After my talk at Cambridge University a few months back, a student asked me a question along these lines:
Jorge, we often hear that socialism is what the Scandinavian countries are practicing. And these countries are not collapsing at all, but rather are experiencing high levels of socioeconomic development. If this premise is correct, shouldn’t we not only associate socialist economies with failures like Venezuela and the Soviet Union?—because a socialist economy can indeed work, if it is implemented properly, just like the Scandinavians managed to do.
That question was among the most important ones of the evening, partly because it reflects a viewpoint that makes sense to a lot of people. Take Norway, for example. It has an extensive public sector funded by an oil-rich state, just like Venezuela. Yet unlike Venezuela’s, Norway’s economic performance is stellar. Therefore, couldn’t we argue that the failure of Venezuela was the result not of the principles of the socialist system, but of the country’s mismanagement of that system?
Self-proclaimed socialists like Bernie Sanders and Jeremy Corbyn agree. Years ago, Sanders praised Venezuela by saying, “These days, the American dream is more apt to be realized in South America, in places like Venezuela.” Jeremy Corbyn praised former Venezuelan president Hugo Chavez for “showing that the poor matter and wealth can be shared.” Neither of them praises Venezuela anymore. And how could they? The country is experiencing an unprecedented economic collapse. Instead of blaming the system, however, they simply link the country’s economic issues to Nicolas Maduro’s handling of the country’s declining oil revenues. Coincidentally, these politicians now use the Scandinavian countries to back up their policy agenda.
In order to properly address a question like the one I got at Cambridge, a deeper study of the Venezuelan and Scandinavian economic models is required. To that end, this essay compares the Venezuelan model to that of Norway—a typical Scandinavian country with rich natural endowments that are similar to those of Venezuela. In particular I compare the countries’ respective levels of economic freedom. Economic freedom is the main economic indicator by which to distinguish market-based economies from socialist ones. Comparing it across the two countries will allow us to determine whether the Norwegian and Venezuelan models are different structurally or only in their implementation of what is in fact the same core system.
Opposite Economic Performance
We should first compare the economic performance of each country. Their difference is substantial.
Norway’s social and economic development is remarkable. Its gross domestic product (GDP) per capita is over 65,000 U.S. dollars, the sixth highest in the world. Its poverty rate is less than nine percent, among the lowest in the world. Over 76 percent of Norwegians are currently employed, and over 70 percent of women are working—impressive labor participation rates. Moreover, Norway has an oil-based sovereign wealth fund of over a trillion dollars—$200,000 per capita.
Given this economic success, Norway ranks among the best countries in numerous indicators of the well-being of its citizens, such as personal security, housing, and health conditions. Norway’s educational system is among the best in the world, with over 80 percent of adults completing upper secondary education. The country’s pollution level is considerably low because 47 percent of its energy comes from renewable sources. Ninety-eight percent of Norwegians express satisfaction with their water quality, while the OECD average is 81 percent. And Norway’s 83-years life expectancy is above the OECD average, also better than the United States’ 78-years life expectancy.
Venezuela, on the other hand, has one of the worst performing economies of our time. Since 2013, the country has lost over 70 percent of its GDP—the worst GDP collapse in the modern history of the western hemisphere. In the same period, its minimum wage has fallen over 95 percent to less than ten dollars a month. Currently, 95 percent of Venezuelans live in poverty, and 79 percent live in extreme poverty because they cannot afford even the minimal amount of nutrition for a healthy diet (known in economics as the “basic food basket”). Only 32 percent of Venezuelans consume over 2000 calories per day. Overall, Venezuela’s GDP is expected to shrink another 26 percent in 2020.
As these economic indicators illustrate, the economic performance of Norway and of Venezuela could not be more different. The Norwegian economy has experienced robust growth, improving the living standards of its people, while Venezuela is experiencing a widespread economic collapse. The fact that this difference is so considerable increases the importance of correctly identifying the causes of it. By doing so, we will be able to properly identify which policies to avoid or encourage in the future.
Opposite Attitudes Toward Markets
Analyzing the economic freedom of Norway and Venezuela helps us determine whether the two are indeed socialist at their core. According to the traditional distinction between market-based and socialist economies, if both countries exhibit a hostile attitude toward market mechanisms, then both are socialist. If they have opposite attitudes toward markets, the two economies must be different in principle.
Economic freedom entails the right of citizens to freely produce, commercialize, and consume goods and services. In practice, countries are economically free when they have established institutions that enhance markets, such as property rights, free trade agreements, and flexible labor laws. Property rights have to be well defined, so that economic agents can enjoy the benefits of acquiring, using, and commercializing their property. Prices should be set freely by the private sector, so that they can efficiently reallocate resources toward productive endeavors. And judicial systems should be effective and transparent, in order to encourage businesses to use commercial contracts, which reduce the risks associated with doing business.
To measure economic freedom, the Heritage Foundation produces the Index of Economic Freedom (IEF). The index measures the quality of a number of institutions that foster correctly functioning markets. When these institutions work properly, the country receives a higher IEF score. Economists and policymakers often use the IEF to identify what reforms to conduct in their countries, given that a country’s performance on the index correlates with the growth of key indicators of its economic success—such as gross domestic product, social progress, entrepreneurial dynamism, and foreign direct investment. This correlation between economic freedom and economic performance is particularly strong for countries situated at the bottom of the ranking; that is, when countries do not reach a minimum threshold of economic freedom, they experience economic decline.
The IEF ranks Norway among the best in virtually all categories, such as business freedom, labor flexibility, and monetary stability. Thanks to Norway’s emphasis on developing its international commerce—which accounts for over 70 percent of the country’s GDP—it has virtually no barriers to free trade. Regarding the rule of law, Norway ranks among the best in protecting property rights and in judicial effectiveness. Overall, Norway ranks 28th in the index, putting it among the most open economies in the world. Beyond the IEF, the World Economic Forum produces two indices that measure countries’ attitudes toward the private sector: the ease of doing business index and the global competitiveness report. In them, Norway ranks ninth and seventeenth, respectively. It is safe to say that Norway has a welcoming attitude toward markets and the private sector.
Venezuela scored second to last among the 180 countries measured on the IEF. This comes as no surprise, given the country’s policies in the last two decades, such as widespread price and currency controls, production quotas, and the politicization of the country’s central bank, oil industry, and all state institutions. Between arbitrary expropriations by the government, rampant criminality, and collusions between public officials and organized crime networks, property rights in Venezuela are as weak as they get. As for financial stability, in August 2020, Venezuela marked its 32nd consecutive month of hyperinflation. According to the International Monetary Fund (IMF), the country’s hyperinflation in 2020 will reach 15,000 percent. Moreover, the country’s debt obligations exceed 150 billion U.S. dollars—five times the country’s 2018 exports.
Overall, Venezuela’s IEF score is even worse than Cuba’s and better only than North Korea’s. Economic freedom is virtually nonexistent in the country. Beyond the IEF, Venezuela ranks 188th out of 190 countries in the ease of doing business index, and 133rd out of 140 countries in the global competitiveness report. In other words, Venezuela is extremely hostile toward the private sector and market mechanisms. As a result, private investment has been leaving Venezuela in favor of countries like Chile and Colombia, as these have economies suited to private sector development. From 2003 to date, over 200 billion dollars of capital has fled the country, the rough equivalent of twenty years’ worth of food imports, calculated at their peak year.
Complementing versus Replacing Markets
Whenever people claim that the Norwegian and Venezuelan economies are similar, they tend to base their conclusion on the one trait that the countries have in common: a large public sector. But with the help of the intellectual framework that this article has provided, we can see that, in fact, precisely because of the countries’ different economic philosophies, their public sectors have very different roles in their respective economies.
Norway’s public sector is aimed at complementing the forces of the market. It provides citizens with public services that are meant either to supplement or to enhance markets. The former services include safety nets, subsidies, and social programs for people in economic hardship. The latter include the public goods that markets need to realize their potential, whether skills education for the workforce, national security, or infrastructure. As a result, Norway has been successful at attracting foreign capital, increasing domestic investment, and, overall, at building a modern, innovative, and highly productive economy.
On the other hand, Venezuela’s public sector aims at replacing market mechanisms. The Venezuelan state controls virtually all the country’s means of production, from basic industries like oil and aluminum, to agriculture, food distribution, telecommunications, and most other economic sectors. Moreover, through tight price controls and production quotas, the state strictly regulates those parts of the economy that are owned by the private sector. As such, the Venezuelan economy is doomed to low levels of investment, productivity, employment, and income. In short, Norway’s openness to markets leads it to set policies that complement the market, while Venezuela’s hostility toward the private sector leads it to replace the market with government mandates.
Any similarity between the Venezuelan and Norwegian economic models is only superficial. When we compare them in depth, it becomes evident that the two countries follow opposite principles. Norway’s economy is among the freest in the world, while Venezuela has become a prime example of what a socialist economy looks like. The Norwegian model is widely praised by governments, multilateral institutions, and most importantly, Norwegians themselves. Venezuela’s policies, on the other hand, have sent it into one of the worst economic collapses in history.
So, to answer the question from the student at Cambridge, no, Venezuela and Norway aren’t two sides of the same coin. Their economic systems couldn’t be more different.