Commodity, Ideology, Governance—The Divide Between Chile And Venezuela | The Reason Why

Viral posts on how capitalism won in Chile and the way socialism failed in Venezuela have surfaced recently. The claim is emotionally compelling and even partially true. But did you know that in the 1950s, Venezuela was the world’s fourth-wealthiest country?

Back then, Venezuela's per capita income was above $7000—4x of Japan, 2x of Germany, and 12x of China. Chile at that time was far poorer. But, the paths changed for both of them. Venezuela's decline and Chile's success have multiple causes beyond just ideology. We need to get deeper into it.

Let’s begin with the devil in the room – commodity. Venezuela’s economy depended on oil, while Chile’s on copper. When a country can earn from exporting commodities, it has less incentive to diversify production and build robust institutions and a sustainable tax base; this is known as the resource curse or the Dutch disease.

This had far-reaching effects on both countries. Chile course-corrected early; Venezuela did not. Venezuela had a fixed exchange-rate system with an overvalued bolivar, which made imports cheaper.

It also took away the incentives for boosting local industries, as one could import anything. However, when oil prices collapsed after 2014, the exchange-rate regime broke down, dragging the economy into hyperinflation and a broader collapse.

On the other hand, Chile spent years overcoming the resource curse. Here are three major reforms it carried out:

1.       Diversifying exports

Economic diversification was the best reform. Between the 1960s and the late 2000s, it managed to increase its exports of wine, fruit, salmon, and manufactured goods while reducing the share of commodities. It even diversified its customer base: from slow-growing advanced economies to faster-growing emerging markets.

2.       Reforms in government finances

 Chile set up the Copper Stabilisation Fund in 1985. The idea was simple: save extra money when copper prices were high and use those savings when prices dropped. In 2001, it introduced a rule which capped the amount the government could spend every year.

It was based on the average copper price and the country’s long-term economic growth, not the revenue. These reforms helped build buffers, kept exchange rates and prices stable. Venezuela also created a similar fund, but it didn’t work as expected.

3.       Exchange rate reforms

Chile shifted to a floating exchange rate in 1999 after repeated crises showed that defending the peso was amplifying shocks. Markets then set the peso’s value, mainly reflecting the copper cycle. The exchange rate, therefore, became the shock absorber for external events, limiting the impact on growth, employment, and inflation.

For much of the late 20th century, Venezuela was one of the most stable democracies in Latin America. However, corruption and populism crept in, helping Hugo Chávez become the President in 1999.

He concentrated the power in his hands and weakened the courts, the legislature and the central bank over time. Nicholas Maduro, a bus driver, later became the President in 2013, worsening the politics, governance and institutions.

Chile’s path was opposite. After democratisation in 1990, centre-left governments continued the market-friendly policies of the earlier regime. It followed fiscal discipline along with spending on social welfare.

It even granted the central bank constitutional independence. These efforts resulted in notable political and economic stability.

Chile rebuilt its economy around markets and property rights: Water became a tradable asset, forests became subsidised plantations, labour reforms made unionisation difficult, and pensions were privatised.

Investor sentiment improved, farm exports increased, forestry expanded, businesses developed, and capital markets strengthened. But the same system also created inequality, environmental damage, weak bargaining power for workers, and low pensions for many retirees, among many other drawbacks.

Venezuela had a state-led, oil-funded system. Land reform redistributed large estates to cooperatives that struggled to produce, nationalisations hollowed out private industry, and state‑run supermarkets couldn’t function efficiently.

Social missions reduced poverty and expanded healthcare and education during the oil boom. But as oil prices fell, the system collapsed. The country slid into famine, deindustrialisation, shortages and institutional breakdown.

Both countries relied on a commodity. But one diversified, while the other didn’t. One saved windfall gains in good times and spent them when the cycle turned; the other spent first and suffered later.

One built robust institutions—independent courts, a credible central bank, predictable law and order, and orderly transfers of power—while the other steadily weakened them.

In short, Chile saw growth and efficiency, with some expected downturns typical of capitalism, while poor governance and over-centralisation destroyed the Venezuelan economy.

Yes, it is tempting to conclude that capitalism won. But the real drivers were functioning democracy, institutional discipline, and economic management. Remove any of them, and you could see a failed state like many in the world.

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