Edited by Jalil Javed and Henry Kincaid
The crisis in Venezuela has been fueled by high oil dependency, the decline of the manufacturing sector, and ‘The Dutch Disease’.
Is “Socialism” responsible for the Venezuelan crisis, or does the problem have more nuanced causes? According to Free Market Ayn Randists and the like, there is no doubt that this is definitely the fault of Socialist; meanwhile, according to socialists, this is not a case of “real socialism”, repeating the only argument they have when debating the impracticality of Socialism and its ideas.
The problem here is that these ideological fights take our attention away from the real questions, such as what caused the crisis in Venezuela, and if there was a more fiscally conservative regime in charge of the country, could they have avoided this crisis?
The answer is most likely no, and this is because the main problem of Venezuela is the serious lack of economic diversification, as well as a huge decline in the manufacturing sector, caused by Venezuela’s strong dependency on oil and its huge reserves of the substance. In fact, Venezuela is so dependent on this liquid, that 95 percent of its export is oil.
However, it is unlikely that a more classically liberal government could have avoided this crisis because, as economic research shows us, there is a known phenomenon called the ‘Dutch Disease’, sometimes known as ‘Resource Curse’. This phenomenon describes how in times of ‘resource boom’, the economy experiences decline in other sectors of the economy due to the appreciation of the currency. This, in turn, makes exports from the country less attractive, and imports more attractive. This phenomenon was first discovered during the 70’s; while most Western countries experienced the infamous ‘Stagflation Crisis’, oil-rich countries enjoyed the ‘Oil Boom’, bringing in huge amounts of revenue from their monopoly on the substance, however; when the ‘Boom’ ended, those countries realized that other sectors of the economy had declined, leaving those countries in a worse position than before the ‘Boom’ began.
In the case of Venezuela, this ‘Boom and Bust’ resource cycle is a known phenomenon; even under the more relatively conservative government of the 1990’s, when the oil prices dropped, Venezuela experienced a crisis with 120 percent inflation, and 10-15 percent unemployment.
So, what is the solution to the Venezuelan crisis? It is most certainly not the populist Chavista welfare programmes, and it’s not the privatization of natural resources, in fact; it would be in the government encouraging economic diversification, like in Uruguay, and sovereign funds, like in Norway.
Sources http://www.panoramas.pitt.edu/economy-and-technology/venezuelas-case-dutch-disease-cursed-oil http://atlas.media.mit.edu/en/profile/country/ven/ https://www.forbes.com/sites/panosmourdoukoutas/2016/07/18/what-destroyed-venezuelas-economy-big-government-and-anti-americanism/#1d779b0836d4 https://revista.drclas.harvard.edu/book/venezuela-1980s-1990s-and-beyond https://www.forbes.com/sites/ellenrwald/2017/05/16/venezuelas-melt-down-explained-by-the-oil-curse/#7db93ec5282b
Featured Image Credit: Christian Veron/Reuters