Recent political events in Venezuela might seem to resemble the script of the film comedy “Moon over Parador,” but the reality is tragic.
Behind the 50 or more lives lost in recent civic violence looms a larger tragedy of millions of people who are far poorer than they need be. Like Argentina, at the other end of this huge continent, the tragedy of Venezuela is a tale of missed opportunities. In a land endowed with such rich natural resources, why are so many people poor?
Poverty in nations without natural resources, such as Bangladesh, Mali, Chad, Afghanistan or even Bolivia, makes sense to the lay observer. Venezuela, however, has ample mineral and agricultural resources compared to its population. Moreover, it’s without the divisions between indigenous and European-origin groups, which is common in the five Andean nations to its west and south. Nor is there the racial divide between Euro- and African-Americans that plagues the United States and Brazil.
Most visibly, with all of its oil wealth — wealth that has been exploited for more than six decades — why is Venezuela still poor?
If you look beyond Venezuela to other oil-rich developing nations — Mexico, Nigeria, Angola, Ecuador and Indonesia — you may reach two conclusions. A general lesson is that natural resource wealth and high standards of living are only tenuously related. A specific one is that oil can be a curse rather than a blessing to developing nations.
I’m not sure who coined the phrase “the curse of oil,” but its use has become commonplace. And the fact that this curse has even touched the Netherlands, my grandparents’ birth land, demonstrates that at least one aspect of the phenomenon is not specific to the tropics or to former colonies.
The clearest economic component of the “curse of oil” has its own name: the “Dutch disease,” although it has affected Norway as well. As these countries developed oil and natural gas in the North Sea over the past four decades, the quantity of available energy was greater than their limited populations could use. Thus, most was exported.
Exports earnings from oil and gas grew from near nothing to large fractions of Dutch and Norwegian gross domestic product. Large export sales mean large influxes of foreign exchange. As money poured into the Netherlands and Norway in payment for oil, their currencies naturally became stronger — much stronger — than they would have been otherwise.
As U.S. farmers know, but presidents Reagan and Bush can’t grasp, a strong currency punishes any producer who needs to export or who competes with imports. It is hard to sell anything abroad even if technical efficiency in production is world class. And all sorts of imports become cheap.
The “riches” of North Sea oil and gas made existing Dutch and Norwegian businesses less competitive and less profitable than they otherwise would have been.
The Netherlands suffered relatively more, since industry made up a larger portion of its GDP than in Norway. Energy sales also put upward pressure on the British pound, but were smaller in proportion to the total UK economy than for its smaller neighbors across the water.
At the same time, spending on oil rigs and in the oil service businesses pushed up wages in coastal cities. Existing employers had to pay more to keep workers, and the central banks had to maintain tighter money than otherwise to avoid inflation.
These nation’s economies grew, but the sharp growth in energy was partially offset by contraction in non-energy productive sectors.
The same has been true for Venezuela and Nigeria for decades and Mexico since the mid-1970s. Oil exports bring in foreign exchange that strengthens the currency above what it would otherwise be and discourages local industry. When a country is awash in oil-earned dollars, importing capital and consumer goods is an easier alternative than producing them locally. Diversification of the nation’s economic base is less than it might be if oil were less plentiful.
But while the “Dutch disease” phenomenon explains some of the difficulty faced by Venezuela and Nigeria, it doesn’t explain all of it. At this point, “curse of oil” explanations become more speculative and less grounded in solid economic theory. But they still convince many people.
Poor countries with petroleum resources frequently face inflows of money that their governments are institutionally unprepared to handle. Many have state-owned oil companies, such as Venezuela’s PdVSA. In others, a national ministry negotiates contracts with private oil firms.
Both situations are rife with possibilities for corruption and waste.
In Indonesia and Nigeria, government leaders clearly skimmed off billions for their personal use over decades. In Venezuela, Mexico and Ecuador, outright theft has been less egregious, but state oil companies long have been used as tools of political patronage.
Moreover, the fact that most oil earnings in developing countries flow directly to or through government coffers means that political criteria govern their spending.
Government oil revenues may go to build bloated militaries, needless government buildings, or splendid highways to home villages of political powerbrokers.
Democratic institutions emerged in the Netherlands some 500 years ago, and there was a large sophisticated private business sector by 1600. While oil wealth put some strains on the Dutch economy in the 1970s and 1980, these established institutions prevented the problems experienced in poorer countries with newfound oil reserves.
Indonesia and Nigeria, in contrast, were under colonial rule until the mid-20th century. Venezuela, Ecuador and Mexico have been independent for nearly two centuries, but struggle under a political culture that never experienced the Reformation and Enlightenment that fostered institutions of democratic capitalism in northwestern Europe.
Oil can bring wealth to a country, but only if that country has the institutions and political and economic culture to manage it. The question of whether it is on balance a blessing or curse will remain unanswered for decades.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.