How the most oil-rich country was ruined by oligarchs?

Interview of Andrei Rajewski with a professor of US economics Michael Hudson about the economy of Venezuela

Part 1

Paul Craig Roberts considers Hudson “the best economist in the world.”

AR: Could you summarize the state of the Venezuelan economy at the time when Chavez came to power?

MH: Venezuela was an “oil monoculture”. Export revenues were spent on imports of food and other basic necessities. Trade was conducted mainly with the United States, and the country’s external debt only increased.

US oil companies were afraid that Venezuela would one day use their oil revenues for the benefit of the entire population, instead of allowing the US oil industry and the local comprador aristocracy to siphon riches out of the country. The oil industry, backed by the tools of American diplomacy, kept Venezuela hostage in two ways.

First, refineries were not built in Venezuela, but in Trinidad and the southern states of the United States on the coast of the Gulf of Mexico. This allowed US oil companies – i.e. the US government is to leave Venezuela without the means to independent actions and conduct an independent policy regarding its oil, since for this it had to be refined. What is good in this case from owning oil reserves?

Secondly, the leaders of the central bank of Venezuela were convinced of the need to provide the country’s oil reserves and all the assets of the state oil sector (including Citgo) as a guarantee of the external debt of Venezuela. This meant that in the event of Venezuela’s default (or a forced default as a result of the actions of US banks that refused to make payments on external debt in a timely manner), bondholders and large US oil companies would have a legitimate opportunity to seize Venezuela’s oil assets.

This US policy has made Venezuela a typical polarized Latin American oligarchy. Despite the fact that the country was nominally rich in oil, its wealth was concentrated in the hands of the pro-American oligarchy, which allowed the World Bank and the IMF to manage the development of the country. The indigenous population, especially its racial minority in the countryside, as well as the urban lower class, were deprived of their share in the country’s oil wealth. The election of Hugo Chávez was a natural result.

AR: What were the reforms and changes of Hugo Chávez? What did he do right, and what was wrong?

M.Kh .: Chavez sought to restore a mixed economy in Venezuela, using state revenues – mainly from oil, of course – for infrastructure development, for health care, education, increasing employment and the standard of living of his voters.

What he failed to do was clean up the oil sector from embezzlement and universal bribery. And he could not stop the flight of capital of the oligarchy, the seizure of wealth by the oligarchy, its export abroad and the flight of the oligarchs themselves.

It was not “wrong.” It just takes a long time to stop the destruction of the economy – while the US uses sanctions and dirty tricks to counteract this.

AR: What do you think are the causes of the current economic crisis in Venezuela? Is this mainly due to the mistakes of Chavez and Maduro, or is the main cause of sabotage, subversive activities and US sanctions?

MH: Chavez and Maduro could not pursue a policy in the interests of Venezuela and its economic independence without the United States provoking protests, conducting subversive activities and not applying sanctions. US foreign policy remains as focused on oil as it was when the US invaded Iraq under the Dick Cheney regime. The US policy is to treat Venezuela as a continuation of the US economy and, using the trade surplus in the oil sector, to spend the funds received in the United States or transfer savings to US banks.

By imposing sanctions that prevent Venezuela from accessing its bank deposits in the United States and to state-owned Citco assets, the United States prevents Venezuela from repaying its external debt. This pushes the country to default, which American diplomats hope to use as a pretext to deprive Venezuela of the right to dispose of its oil resources and confiscate its foreign assets. The hedge fund of Paul Singer did the same with Argentina’s foreign assets.

The United States acts against Venezuela just as they acted against Chile. Under Kissinger, Washington’s policy was to make the Chilean “economy shrill”. The United States uses Venezuela to produce a “demonstration effect.” They warn other countries: do not act in any way in your own interests if this prevents US investors from siphoning off the revenues of these countries.

AR: What, in your opinion, should Maduro do next to save the Venezuelan economy (provided that he remains in power, and the US does not overthrow him)?

MH: I can’t think of anything that President Maduro could do and that he no longer does. The best thing he can do is apply for foreign support and demonstrate to the world the need for an alternative international financial and economic system.

He has already begun to do this, trying to take the gold of Venezuela from the Bank of England and the US Federal Reserve. This is turning into an “asymmetric war” that threatens to destroy the dollar standard in international financial relations. The refusal of Britain and the United States to give the legally elected government control over its foreign assets demonstrates to the whole world that only diplomats and US courts can and will control other states as an appendage of American nationalism.

The price of the US economic attack on Venezuela, therefore, is the destruction of the world monetary system. The defensive move of Maduro shows other countries that it is necessary to protect oneself in order not to turn into “another Venezuela”. And that means away from the dollar, pound sterling and the euro.

The only level where Maduro can fight successfully is institutional. He needs to raise the stakes in the game and think outside the box. His plan – and, of course, this plan is designed for a very long time – is to become a catalyst for the formation of a new international economic order that will not depend on the standard of the US dollar. In the short term, this will only work if the United States considers that they can get out of this fight against the reputation of an honest financial broker, an honest banking system, and a supporter of democratically elected regimes. But the Trump administration ruins all illusions more effectively than any opponent of imperialism or economic competitor could do!

In the long term, Maduro should also develop Venezuelan agriculture, mainly in the same areas in which the United States protected and developed its agriculture in accordance with the New Deal legislation of the 1930s. These include the extension of services to rural areas, agricultural loans, seed advice, state-owned companies on purchasing and marketing products, supplying machinery and equipment, and the same price support that the US has long used to subsidize its agricultural investments to increase productivity.

А.R .: What about the plan to introduce cryptocurrency provided by oil? Will this be an effective alternative to a dying Venezuelan bolivar?

M.Kh .: Only the government of a state has the right to issue currency. A “crypto” currency tied to the price of oil will become a hedging instrument in the hands of sellers-buyers entering into forward transactions; it will be subject to manipulation and price fluctuations. The national currency should be based on the ability of the state to introduce and collect taxes. The main source of tax revenue in Venezuela is oil revenues, and they are blocked by the United States. Thus, the position of Venezuela is similar to the position of Germany, which emerged from hyperinflation in the early 1920s. The only solution is to maintain the balance of payments. It seems that such support can only come from outside the dollar sphere.

The solution to any hyperinflation must be agreed through diplomacy and supported by other governments. In my book “Trade, Development and Foreign Debt” (Trade, Develpoment and Foreign Debt), I described how Germany’s hyperinflation was solved with the help of a rental brand.

The rent tax in the Venezuelan economy will come from oil, elite real estate, as well as monopoly prices and high incomes (mainly financial and monopoly income). The formulation of such a tax and monetary policy requires a certain logic. In the past half century, I tried to explain how to achieve monetary and, consequently, political independence.

This policy is applied most effectively by China. It is able to do this because it is a large and self-sufficient economy, which has such an export surplus to pay for food imports. Venezuela is in a different position. That is why at present it is counting on the support of China.

AR: What kind of help do China, Russia and Iran provide and what can they do to help? Do you think that these three countries together can help counteract sabotage, subversive activities and sanctions from the United States?