The Resource Curse: Venezuela, Oil and Poverty

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CARACAS, Venezuela — As Venezuelan President Maduro traveled through China, Russia, Algeria, Qatar, Iran and Saudi Arabia in January, he declared to all that “God will provide.” He was trying to ease the fears of his own country, as well as those around the world, that the petrostate’s economy would not collapse in on itself as oil prices and global development remain low.

How is that a country with the world’s largest estimated petroleum reserves could be so close to the brink? In 1993, a British economist named Richard Auty wrote a book in which he laid out the premise of what he coined the “resource curse.” He claimed that the resource curse occurs when a country—usually developing—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.

Venezuela’s economy is almost entirely dependent on oil exports. It accounts for 96 percent of export earnings, 45 percent of budget revenues and 12 percent of GDP. The high dependence focuses resources on the oil industry. The government owns most oil infrastructure, meaning much of the revenue from exports is funneled back into the industry instead of going toward other government expenditures.

Instead of investing in manufacturing and other industry to diversify the economy and mitigate the risks that come with the volatile commodity market, the Venezuelan government has decided that oil revenues are good enough. This decision means that Venezuelans hoping to move up in the government or make a lot of money have to curry favor with or bribe elected officials who control oil money.

Concentration of an economy on a particular export increases the chance of violence in the country. Studies done by Paul Collier and Anke Hoeffler show that “if a third or more of a country’s G.D.P. came from the export of primary commodities, the likelihood of conflict was 22 percent,” compared to a one percent chance for similar countries without the high proportion of exports from one commodity. Venezuela is one of the most violent countries in the world, with an estimated 82 homicides per 100,000 people.

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

Venezuela has to import over 70 percent of its consumer goods, including food. Supermarket lines are blocks long, even as shelves lie bare. Basic necessities, subsidized by the federal government, are closely monitored by regulators to ensure people are only getting the goods allotted to them. The middle class, who has generally been buffered from the poverty, violence and shortages of Venezuela, has had to come face-to-face with the realities of the country’s economy.

President Maduro, successor to the popular former-President Chavez, has ratings below 20 percent. Maduro won a highly contested election in 2013 after the death of Chavez, who was in power for 14 years. The opposition, which has traditionally been extremely weak in Venezuela, lost by only a slim margin. There was civil unrest and violence during and following the election. Widespread crackdowns on the opposition spread fear. Growing unease with the government is still just whispers because of the fear of retribution for speaking out against Maduro or his administration.

Venezuela now has two options: either take a bailout offered by the IMF or default on its international debt obligations. Both options will hurt Venezuelans in the short-term. The current government has no interest in taking a bailout from the IMF, which would most certainly come with unpleasant strings attached. But defaulting on international debt obligations would be equally as hard on the people of Venezuela, even if less of a public relations problem for the government, which has renounced the IMF and its stipulations for assistance.

Caitlin Huber

Sources: Bloomberg, CIA World Factbook 1, CIA World Factbook 2, The Brookings Institution, The Huffington Post, The New York Times 1, The New York Times 2, TIME
Photo: Flickr

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