An Introduction Essay to Alternatives to State-Owned Companies: Why State-Owned Companies Failed the Venezuelan Economy

Imagine having a game of Monopoly with your friends. Monopoly is a strategy game in which one’s goal is to amass the most considerable quantity of wealth, charging others when they pass through your properties. To play this game, the first step is to usually lay out the game’s rules and establish which token will be each person, and decide who plays as the bank. In a perfect monopoly match, you should have five people, four playing with tokens and one as the bank. Also, everyone should know the rules beforehand to avoid any discrepancies or misunderstandings.  Imagine having one person who serves as the banker, who has exclusive access to the sheet of rules and is still a player with the hat token. That one player tells everyone what to do because he controls the rules, and, potentially, he could be the player who amasses the most significant wealth in the game, having properties such as Broadway, New York Ave., or even all of the Train, Water, and Electric properties (which are some of the most valuable and cost-effective properties in the board game). Is that fair? Is that player balanced in comparison with all the other players? Did he have the same start as everyone? While this example comes from a fictional game, we have to ask ourselves if some shady breaking of the rules happens in real life. Do these types of monopoly players exist in real life, and if they do, who are they? 

Government intervention in the economy works like the Monopoly banker, who has control of the bank and exceptional knowledge of the rules. Acquiring properties as a public facility stops the progression of the free market and increases the power of a centralized state. This essay will argue that government intervention in the national economy should be carefully designed. Most importantly, it will break down the myth that there are no alternatives to government intervention in public transport, healthcare, fuel, and minerals. 

Let’s look at Venezuala, a failure of government intervention in the economy. Venezuela is a country that, in the last eight years, has had the most prominent political, economic, and social crisis any country in modern history has gone through. Since Hugo Chavez rose to power, the South American country entered a time of shadows that have not shown a sliver of light. Chavez’s presidency was full of government takeovers, unlawful governance, and oppressive behavior. Venezuela’s leading state-owned company, PDVSA, had been the nucleus of the economy for decades, representing the primary income source to the Venezuelan government. Since PDVSA was the main source of income to the state, it held enormous institutional power second only to the government. Chavez used this company to his advantage to tighten power around his figure, consolidating socialism for years to come. Due to the government takeovers, unlawful governance, and the oppressive behavior this article will discuss, Venezuela could be the best case for the failure of state-owned companies in the twentieth-first century.

Venezuela broke ground and discovered Petroleum in the 1920s when American geologists were looking for a black glue-like substance found all over Venezuelan surface soil. In their attempts, American geologists found some of the most extensive reserves of oil found in the world, bringing transnational oil corporations to extract Venezuela’s black gold. Petroleum quickly became the leading resource of production and exporting that Venezuela had in its power. However, this created a phenomenon in the Venezuelan economy, often referred to as Dutch Disease, first seen in 1929. The country focused all of its economic efforts on Petroleum, drastically decreasing the production of all other economic sectors.

In 1920, agricultural production accounted for one-third of the Venezuelan economic output. In 1929, it accounted for only one-tenth of the Venezuelan economy. The massive petroleum production centralized the Venezuelan population in big cities like Caracas and Maracaibo since Caracas was the administrative and economic center of the country, and Maracaibo was the central petroleum hub. The rest of Venezuela, underdeveloped and agricultural-centered, was left unpopulated to sustain the financial weight that the government had in rural life. 

After supporting the allies in the Second World War with Petroleum, Venezuela realized its massive economic potential to the world. Soon after, it joined the efforts of four other countries to create OPEC (Organization of Petroleum Exporting Countries). However, this move didn’t grant the government much power since the oil production was primarily privately-owned. To control their intervention in the economy and their ownership of the oil sector, the government implemented the 50/50 rule, an executive order which forced companies to grant fifty percent of their earnings to the nation. If one were lucky enough to be one of the companies that the government entered into business with, he was granted a piece of soil in which you could extract whatever amount of oil you wanted and invest the same way. This taxation method was used to maintain rights over the petroleum industry without intervening in the production and exploitation of oil. 

In 1973, the oil industry changed drastically. Due to conflicts in the Middle East, oil-producing countries in the Persian Gulf stopped exporting oil to the United States, placing the significant embargo of 1973. Venezuela was one of the few countries that found themselves advantageous in supplying oil to the United States during this embargo period. This position granted Venezuela a political and economic strength in the region that historians couldn’t compare to any other time in the nation’s lifetime. Just a few years later, in 1976, president Carlos Andres Perez got tired of many years of international intervention in the Venezuelan economy and no authority from the state in the Oil industry; even though during these same years, Venezuela became the fourth country with the highest income per capita in the world. President Perez decided to break the contracts made with the international oil companies to nationalize the whole oil industry of Venezuela. Since that presidential order, Venezuela’s major state-owned company, Petroleum of Venezuela S.A. (PDVSA), was born. 

With the birth of PDVSA, political theorists and economics counted the days left of a free and prosperous economy in Venezuela. Moreover, many Venezuelan political theorists believe that this aggressive nationalization was the first step into the free fall of the Venezuelan crisis. PDVSA granted the central government an economic power that turned Venezuela into a “casino.” In the form of oil, money was coming to the government in the form of a lottery due to the increase of oil prices in the world. However, in 2002, this same power that the company granted to the central government turned its back against the Chavez administration and started a national oil strike. This action paralyzed Venezuela’s oil production for a whole three months and created some of the biggest protests, civil unrests, and social movements that we have seen in the last 24 years of Chavism. Nevertheless, these efforts didn’t create the significant change wealthy and middle-class Venezuelans wanted to see in the central government administration. Chavez decided to fire most of the high and mid command of PDVSA -over 18,000 employees from the industry.- He later decided to place trusted managers, presidents, petroleum officials, and many other power positions in the state-owned company. At this moment, the oil power ultimately consolidated Chavez’s power, and the income from PDVSA gave him the chance to destroy the Venezuelan economy. 

PDVSA’s revenue was reinvested into social programs, and the country spent more than they received into creating ways for the poor people to have commodities of the rich. Essentially, Chavez tried to make Venezuela a developed nation, only for the poor with social programs, without a developed country’s infrastructure or culture. Politically, Venezuela wasn’t strong enough or democratic enough to withstand all spending and social programs like European countries do. Apart from this, Chavez was a figure that resembled and applied something called the “socialism of the twenty-first century.” One of the main pillars of this new socialism was the idea of the “Buen Vivir” (translated to thriving living). It proposed the opportunity for poor people to live like rich people, without being rich since they had the government’s support and economic power. However, without economic policies and state control over the nation’s income, there was no way to afford the “Buen Vivir.” Raising taxes on the rich was not an option due to the lack of taxing infrastructure Venezuela had and continues to have, the false declaration of incomes, corruption, and the control wealthy families had over the informal Venezuelan economy. Furthermore, raising taxes on the rich would have affected most Venezuelan government officials due to the high levels of corruption that the country had in the last 30 years. 

Chavez’s extensive control over PDVSA benefited the country only while the oil price was high in the international markets. In June 2008, adjusted to inflation, global markets recorded $162.31 per barrel while the Venezuelan oil industry produced 2.4 million barrels a day (approx. 390 million dollars in a day). However, once the oil prices fell to $44.08 per barrel in 2015 (approx. 105 million dollars in a day), the government’s expenditure was shut down due to a lack of cash. PDVSA financed all the social programs that fed the people, maintained their homes, promoted security, funded healthcare in public hospitals, and imported all the things Venezuela lacked due to the poor reinvestment of capital in the economy. The overcontrol of the government in the economy, the lack of precautions and the search for absolute power made the biggest state-owned company Venezuela has ever had a failure to the country, its inhabitants, and the government. Moreover, it could be argued that PDVSA was one of the main reasons why Venezuela now has the most significant economic, social, and political crisis in the whole world. 

But what is government intervention outside of Venezuela? State intervention in the economy is when the central government, federal state, or governmental administration creates an economic policy that grants control to the government over a company, asset, entity, or property. Public or public-private ventures/partnerships are the most common examples of this government intervention. 

It’s also considered a type of government intervention when the government directly involves itself with a business by giving it grants, loans, or subsidies. However, this system usually leads to business dependence on the state, bringing the possibility of state ownership over the business since they control part of their finances. A grant is when the government gives money to private or public investors without asking for repayment. At the same time, they are usually the most beneficial way to stimulate a business but the most harmful to governmental accounts. Also, grants are given when the current administration wants to promote private investment and economic growth without receiving anything in return. Typically, the government recoups the costs of this financial aid through taxes, rising employment, or unique contributions. Loans are grants repaid by the borrower and can help grow the business in the short term. Still, they also present a liability to the company in the form of continuous payment, which does not consider any good or bad economic status of the debtor.  

The last type of government intervention comes in the form of subsidies.  A subsidy is a direct contribution from the government to a private or public institution in the form of funds, tax breaks, or special attributions. It is used to directly influence economic activity and alleviate economic costs on the private sector. However, they are also the most direct way of government monetary intervention.

Let’s look at an example to understand the difference between grants, loans, and subsidies and put everything in perspective. The government of the United States is trying to evaluate an intervention through economic policy in a private company that extracts petroleum in Montana. The company is running out of cash quickly because they are investing in three more drilling sites to increase the output of oil, which will increase the production of gas in the state. However, the expected return of this investment never happens due to a global decrease in oil prices. In the case of grants, the government supplies an amount of money as a “gift” to this company to finish the construction of the drilling sites while still maintaining the rest of the costs. In the long run, the government will receive more taxes from the increase in production in the drilling sites, paying for the grant they gave to the company. In the case of loans, the company applies for a governmental loan, and, after careful evaluation, the administration decides to issue or deny the loan. Usually, if approved, the company will have several years to repay this loan with interest. This system would be in addition to paying taxes to the government, which will eventually hurt the business but benefit the government since more money is drawn from the industry to the state coffers. For subsidies, the government will give the business a grant; the company will, in return, give up some portion of their decision-making. In the Montana petroleum company, the government can argue that they need to receive a percentage of the increased newly generated oil in their drilling facilities in exchange for the money. The company wouldn’t have to repay the money, but, instead, the government would redirect the companies efforts for the government’s intentions. 

One of the real-life problems with subsidies was witnessed in Spain a few years ago when the unemployment crisis struck the nation.  In response to the 2013 rate of unemployment of 26.09%, the government gave subsidies to many farming and agricultural facilities in return for food to make food boxes for the unemployed. While one may believe this is a great plan (and, for the most part, I would agree), in early 2020, a problem appeared. The sustainable food system for the unemployed had two main issues: less profitable farming businesses and excessive food waste.  Because of subsidies, farmers were earning less for their products, making them lose money since the government set a general price for food. For example, oranges, which cost around 0.20 euros to 0.22 euros each to produce, were being sold for 0.18 euros each by government restrictions which caused many farmers to lose money even though the government was supplying the money for their production. Aside from that, the government also placed a CAP (Common Agricultural Policy) on subsidies, which hurt the current output taken care of in the farms. This government intervention made them lose the continuous income that the government depended on and decreased prices because of government regulations. Additionally, due to the massive subsidies and loans given by the Spanish government every year, Spain has one of the highest debt-GDP ratios in the world,  with 95.12% just in one quarter, which hurts the Spanish economy from the massive debt payments they pay annually. Companies could potentially use the money allocated to repay debt for funding or expansion. Last but not least, the idea that the Spanish government was going to fund businesses like farms permanently led to insufficient capital when the Spanish government removed the CAP, as many companies counted on their once-recurring payments. Now, the current production in those farms decreases since there’s not enough money to maintain it. 

After reviewing these three types of state intervention, it’s essential to go back to the basics of government intervention in the form of ownership. The three common types of government intervention are private companies being publicly funded, public companies being governmentally funded, and partially private-public companies being private or publicly funded. In the first scenario, a private company receives funds or a tax break from the government, which helps them grow.  A clear example would be a privatized healthcare system in New York. While the administration is private and is owned by a particular entity other than the state, it receives funds from the state government to supply its services to the people. However, with this system, if the government is unable to keep up with the funding of the healthcare sector, it could lead to the same problem that happened in Spain with the farming sector, as many people depend on the continuous supply of money from the government to have their healthcare. While the term “state intervention by ownership” most resembles cases of public ownership, privately-owned companies that are publicly funded are considered a type of state intervention by discretion since the source of growth for the company is the state, which, in the majority of situations, influences the decision making of the business in question. 

The second scenario works when a company is publicly owned, like the MTA (Metropolitan Transportation Authority), owned and funded by New York. The public management of the transport system in New York has led to several issues, such as the worst on-time rating for the subway cars and a deficit of over 42 billion dollars. I want to clarify that there are cases when publicly owned and publicly funded companies could work. Still, a great majority of the examples either show a debt to the state from the subsidized prices that it usually gives or a problem in changing political administrations that I  will explain further. 

The third scenario of government intervention by ownership comes in private-public companies that are either privately or publicly funded. This case resembles the best and worst of both worlds, as any party could have the final word in the decision-making. When having private investment in this type of scenario, corporations or individuals are privately funding the government, which, in many cases, can align or disagree with political beliefs. For example, if a very conservative person is financing a healthcare company that is both privately and publicly owned, and this company supports abortion, the private investment could be withdrawn, making them as volatile as subsidies. Also, the private part of the company will keep in check the accounts, as privately owned businesses have a different perception of debts than publicly owned ones

With these facts in mind, we must ask, is there a system of government intervention that creates no direct issues to the economy?  There are two possibilities that I think are reasonable. The first one is to equilibrate the spending of public companies with taxes, creating systems of massive recollection similar to the ones found in Denmark or Sweden taxing 50%-52% of their citizens’ income to maintain their social programs.  The fundamental criticism of this system is that, while it presents a good for the overall community, individuals are not working for themselves but for the government, as most of their income goes to the social programs they may or may not use. 

The second possibility is to distribute government vouchers, which support private investment, growth, free markets, and libertarian policies without direct government intervention.  Simplistically, we could compare a free meal cafeteria pass with a government voucher, where you can choose the food you like. The funding of vouchers comes from an equilibrium of individual and company taxes. In the same example of the cafeteria, while it’s technically a “free pass,” that food is paid for with your room and board (the cost of that pass needs to come from somewhere). 

Vouchers are an annual opportunity that the government supplies to the citizens. Individuals can pay for social programs with the government’s help, supporting the national economy and eliminating government intervention. An example of this alternative would be healthcare vouchers, which directly help people unable to pay for healthcare by themselves and support private companies in the market. The government issues healthcare vouchers to everyone economically unable to pay fully for healthcare. Then, individuals negotiate with their company of preference and apply their healthcare voucher for healthcare policy. The logic in this system is that the government would pay the healthcare voucher (paying the company via the private citizen) but would leave the selection of the healthcare provider to the individual. Eventually, citizens will pay for the healthcare vouchers through taxation. There will be an equilibrium in the economy since the healthcare voucher system is less expensive than the universal healthcare system.

In other words, and to be clear about the purpose of the government voucher, it creates a way for individuals to acquire private services in the economy by exercising their freedom to choose.  The government gives a coupon to each person to buy in whole a health insurance plan from a private issuer. The voucher pays in full for the policy instead of paying for the total costs of the operation or the healthcare services. It has been often referred to as the Purple Healthcare Plan as it joins the best of both proposals from the Republicans and Democrats.  

Moreover, it’s essential to explain the difference between a Single-Payer healthcare system and the voucher system. The proposed system is a single issuer healthcare network with many private insurance providers. The government, as said before, is not involved in the process of offering the systems of healthcare but creating the links and payment methods between those in need of healthcare and the private companies. There are many exciting aspects of this plan explored in this Forbes article by Laurence Kotlikoff

However, this system has advantages and disadvantages, which can also be demonstrated with the healthcare voucher example. This case brings efficiency to the market, as more customers are brought to the business. Instead of making the state a competitor for the customers with the healthcare systems, it becomes an advocate for private insurance. This action supports jobs, infrastructure, a continuous line of supplies for the healthcare industry and still achieves the goal of universal healthcare shared by developing countries. The cost of the healthcare voucher system is approximately $3,000, depending on the person’s needs. In contrast with the current healthcare system in the US, which sits around $11,000 per person annually (and is expected to increase to $18,000 annually by 2028), or 32.6 trillion dollars over the course of the next ten years, healthcare vouchers would be less expensive. However, the current healthcare system of the United States is not universal or unlimited, making the price of the alternative proposed lower than the current cost of American healthcare. If the US wanted to create a fully universal healthcare system, it would cost approximately 149 billion dollars more annually than the current system. This cost doesn’t count the future need to invest in hospitals, healthcare jobs, administrative infrastructure, and a long chain of supplies to maintain the system, another cost to apply since it’s publicly managed. 

Apart from the cost, we are not considering that a change in the political administration can overturn the agenda of its predecessor. One of the biggest problems of universal healthcare is that it supports healthcare for people who could pay for private insurance and those who cannot. When dealing with government-sponsored universal healthcare, a significant deficit must be expected. The system pays for all the bills of people in need of healthcare, despite their economic status. However, the system also has spent a lot to offer nationwide healthcare, even if it is not used. The nation can now afford a healthcare system, but it risks expenses far outrunning its income.     

Healthcare vouchers could be the synthesis between policies and standards, with both Republicans and Democrats having a seat at the table.  Vouchers fill the space of government-sponsored healthcare while being conscious of the nation’s funds while reducing economic intervention.  It lets its citizens choose a healthcare provider while substantially decreasing unnecessary taxation. The healthcare voucher system has the chance to be profitable for the government, reduce outstanding debt, and remove maintenance costs from the government. 

However, the main problem with the voucher system is that there’s a large population of people who depend on government vouchers. If the government cannot pay them, it would lead to many people losing their healthcare, similar to a debt crisis in the universal healthcare system. Another problem with this system is that it could potentially lead to monopolies in the healthcare market when a company obtains too many customers. It is also the responsibility of consumers to advocate for competition in the free market and prevent monopolies, as long as their detriment to society is more than the benefits they produce.

In theory, vouchers could be applied to many other economic cases, such as transportation, education, oil and gas, social security, etc. This different avenue would create a natural alternative to state-owned companies while supporting the free market. 

Now, that monopoly player would potentially never exist. The bank, the rules, and the market are separated. The government should not have any direct economic intervention in a monetary policy or ownership since they are subject to administration charges. There are many mechanisms to ensure social security from private companies without government involvement and ownership. Choosing the right way to act now is better than waiting through years of indecisive legislation. 

In the words of Arturo Uslar Pietri, a natural-born Venezuelan economic theorist, “healthy and broad and coordinated foundations…of a progressive economy…will be our true act of independence.” Hopefully, this future is still achievable, and countries like Venezuela have the chance to become the bright star it was meant to be and once was.