“Venezuela is the archetype of a decaying petrostate.”
The events following the discovery of oil in this country led to the rise and fall of Venezuela.
Venezuela is a country in South America with an estimated population of 28 million. Christopher Coloumbus in 1498 described the country as ‘Heaven on Earth’. The country is rich in natural resources like petroleum, natural gas, iron ore, and gold. It was not a long time ago that Venezuela was one of the fastest-growing economies in Latin America.
The Venezuelan crisis has recently been an imminent topic of discussion when it comes to countries facing extreme economic, political, and social ruin. However, even before it was ever on people’s tongues, the fall of this country had commenced. Ever since oil was discovered in this country in the 1920s, the poor utilization of this highly profitable resource brought the country from riches to rags. A neglectful government drove the country to economic and political ruin.
So, how did it all go downhill?
It started when geologists from Royal Dutch Shell found oil at La Rosa, a field in the Maracaibo basin, at an alarming rate of one hundred thousand barrels per day. Striking this amount of oil drove international oil companies insane, and hundreds of companies started producing oil in Venezuela with full support from dictator General Juan Vincente Gomez (from 1908-1935). At first, the country was doing well and became the second-largest producer of oil by 1929. However, just when the dictator had died in 1935, the Dutch Disease had hit Venezuela, and the poor governance in this state made sure that this disease still prevails today. (Dutch disease- when a resource boom attracts large inflows of forex in an afflicted country, which leads to an appreciation of the local currency, and soon tends to suck capital and labor from other important sectors like agriculture and manufacturing which are more important for future growth and creates an unhealthy dependence on the resource to the point where the whole country’s economy is dependent on said resource and its swings in the international market.)
In 1943, the Hydrocarbons Law was passed which required foreign companies (Royal Dutch Shell, Gulf, and Standard Oil) to give half their profits to the state. The first stable democratic government was established in 1958 and Venezuela’s three major political parties signed the Punto Fijo pact which promised state jobs and oil rents to the three parties, and also made sure that oil profits would only be concentrated in the state. Venezuela became a part of the Organization of Petroleum Exporting Countries (OPEC) in 1960 as a founding member, established its first state oil company, and increased the income tax of oil countries to 65% of profits. The country’s economy boomed in the 70s when oil prices quadrupled due to disturbances in other oil-producing companies and made Venezuela the country with the highest per capita income in Latin America. President Perez allowed state-owned Petroleos de Venezuela S.A. (PDVSA) to pretty much run with minimal government intervention.
The 1980s is when the country started to hit rock bottom. As international oil prices plummeted, so did Venezuela’s income. There was major inflation and massive debt. Perez launched a fiscal austerity package by the IMF which caused riots. Chavez, a military officer, launched a coup in 1992 which failed but led to his fame.
Venezuela has been a Federal Presidential Republic throughout. The country has witnessed socialism under the regime of its two dictators. Hugo Chavez, a legendary figure in Venezuela, served as President from 1999 until his death in 2013. Coming from a poor background, Chavez championed the cause for the poor through his social programs. The country blossomed economically during his regime due to the unprecedented oil boom. However, Chavez played little to no role at all in improving other sectors of the economy. The economy wasn’t diversified, the country depended on imports for basic amenities like food and medicines.
After the demise of Hugo Chavez, his chosen successor Nicolas Maduro inherited a troublesome economy. Maduro gained power due to economic unrest and free fall in 2014. Through repression, censorship, and manipulation, he unfairly won elections in 2018. Even though he won, Juan Guaidó, the head of the National Assembly, was recognized internationally.
Today, measures have been taken to curtail Maduro’s income, even though support from oil trading partners has kept his regime alive. Maduro is gaining support and has now assumed leadership of the remaining chaos, even though the opposition has boycotted his vote. It’s presumed that he will now step up his repressive measures.
Due to the ignorance of the political leaders of this nation, the people have suffered massively. Around 5.4 million refugees, asylum seekers, and migrants have left the country seeking better opportunities. Around 1.7 million refugees have taken refuge in Colombia. This is the largest migration in Latin America. People are forced to leave their homes in search of food, shelter, and a better future.
Hyperinflation, violence, food, and healthcare shortages have left citizens awry. COVID 19 has further worsened the situation as many migrants have returned due to a lack of employment. Shortages of basic resources are causing riots. The rich are affluent and the poor have hit rock bottom. Inflation and devastatingly low oil prices have caused this extreme poverty. Decades of poor governance and the ever-lasting oil crises have left this country crying for help.
The current annual inflation rate in Venezuela is 2,719%. This number is pretty hard to believe but displays the apt image of the crisis. As the oil prices continued to grow in 2013, the value of the Bolivar, the currency of Venezuela, kept falling, and so did the price of imported goods. The immediate solution was to print more money, but as the oil prices kept falling and so did the factors that reduced the oil-producing capacity of the country, the crisis got worse. To further aggravate the situation, International investors and importers turned to other countries, therefore affecting the sole source of revenue for the nation. In this scenario, printing more money proved to be disastrous as it pushed the value of the currency further down.
The Venezuelan crisis serves as a lesson for economies around the world. It clearly indicates the impact resource wealth can have on developing countries and how an unhealthy dependence on a resource can dismantle a flourishing economy. We saw how authoritarianism, poor governance, and corruption plundered the nation and forced its people to leave their land in search of basic amenities like food. Economic diversification, better use of resources, responsible measures, and a qualified government can save the country, however, that is difficult in the current scenario. Economists, Policymakers, and Politicians are equally to learn from this avoidable crisis.
By:- Swasti Srivastava
Vaibhavi Bhardwaj
(2nd Year)
REFERENCES
https://www.worldvision.org/disaster-relief-news-stories/venezuela-crisis-facts#facts
Cheatham Amelia and Labrador Rocio Cara, January 22, 2021. https://www.resourcegovernance.org/sites/default/files/Venezuela_Final.pdf
"Venezuela: The Rise and Fall of a Petrostate” https://www.cfr.org/backgrounder/venezuela-crisis
Aleem Zeeshan, September 19, 2017 “How Venezuela went from a rich democracy to a dictatorship on the brink of collapse” https://www.vox.com/world/2017/9/19/16189742/venezuela-maduro-dictator-chavez-collapse
Kiger Patrick, May 9, 2019.“How Venezuela Fell From the Richest Country in South America into Crisis” https://www.history.com/news/venezuela-chavez-maduro-crisis
“Venezuelan Migration: the 4500 km Gap between Desperation and Opportunity”. worldbank.org
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