SHOCKING STORY OF VENEZUELA: RICH IN OIL BUT POOR

 

 

SUMMARY OF THE ARTICLE

• In the 1950s, Venezuela was a prosperous country with a strong economy, ranked fourth globally in terms of wealth.
• The discovery of oil further enriched Venezuela, attracting immigrants and boosting the economy.
• However, mismanagement by the government and external factors like the 1970s oil crisis led to economic troubles.
• By 2013, Venezuela was drowning in debt, with rampant inflation and widespread poverty.
• The government's reliance on oil revenue and neglect of other industries exacerbated the situation.
• President Hugo Chávez's social welfare programs, funded by oil revenue, proved unsustainable.
• After Chávez's death, falling oil prices in 2014 exposed Venezuela's over-reliance on oil.
• Under Nicolás Maduro's administration, economic and political crises worsened, with human rights violations and international sanctions.
• Mismanagement and corruption led to a decline in oil production, further worsening the economic situation.
• Venezuela's story underscores the importance of effective governance and diversification of the economy beyond natural resources.

 VENZEULA FROM PROSPERITY TO CRISIS: TALE OF A ONCE WEALTHY NATION

The country of Venezuela in South America was flourishing in the 1950s. There was progress everywhere, and people were happy with plenty of money. The city dwellers had so much wealth that their annual income not only ranked first in South America but also made Venezuela the fourth richest country globally. People had cars, big houses, and with inflation under control, buying necessities was easy.

New buildings, roads, and bridges were being constructed, hospitals and educational institutions were being established. The government provided affordable housing to millions of people. Venezuela was so prosperous that not only neighboring countries but also developed nations like Spain, Italy, Portugal, and Germany saw it as an attractive place to live.

In 1960, Venezuela, along with Saudi Arabia, Iran, Iraq, and Kuwait, formed OPEC to control oil prices. This further enriched Venezuela, as oil wealth poured in like rain. Many people came here for employment from Argentina, Peru, and Chile. The local currency, the Bolívar, was strong, and Venezuelans were jet-setting to expensive cities in America and shopping for various goods at lower prices.

However, in 1973, due to the Arab-Israeli conflict, Venezuela's prosperity suffered a blow. The Arab countries, as part of an oil embargo, stopped supplying oil to nations that supported Israel. This led to a four-fold increase in oil prices. Despite the windfall, mismanagement by the government and exploitation by American investors caused economic troubles.

TODAY’S VENEZUELA:

The 1960s and 1970s saw visible progress in Venezuela, but beneath the surface, there was growing corruption and inefficiency. The country, once the wealthiest in terms of oil reserves, was now struggling. By 2013, oil production had plummeted, and Venezuela was drowning in debt, surpassing even Pakistan. The debt-to-GDP ratio reached alarming levels, indicating severe danger for the country.

Venezuela's currency, the Bolívar, which was once stronger than the dollar, had lost its value entirely. Shopping malls were empty, hospitals were in disarray, and food scarcity had become widespread. According to the National Immigration Form, over the past decade, around 7 million Venezuelans had left their country, with the majority seeking refuge in Colombia. Many who left were so destitute that they couldn't afford transportation, resorting to walking.

The situation was dire, with even basic necessities like food and medicine becoming scarce. Women had to sell their hair to feed their families, and some resorted to selling their bodies just to survive. In 2018, the Bolívar's inflation was so severe that people started making decorations out of currency notes because they were practically worthless. The government couldn't even pay its employees, and inflation soared to 130,000 percent.

In short, Venezuela went from being one of the wealthiest countries in the world to a nation in crisis, with its people suffering immensely.

DOWNFALL OF VENEZUELA:

From the 1970s oil crisis, initiated by the Yom Kippur War and exacerbated by support from Arab countries to Israel, oil prices began to rise. Due to this, Venezuela started to focus on oil purchases. With rising oil prices, the country experienced an influx of petrodollars, boosting its economy. Venezuela's currency also strengthened, and people started prioritizing imported goods, especially those related to oil.

While this seemed beneficial, the Dutch Disease phenomenon was also taking hold. This occurs when rapid growth in one sector, such as the petroleum industry, leads to a strengthening of the national currency, causing other sectors to suffer. During this period, as Venezuela prospered from oil revenues, its currency became strong, but other industries suffered neglect, causing them losses.

However, amid the prosperity from oil revenues, Venezuela's President Carlos Andrés Pérez decided in 1975 to nationalize oil companies, establishing a new state oil company, PDVSA. The government faced two options: either subsidize oil revenue or invest it in other industrial sectors for diversification and sustainable growth. They chose to subsidize imports and implement tariffs to promote local industries. While this policy seemed good, it favored only those with government connections, excluding ordinary individuals from business opportunities.

Most of the oil revenue was used for subsidies, further exacerbating the situation. In the 1980s, when oil prices temporarily decreased, Venezuela's poor policies began to show their effects. The country's currency value rapidly declined against the dollar. Instead of addressing this, the government continued subsidies and introduced import substitution policies to promote local industries. However, only those connected to the government benefitted, while ordinary citizens faced economic challenges.

By the late 1980s, Venezuela was heavily indebted, and the government had to take heavy loans. Social welfare programs were cut, and unrest ensued. In 1999, under Hugo Chávez, Venezuela further nationalized various sectors, including oil and gas, exacerbating tensions with multinational companies. During Chávez's rule, as oil prices rose and oil accounted for over 90% of Venezuela's exports, the influx of petrodollars continued.

Chávez initiated social welfare programs using oil revenues, neglecting the development of local industries. While beneficial in the short term, this approach was unsustainable. Chávez also failed to focus on new industries, posing a risk when oil prices eventually decreased. After his death, oil prices indeed fell in 2014, revealing the vulnerability of Venezuela's over-reliance on oil and its failure to diversify its economy.

When the prices of oil dropped in the international market, it became impossible for the administration of Nicolás Maduro to continue these programs, and the country fell into a state of chaos. In 2017, when the value of the Venezuelan currency, the bolivar, plummeted rapidly against the dollar, the government fixed the official rate at 10 bolivars per dollar, while the black market rate was much higher, at around 13,000 bolivars per dollar. This official rate was mainly beneficial for government officials and military generals, who had access to dollars at a much lower rate than the general public, who had to buy dollars from the black market at exorbitant prices.

Because food and other essentials were controlled by the military, they profited heavily from importing goods at the official exchange rate and selling them at inflated prices on the black market. Apart from these economic issues, Venezuela also faced a political crisis under Maduro's administration. Opposition leaders were suppressed, and there were violations of human rights. International sanctions worsened Venezuela's economic situation, leading to a collapse in living conditions.

While Venezuela had abundant oil reserves, mismanagement and corruption led to a decline in oil production. Skilled workers left the country due to the deteriorating economic conditions, further exacerbating the situation. Additionally, extracting heavy crude oil, which Venezuela primarily had, requires more advanced technology compared to light crude oil. However, Venezuela lacked the necessary investment to upgrade its technology and infrastructure, hindering its ability to export oil efficiently.

Due to import restrictions imposed by the United States and other factors, Venezuela, once one of the wealthiest oil-producing countries, saw a drastic decline in oil production compared to 2013. At one point, Venezuela had to import light crude oil to extract heavy crude oil. While there have been some softening of import restrictions by the US recently, the hope is that the country's situation might improve somewhat.

Natural resources alone cannot make a country rich; it requires effective governance and sound economic policies. Venezuela's fascinating yet tragic story of rich natural resources and poor governance highlights this reality.

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