The resource curse in Venezuela

The largest oil reserves in the world

Venezuela today is an exception among the giants of oil, different from its partners in OPEC (Organization of the Petroleum Exporting Countries): it has a catastrophic economy with an inflation rate of 68.5% in 2014, wich is the highest in the world. For the end of 2015, inflation is predicted to hit 100% a year devaluating even more the Venezuelan currency and worsening the crisis of shortages generating serious food scarcity in the country.

How is it possible for a country with the world’s largest oil reserves to be so close to the brink of collapse? Venezuela is experiencing the “resource curse” when a country, usually undeveloped or in development, has an abundance of a natural resource that is in high demand. The resource creates a dependent, inflated economy and leads to conflict, corruption and poverty.

Oil dependency and the crisis

In 2013, the venezuelan ex-president Hugo Chávez started a strong valuation policy of the country’s currency. The country had strong foreign exchange reserves with the result of a positive balance in a period where the oil price was high, due to the war in Iraq and a strong demand related to the world’s economic development.  A strong currency means cheap importations and Venezuela preferred to import instead of producing. The country's main economic policy was to focus on oil production, relying on its “stable” prices.

Venezuela’s economy today is entirely dependent on oil exports. The exports account for 96% of export earnings, 45% of the budget revenues and 12% of GDP. Instead of investing in manufacturing and other industries to diversify the economy to face the risks of the volatility of the oil market, the Venezuelan government decided to rely only on oil revenues and importing all of the goods the country’s population need, including food. This decision depends on exporting oil at the best price in order to be able to have a positive balance and pay for its importations.

Instead of saving the money from oil by protecting the foreign exchange reserves to face a possible crisis due to lower oil prices, the Venezuelan government kept spending money to support its populist policy, investing in hugely overpriced public infrastructure projects and inefficient social programs.

Another problem that destroyed the country’s economy was corruption in all of the country’s sectors. Corruption is present everywhere in Venezuela, and an important part of oil revenue is funnelled into corruption. The venezuelan government spend public money to support its un-democratic policy, boosting military expenses, suffocating opposition, corrupting justice and destroying the rule of law.

This year, the price of oil dropped below $50 a barrel, well below the amount Venezuela needs to keep up its spending habits. While president Maduro blames this on an “economic war” waged by the United States on Venezuela, the economy continues its downward spiral.

Shortages in Venezuela

Venezuela has to import over 70%  of its consumer goods, including food. Supermarket lines are blocks long, and their shelves are empty. As the country does not produce what is needed to meet the demand for food and basic necessities, and it does not have the money to pay the importations, there are shortages in all of the economy’s sectors.

The government monitors strictly the right amount of food each citizen can buy on a supermarket a day, by using a complex system involving a digital fingerprint device. Even the middle class, who have generally been buffered from the poverty, violence and shortages, has had to come to face to face with the realities of the country’s economy.  

A declining oil dictatorship

The current Venezuelan president, Nicolas Maduro who is the successor of the popular president Hugo Chavez, has ratings below 20%. The current president won a contested election in the year of 2013 after the death of Hugo Chavez, who was in power for 14 years.

In Venezuela the opposition is extremely weak, and it claimed that the government had committed fraud in the last elections of 2013 just after the death of Chávez. During and following the elections there was civil unrest and violence. Today the government spreads fear in a weakening opposition, and a bad economic result, inflation crisis, and a low price of the oil, it is making even more difficult to sustain such an authoritarian regime.

Possible solutions

Venezuela has to start a policy of diversifying its economy, trying to restore local production by fighting the inflation and restoring currency stability. The IMF (International Monetary Fund) has recently offered a bailout to the country, rejected by Maduro because of the unpleasant strings attached.

The country needs a quick solution for its economic and political crisis in order to avoid a civil war. The people is now divided, and many Hugo Chávez and Maduro electors are now discontented with the administration and the government is quickly losing control of its own country.

Alonso B.