Venezuela's economic collapse has been startling. Not too long ago, it was the wealthiest country in Latin America; in 2016, it's economy shrank by more than war-torn Syria's. It was once a poster child for socialism; today, hyperinflation is so severe that Venezuela has disintegrated into a barter economy. It's journey to this point, in such a short space of time, offers a warning to Nigeria.
From Marx to madness
A decade ago, Venezuela was a peaceful welfare state running on the tenets of “Bolivarian Revolution” – a form of socialism aimed at improving economic and social conditions through the provision of free medical services, food subsidies and housing subsidies. In reality, steady economic growth and declining poverty rates – steered by high oil prices – had for years disguised deep structural inefficiencies and poor economic policymaking under Presidents Hugo Chavez and Nicolas Maduro.
The country managed to squander almost all its export revenues while incurring massive debts it now struggles to repay. From 2000 to 2013, government spending as a share of GDP rose from 28% to 40%, a much bigger rise than in Latin America’s other large economies, while government Debt to GDP averaged 42% from 1994 until 2017, reaching an all-time high of 72% percent in 2013.
Chávez, elected in 1999, implemented a series of redistributive policies aimed at alleviating poverty and reducing inequality. Subsidies for housing, education, medical care, and food were funded using revenue from Venezuela’s state-owned oil industry. However, a steep decline in oil prices from over $100 a barrel in the summer of 2014 to a low of around $33 a barrel in early 2016 created a budget shortfall, a situation similar to Nigeria and Egypt. The government attempted to address the situation by imposing price controls, but this only triggered hyperinflation. By the end of 2017, Venezuela's GDP and GDP per capita had contracted by 35% and 40% respectively in comparison to 2013, worsened by an inflation rate estimated at 1,600%.
In five years, Venezuela was closer to Zimbabwe than a socialist utopia.
Nigeria and Venezuela: Two Sides of a Coin
Despite differences in geography and politics, Nigeria and Venezuela are similar states. Both rank among the world’s top ten oil producers, with economies significantly reliant on oil, and both are very corrupt – placing 148th and 169th respectively on the Transparency International Corruption Perception Index. Unsurprisingly, both nations suffer from the Dutch Disease as oil export earnings over the decades have been expended on profligate populist policies.
And while Nigeria has not reached Venezuela's level of economic ineptitude, it has often flirted with economic collapse, evidenced by the recent recession. Like Venezuela, Nigeria has wasted its oil export earnings. Estimated to be over ₦77 trillion since 1999, oil proceeds have been squandered on white elephant projects, consumption subsidies or outrightly stolen.
Furthermore, Nigeria may be sinking into a black hole of debt. One noticeable feature of Venezuela's economic demise was a ramp-up in public borrowing for recurrent expenditure, a path seemingly being toed by Nigeria. Over the past five years, Nigeria’s public debt has continued to increase, while a significant chunk of government revenues now diverted towards debt servicing. Critically, Nigeria's government has stressed that borrowing has been to fund infrastructure, not to fund salaries or expensive subsidy programs. As we have seen in Venezuela, a rise in public spending and debt, without a corresponding investment in infrastructure is a recipe for failure.
Perhaps the most relevant lesson from Venezuela is the dangers of being wedded to expensive subsidy programs and ignoring market forces. Subsidies, like Nigeria's fuel subsidy, are often populist but inefficient and expensive ways of promoting equality and tackling poverty. For instance, Nigeria has spent over ₦1.4 trillion on petroleum subsidies in the past year, a figure more than double the proposed 2018 budgetary allocation to education. Moreover, subsidies do nothing to promote the productive capacity of the economy, as Venezuela discovered after decades of spending oil revenues on providing free public services and subsidised non-essential goods.
Also, Nigeria's penchant for interfering with free market prices, whether through price controls or exchange rate controls, is reminiscent of pre-crisis Venezuela. These disconcertingly similar situations which precipitated Venezuela’s economic collapse are currently observable in Nigeria, albeit on a smaller scale.
A look into the crystal ball
What can Nigeria learn from Venezuela? A combination of Dutch Disease, excessive public borrowing, and elaborate subsidy schemes can quickly lead to economic turmoil, and full-scale disaster if the policy response is to fight against market forces and stoke internal tensions.
Venezuela's political class managed to turn a country with one of the world's largest oil reserves into a pauper state experiencing an economic, political and humanitarian crisis. Although Nigeria looks to be far away from that scenario, the seeds of the Venezuelan crisis were planted in a time that looks a lot like Nigeria today.
To forestall a Venezuela-like economic crisis, we must wean ourselves off oil dependence, and take the bitter but necessary step of curbing administrative excesses, particularly by trimming a bloated civil service, cutting subsidies, and allowing markets work. Most importantly, the government must embark on prudent financial management and really fight corruption, one root of the Venezuelan crisis.
Should they fail to do this, we would not have to look far to see what Nigeria would look like. From Venezuela, with love.