more money for them—thereby reducing the supply available domestically. At the same time, strict food rationing systems and long lines at grocery stores have created a domestic black market for food too, with individuals essentially making jobs out of queueing for cheap goods and reselling them at several times the price. And as mentioned earlier, the price controls are disincentivizing local food production, putting even more pressure on imports. To top it all off, a persistent drought in the country is damaging the limited amount of food Venezuela does produce 

While Venezuela’s food shortages are not new, they have gotten worse over the past year or so, coinciding with the dramatic drop in oil prices that began in 2014. As a result, dollars have grown increasingly scarce in the country and the government is struggling to distribute them in its official exchange system, which in turn has meant that some food importers are unable to operate.

Amid a worsening crisis, President Maduro announced currency overhauls in early March, devaluing the bolivar and consolidating the three-tiered exchange system into a two-tiered one. Now, the lowest exchange rate is 10 bolivars to the dollar, and all others will use a floating exchange system starting at around 200 bolivars to the dollar. 

Around the same time, Maduro unveiled his urban agriculture plan, designed to encourage city dwellers to grow more fruits and vegetables. But as with any urban agriculture initiative, the potential impact is relatively limited (given the size and space constraints associated), and the dearth of fruits and vegetables is only a part of the food woes in Venezuela. 

Conclusion

The situation in Venezuela is complicated. Decades of economic mismanagement, corruption, and over-reliance upon oil have created a weak economy buckling under the pressure of cheap oil. And while many economists are pointing to the need to overhaul the currency and price control systems, it is also essential that Venezuela makes sustainable, aggressive, and effective investments into its agriculture sector. Not only will a strong agriculture sector help create a more diversified economy, it can help ensure that a potential economic crisis in the future does not devolve into a food crisis.