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What Next For Venezuela?

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Includes: FLN, ILF, LAQ, LBJ, LDF
by: Barker Report
Summary

What are the economic prospects for Venezuela for the next 10 years?

Exploring the possible scenarios of a Venezuela recovery based on current events.

Although Guaidó has been backed by several governments around the world, there are some major military powers still backing Maduro, chiefly Russia and China.

Long-brewing crises like that in Venezuela take longer to recover. It all comes down to the way in which the transition of power will take place.

During my last post, "Hail Venezuela's Libertador," we reviewed the political and social climate in Venezuela, but what are the economic prospects for the next 10 years?

It is very easy to hear left-of-center (to put it mildly) politicians cry out that the whole idea of the US supporting Guaidó is because of Venezuela's oil reserves. Well, what about China and Russia? Are they doing it for the arepas?

Let's explore the possible scenarios of a Venezuela recovery based on current events. Many countries in Latin America have returned from the brink: Argentina, Peru, and Brazil, all recovered from hyperinflation and mega-devaluations in the 80s and 90s. So, could Venezuela do it?

Venezuela's case is slightly different to many other Latin American countries which have faced their share of crises. For starters, this crisis has brewed over two decades, and has been a slow but steady descend down the tubes. The fact that it has reached alarming proportions in the past few years doesn't deter from the long path it took to get there. Long-brewing crises take longer to recover.

Secondly, the country's resources have been depleted; here, I'm not talking only about means of production and natural resources, I'm also talking about manpower. The brain drain I discussed last week is a key factor when thinking about a recovery and how long it will take. Once your garden variety crisis is contained with macro-economic measures put in place to support the currency and keep inflation in check, the productive system kicks into gear and the economy starts recovering. The integrity of the productive system generally determines the speed of the recovery. Venezuela's is long gone.

Finally, there are the natural resources. Unlike many of its peers, Venezuela has vast oil reserves, which could help them gather the necessary funds to a speedy recovery.

Possible outcomes

Before considering the prospect of a recovery, one must ponder the likelihood of a peaceful transition of power. Although Guaidó has been backed by several governments around the world, there are some major military powers still backing Maduro, chiefly Russia and China.

Domestically speaking, as long as Maduro has the backing of the armed forces, it is very unlikely that he will go quietly. This would trigger riots in the streets and more violence. Should the army act against the protesters, it is very likely to end up in a civil war. Since the opposition is no match for the armed forces, they would require to be armed by foreign powers, namely the US and its allies, which would result in an immediate response from Russia supporting the armed forces... and before you realize it, you have a Syria in South America.

So, what would it take for the armed forces to withdraw their support for Maduro? Normally, it is lack of payment. If the government runs out of money and can't afford the military's salaries, they are very likely to withdraw their support, which would imply an immediate fall of the Maduro regime. But what if Maduro, in a desperate attempt to remain in power, opts for selling Venezuela's future oil production at a deep discount to, say, China? Two outcomes will surely follow: 1) Maduro, with the armed forces' backing, will remain in power for a few more years, and 2) when he is removed, Venezuela will be completely destroyed, since it will not even have oil to sell.

So, it all comes down to the way in which the transition of power will take place. A peaceful transition will mean the country can get back into business as soon as possible and a recovery, albeit slow, will get under way; whereas a violent transition in the form of a civil war, or a prolonged military state with an eventual transition five or ten years into the future, with no natural resources to rely on, would prove certain doom for the country.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.