AMERICAN PERISCOPE. Venezuela sinks as deep as its resources

My student from Venezuela goes to Panama during her breaks — that’s where her family has moved. As she explained, “Everybody is moving from Venezuela to Panama or Bolivia.”

You can’t blame them. Venezuela is a prime example of what economics textbooks call “the resource curse”. This is the paradox when a country rich in natural resources seems to have a hard time getting its economy growing. It could be because the export of natural resources (say, oil or diamonds) strengthens its exchange rate to the point that its other sectors are affected, or it has poor governance or its institutions are weak and corrupt. In this case, the answer is probably “all of the above”.

Venezuela has the largest proven oil reserves in the world, and is also in the top league when it comes to gas reserves. Yet, it has to ration basic necessities such as milk, coffee, toilet paper and so on. A country that has the world’s largest oil reserves and fingerprint scanning equipment at its supermarkets needs to ration toothpaste? If you feel you have dived into the rabbit hole after Alice, you may be right.

That is the only way you can explain the economic situation in Venezuela. The country has defaulted on its debts. It has been experiencing double-digit fiscal deficits the last few years. So the central bank has been printing notes, and also instituted exchange controls. There are actually three official exchange rates that range from 6.3 bolivars to 50 bolivars to a dollar. This can only be supported by a very complicated system of currency controls, and that usually means a thriving black market and people trying to get something that will hold value.

Inflation is currently at about 60 per cent. In 2013, you could get 17 bolivars to a US dollar; now it is 100. The slide in global oil prices has not helped, and the economy is estimated to be shrinking by 2.5 per cent this year. Some companies have started pulling out of the country.

When Hugo Chavez, an unabashed socialist, first became president in 1999, he generated a lot of hope. He promised a Bolivarian revolution that would support popular democracy, reduce political corruption and create more equal opportunity for all.

Coming after years of military coups and rightwing governments that had led to very high levels of inequality, Chavez was welcomed. He introduced publicly funded healthcare and built housing units for the poor. He began demanding a higher share from foreign companies in the extractive industries by raising royalties and increased government controls. And then came a rash of nationalisation of various companies including fertiliser plants, steel mills, and milk bottling companies. Somewhere along the way, he lost focus.

Meanwhile, the productive assets of the country began to deteriorate. Irrational decisions and excessive intervention drove away investment. The focus was on re-distribution of a shrinking pie rather than making the pie grow. Megalomaniacal tendencies appeared in Chavez and he made it his mission to challenge anything the US did, although the US was a large buyer of Venezuelan oil. He admired Cuba’s Fidel Castro, and started funding rebel movements.

Chavez died in 2013 and was succeeded by Nicolas Maduro, a loyalist who also seems to have skipped basic macroeconomics classes when he was in school. The ultimate irony for a socialistic government is when the unions also begin to oppose its policies. And that is what is happening. Workers’ salaries are being eaten up by inflation.

Now, thanks to all the cheap oil it gave its friends, several countries supported it in its desire to win one of the rotating seats on the UN Security Council. Venezuela’s oil will last a long time and we can only hope that sooner rather than later, Venezuelans will benefit.

The author is a professor at Suffolk University, Boston, and Jindal Global Business School, Delhi NCR

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