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I know it's been some days since I published the first part of Venezuela's economic decline, but today I come back with the final part of the story. I hope you enjoyed reading the first one and for those that haven't been able to read it already, just take a look on How and why Venezuela economically declined? - Part 1.
To sum up the first part, when Hugo Chavez came to power he decided to end corruption of the previous regime and did all he could best in order for the Venezuelan economy to thrive, mainly based on oil extraction and export. He did well as long as he did, but things worsened and a fully oriented budget policy just on oil was a catastrophic decision for the country's economy.
So, local economies started to suffer and this really hurts local industries that have to compete with cheaper foreign competitors. It gets even wore though, because, suddenly, Venezuela cannot export anything either. Because their currency has increase in value, suddenly their good are artificially more expensive and less competitive on a global market. On top of this, local industries are starved of workers and investments, as labor and capital is redirected towards the far more profitable oil industry.
A successful natural resource boom can effectively smother all other industries to death with its own success and this trap is so common that has its own name. Dutch disease was particularly bad in Venezuela, because the government did not really do anything to diversify the economy. A lot of oil-rich countries try to reinvent themselves. The United Arab Emirates wants to turn itself into a center for business and tourism. Norway wants to turn itself into the world's largest hedge fund and even countries like Iran make sure that they support local industries.
Venezuela basically said "yes, sustainable industry is great, but who cares, we are rich. Let's make it rain like there is no tomorrow.". By 2008, all export industries, apart from oil, had collapsed. There would have been massive unemployment issues, but the government just threw cash at people to make the issues go away. Dutch disease and reckless government spending, also caused other major issues in the economy.
Crowding out is another major issue that can be caused by an overzealous government spending. In this case, the government of Venezuela was throwing money around the economy pretty aimlessly. This, of course, made them wildly popular amongst their citizens, but it also caused systematic issues in the nation itself. When government-run enterprises and workers get all the money that they ever need it makes it incredibly hard for private enterprises to compete. Likewise, the insane amount of borrowing that Venezuelan government was doing at the time, made it very hard for local businesses and individuals to get access to credit, because the government was kind of just swallowing up all of the money that was available there.
This, also stifled a lot of free enterprise in Venezuela. Why would I start a business if the government will just open a competing business, run it at a loss and drive me out of work?! This happened a lot as the government went crazy with its government owned enterprises moving into utilities, roadways, health, Internet and telecommunications, but also more obscure industries like tourism and finance, buying up private banks and making them state-run, which was financially crippling the purchase and then so poorly run that none of these businesses ever made a profit.
By this time, they even started going into debt. Yes, debt, to fund their excessive government spending. At this point, the country was literally a lottery winner who quit their job, spent all of the money and then remortgaged the home they bought with their winning in order to buy more lottery tickets. "But it was fine, of course. This doesn't matter, we always have more oil and oil is a limited resource. Its price will go up forever.". IT DID NOT!!
The declining oil price then brought the whole house of cards crashing down. By this point, the country was so heavily leveraged that any impact on their oil revenues would case serious financial hardship on the state. When this became a reality, the poorly managed government bureaucracy did what a poorly run government bureaucracy does and tried to print its way out of trouble, causing massive inflation on the currency, which, in small doses might have actually been fine, that this very quickly turned from quantitative easing into straight-up hyperinflation. The rest, as they say, is history!
Venezuela's story is of course very upsetting, giving the level of human misery it caused in the turmoil of the nation. The ongoing protests, government crackdowns and questionable elections have caused political condemnation on the global stage. This led to trade sanctions being placed on the nation with major trading partners like the United States, which is the last thing a crippled country needs and it is further suffocating an already struggling economy.
It is a good case study though when it is compared to other nations or plans that have followed similar paths.
The whole story of Venezuela does not sound too dissimilar from the story of Norway's oil boom. How did one country end up as a poster child for economic responsibility and the other end up as a failed state? Well, in my opinion, the key, as always, is in the details. Norway used its oil wealth for social welfare. The same Venezuela. It wanted to make sure that citizens of the nation benefited from the wealth of the nation. That Norway did it no far smarter way, investing the money into a fund that will continue to generate revenue for the nation, long after the oil is gone. Venezuela just pumped oil out of the ground and kept the party going, living paycheck to paycheck and going into debt to boost its living standards, right here, right now, with very little though for what would happen in the future when the oil runs out or its value declines.
The revenue is not coming from a Golden Goose. It is coming from the inherent ability of the nation to generate wealth, not just pump it out of the ground. Any economic entity that finds itself relying on a single source of income is in a potentially precarious situation. It gets worse the bigger you get as well.
For an individual, relying on just a day job, is probably fine.
For a household relying on a single income is not great, but it works in many instances.
For a company, only having one source of revenue, is very reckless and for a nation, blind purely on one for if income and doing very little to create wealth, otherwise is just a recipe for disaster, like we have seen in Venezuela.
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