Venezuela: An Economic Nightmare
Dutch Disease, Petrostates and Economies going rotten
Most of us have heard of the economic woes of Venezuela. It’s a name that was in the news very often during the mid 2010’s and its only increased in relevance as the situation continues to get more dire. It’s a complicated story, one with its roots far at the turn of the century, whose impact continues to rock the foundation of the country to this day.
In terms of oil exports, Venezuela used to be one of the largest. They were a member of an international oil cartel, the Organization of Petroleum Exporting Countries, and had huge stores of national wealth held in their oil fields. The wealth coming into the country through that industry was so large that it became a springboard for it’s GDP, and the country thrived from the massive foreign investments coming in.
But what caused Venezuela’s problems? With massive foreign investment and funding, most would presume the country was in good shape. Finances were, in fact, going well in the country, but Venezuela fell into what’s known as Dutch Disease, a phenomenon that affects many petroleum heavy economies.
What is Dutch Disease? Well, it’s named after an interesting phenomenon that occurred in the Netherlands in the 50s. The country found massive oil reserves in that decade, which attracted a huge number of buyers. In order to purchase the oil, these buyers drove up the demand for the Dutch Guilder. You needed Dutch currency to pay for dutch goods, and the increased demand made the Guilder far more valuable across the world. This gave the Dutch incredible purchasing power of foreign goods, driving up imports. But the high cost of the guilder disincentivized investment in other industry — why invest anywhere besides oil when it’s so expensive.
The issue was compounded by the Dutch attempts to contol their currency. In order to increase the balance of trade, and put more guilder on the foreign markets, the dutch banks slashed interest rates. Lower interest rates increase investment, and put more guilder on foreign exchange markets, hopefully stemming appreciation from getting to high.
The problem, of course, was that all this investment was flowing out of the Netherlands and into considerably cheaper markets worldwide. The high value of the Guilder began to atrophy other parts of the dutch economy, and unemployment spiked from around 1% to closer to 5%.
What was the point of that long tangent about the Dutch? Well, Venezuela, much like the Netherlands, fell prey to Dutch Disease. Petroleum exports were a massive source of revenue, and the government under Hugo Chavez pretty quickly began to use that revenue to set up social programs to help the Venezuelan people. The increased social programs, coupled with the stronger Venezuelan Bolivar, meant the people of the country were seeing an increased standard of living and unparalleled access to global markets worldwide.
All of it was predicated on one thing — oil prices needed to stay high, and imports needed to stay plentiful.
But they didn’t.
At root, Venezuela began to see massive input shortages, and while high oil prices kept imports steady, the global oil glut of 2014 sent tremors through the economy.
Chavez’s price controls and economic policy discouraged local industry. It was hard to build, and even harder to attract investors with the high price of the bolivar and the low profits any firm could expect. As domestic production slowed down, Venezuela supported itself more and more on foreign markets.
And then, the market for petroleum faced massive supply boost. The United States and Canada both flooded the markets with oil, decreased significantly.
Suddenly, Venezuelan imports were no longer bringing in the funds necessary to handle the costs of programs Chavez, and later Maduro, were implementing. The money was quite quickly disappearing, and imports started to become far more untenable as a solution. With funds dropping, the demand for the Bolivar dropped as well, and the revenue that Venezuela had been using to brace itself quickly dried up.
With the state owned petroleum corporations being one of the largest employers in the country, the slowdown in oil production had a ripple effect across the rest of the economy. Without oil money, many people didn’t have funds. Foreign investments were disappearing, and people were dumping their Bolivar. With imports shrinking, the prices of everyday goods started to rise, and while the government attempted to peg the Bolivar to the USD, black markets quickly emerged. These markets began to depict the true price of the Bolivar — sometimes a tenth of what the official exchange rate was.
This discrepancy was devastating to businesses. With strict price controls still in place, it became difficult for companies to stay afloat. The government began to print larger and larger denominations. Zeros started appearing on every banknote, and sometimes wads of cash were necessary to buy a loaf of bread.
The Government started lopping off the banknotes, changing 3 million old bolivar into 3 new bolivar. It was… an interesting approach, but it didn’t really change the fact that people didn’t have the money to buy… well anything.
It was a disaster for the country, as the numbers in poverty or extreme poverty spiked. Starvation increased, mortality rates spiked, and average lifespans dropped significantly. Political tensions between Maduro and his opposition only continued to exacerbate the issue, as few investors were confident in the government’s ability to allow for financial growth. With the dramatic reorganizing of the constitution in 2017 and 2018, many countries began to levy sanctions on Venezuela, taking any chance they had of recovery and ruining it. As the country slid into the coronavirus, the economy continued to spiral, becoming one of the worst humanitarian economic crises in history.
Venezuela, to some extent, had an opportunity to emulate Europe. Norway had social wealth funds buoyed by oil exports, and similar systems kept many european countries from experiencing dutch disease as they specialized. A combination of mismanagement, bad economic policy, and overconfidence in the price of oil destroyed one of the largest economies in South America, and the situation does not look to improve soon. It’s an unfortunate tragedy of potential squandered, and lives destroyed in the process.
