Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

Dutch Disease: Economic Disaster in Venezuela

by Jim Hurson

 

Market volatility in the price of crude oil has persisted since the crude price bottomed out at around $28 per barrel earlier this year. Oil has made a substantial comeback in the months since January, but for economies that have relied on oil as a chief export, cash flows have been unstable, and volatility has been a constant source of concern. No country has felt the impact of the fluctuations in crude prices more than Venezuela, the holder of the world’s largest oil reserves. What makes Venezuela different from other major oil exporters—think countries in OPEC—is the myopic focus on oil production across Venezuela’s state-dominated economy. Oil is the lifeblood of Venezuela, its only major export, the source of half its national income. So, when oil prices fell in January, Venezuela took a huge hit. This is not to say that Venezuela’s economy has enjoyed stability in the past. But as the world price for oil has fallen, Venezuela has experienced severe hyperinflation, the worst felt by any Latin American economy in decades.

Venezuela’s is a classic case of Dutch disease. With all of Venezuelan (state-backed) industry dominated by oil production—and with no other developed industries outside of oil extraction or refinement—a decline in the price of oil has left the country’s only operable industry in shambles. Call it putting all your eggs in one basket, only to have all the eggs break when the basket sways. OPEC countries—Saudi Arabia, for example—maintain monopoly pricing over the production of oil in the Mid-East, but their economies, compared to Venezuela’s, are more diverse, less state-involved, and managed by leaders more competent than President Maduro. Only a part of Venezuela’s economic crisis can be explained by the nearly 20-month-long fiasco of crude prices. Although revenue from Petróleos de Venezuela (PDVSA), the country’s nationalized oil monopolist, fell by more than 40 percent in 2015, strategies imposed by the Maduro administration have left the country’s coffers bereft of cash.

Meanwhile, prices across the country soar as imports become more and more costly. The aforementioned hyperinflation, according to some analysts’ estimates, has averaged a 70% annual change in consumer prices, with projected inflation to reach unprecedented levels if Maduro’s government doesn’t implement some new strategy. As the government fails to alleviate the effects of prices, Venezuelans, largely destitute by world standards, face shortages of food, personal hygiene products, and other essentials. A black market, made up of smugglers from neighboring Colombia, funnels goods such as paper towels or diapers into the Venezuelan market to meet the growing demand. Refugees, too, looking to escape the miserable conditions in their native country, migrate to Colombia, and even more northward, to Panama and Mexico. Popular support for Maduro, for his inept handling of a crisis that traces its roots back to socialist dictator and former president of Venezuela, Hugo Chávez, has fallen precipitously. Nearly 2 million signees, no doubt Venezuelans impacted by high inflation, have advocated for his recall in a national referendum.

With so much economic turmoil, no sign of relief is on the horizon for Venezuela. In a speech given in May, President Maduro announced that he had elected not to default on foreign debt, which comes mostly from China, and instead shelled out $36 billion in repayments over a span of 20 months. Default would be the most logical strategy in order to avoid further unrest at home, but the current administration fears that such a strategy would undermine the country’s ability to extract and produce oil. With bad credit, the PDVSA could not attain necessary loans to survive; but as the humanitarian crisis worsens in Venezuela—and as the international market for crude remains volatile—one must wonder how effective this strategy will be in continuum. For Venezuela, revolutionary political leadership and the expansion or diversification of industry are the only factors that could stand to salvage the dilapidated economy. 

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