​THE VENEZUELAN CRISIS AND THE DUTCH DISEASE

​THE VENEZUELAN CRISIS AND THE DUTCH DISEASE

By Ruben Tavenier

As of 2011, Venezuela is the country with the world’s highest proven oil reserves. It has surpassed countries such as Saudi Arabia and Iran, making them very dependent on the oil price, which has proven to be volatile[1]. The Venezuelan oil and gas industry accounts for 95% of their export earnings, and about a quarter of their GDP[2]. One would expect Venezuela, a country with an abundance of oil, to be relatively prosperous, or at least economically healthy, but for Venezuela, the exact opposite is the case. A socio-economic crisis broke out, inflation is up to 800%, food and medicine is hard to get a hold of and several protests have taken place[3]. This phenomenon, where a country with a vast amount of a valuable resource such as oil is economically unhealthy is called the resource curse. This curse has been present throughout modern Venezuelan history[4]. The way this curse has become apparent is called the Dutch Disease, named after the consequences of the economic policies that the Dutch government implemented after the discovery of the gas field in Groningen[5].

The Dutch Disease, much like the Resource Curse, describes the negative effects of the abundance of a certain resource. Firstly, a ‘resource boom’ has to take place, where either a large amount of a resource is discovered, or the demand of an already discovered resource has increased significantly. After this boom, two effects take place: demand for this resource will increase, which in turn causes a greater inflow of foreign currency into the country. This will result in an appreciation of the country’s currency, making export products more expensive, and weakening the competitive position of goods in the non-booming sector. The second effect is that the government will place more emphasis on the resource sector, further neglecting the non-booming sector[6]. The Dutch Disease describes a paradoxical effect where the initial increase in wealth due to a boom will lead to a deterioration of the economical situation.

In 2000, due to the emergence of the BRIC countries, an oil boom took place. This has significantly increased the demand for oil, and consequently, increasing the income of Venezuela[7]. The Venezuelan government focused primarily on the booming oil sector, whilst other sectors became more and more neglected. The petrodollars the Venezuelan government now had at their disposal were mostly spent on implementing socio-economic policies which all in their own way have contributed to the crisis Venezuela experiences today.

Firstly, the petrodollars were used to pay for imported goods, and Venezuela quickly became dependent on imports[8]. Importing goods to the extent that Venezuela did, instead of stimulating domestic production, will in the long run do great harm to the domestic production and the country’s economy. Secondly, President Chavez kept the exchange rate of the Bolivar, the Venezuelan currency, artificially high, which was all paid for with the petrodollars[9]. Maintaining an artificially high exchange rate on the one hand contributed to the dependence on imported goods, and on the other hand damaged the exports of non-booming sectors. Products produced in the non-booming sector now became more expensive to other countries, which resulted in deterioration of Venezuela’s trading sector. Exports in oil skyrocketed because of the oil boom, but exports in anything else diminished which harmed the Venezuelan economy even more[4].

In addition, President Chavez spent a significant amount of the petrodollars on social programs aimed at providing services to the poorer segment of the Venezuelan society[10]. What followed was massive overspending because of the expensive social programs. Instead of creating a fund with the petrodollars, President Chavez chose to spend it on the social programs which provided him with the electoral support of the Venezuelan people. Yet these measures proved to be too expensive, and Venezuelan debt levels rose quickly[8].

The oil boom which initially brought more wealth to the country, eventually led to increased debt levels, a neglect of domestic production and a reliance on imported goods. These policies of overspending and import could only be maintained as long as Venezuela would continue to receive revenues from the oil industry; once the money stopped flowing in, crisis was just around the corner. Oil prices dropped and dollars were hard to obtain due to the currency control. Seeing as how imports are paid for with dollars, Venezuela was reliant on imports, and dollars were scarce for the Venezuelan people, shortages of basic requirements such as food and medicine were inevitable. After President Chavez passed away and President Maduro took office in 2013, much of the problems that were created under the Chavez administration persisted, whilst declining oil prices have only further deteriorated the socio-economic situation under President Maduro’s term[4].

The oil boom initially led to more wealth for Venezuela, but because President Chavez failed to use this money to diversify the economy and instead spent it all on imports and expensive social programs, the economic situation quickly deteriorated. The Dutch disease which followed the oil boom was not the sole cause to the civil unrest that can be seen today, but it provided a fertile ground for certain economic policies to be implemented which have contributed to the onset of the protests.

Sources

1. Venezuela facts and figures, 2017, Retrieved September 5, 2017 from http://www.opec.org/opec_web/en/data_graphs/330.ht…

2. Share of crude oil reserves, 2016, Retrieved September 5, 2017 from http://www.opec.org/opec_web/en/about_us/171.htm

3. Holodny, E. (2017, April 21). Venezuela hyperinflation. Retrieved September 5, 2017 from http://www.businessinsider.com/venezuela-hyperinfl…

4. Corrales, J. (2013, March 7). The house that Chavez built. Retrieved September 5, 2017 from https://foreignpolicy.com/2013/03/07/the-house-tha…

5. Heath, H. (2016, May 19).Venezuela’s case of Dutch Disease. Retrieved September 5, 2017 from http://www.panoramas.pitt.edu/economy-and-technolo…

6. Ebrahimzadeh, C. (2017, July 29). Dutch Disease. Retrieved September 5, 2017 from http://www.imf.org/external/pubs/ft/fandd/basics/d…

7. Oil and Trouble. (2014, October 4). Retrieved September 5, 2017 from https://www.economist.com/news/finance-and-economi…

8. Velasco, A. (2016, October 25). Explaining the Venezuelan Crisis. Retrieved September 5, 2017 from http://nacla.org/news/2017/04/28/explaining-venezu…

9. Mallett-Outtrit, R. (2014, January 31). The pros and cons of Venezuelan currency control. Retrieved September 5, 2017 from https://venezuelanalysis.com/analysis/10317

10. Nagel, J.C. (2013, January 5). Maduro vs the economy. Retrieved September 5, 2017 from http://foreignpolicy.com/2013/01/15/maduro-vs-the-…