Venezuela Crisis

Why Venezuela Crisis? Venezuela is an oil-rich country of South America. For years it has been surviving on oil exploration which is under the state government. But the country has been under economic stress for quite some time now. The reason being international fall in oil prices which subsequently resulted in decrease in revenue. This created a downward spiral for the country because of which the social and welfare schemes took a major hit.

As of today, Venezuela is facing hyperinflation (constant increase in prices of the commodities at a very high rate). There is shortage of food and medicines. They are suffering from severe malnutrition and lack of basic health care facilities. Because of poverty, shortage of basic necessities, hyperinflation and failing public services, people are migrating to other countries.

The opposition is supported by other countries including USA and blames the present government for its situation. There are clashes between opposition supporters and pro-government forces. Leader of opposition Juan Guaidó wants president Nicolás Maduro to cede power and has called for series of strikes. But Maduro is backed by countries like Russia and China along with leaders of Venezuela military and has openly refused to relinquish power. 

What is Dutch disease phenomenon?

Venezuela is suffering from Dutch disease phenomenon. Dutch disease defines a paradox in which economy is booming with increase in revenues due to discovery or development of natural resource but there is a decline in manufacturing etc. There is inflow of foreign currency because of the discovery of oil reserves. This leads to local currency appreciation, making exports of other products costlier. Market become saturated with imported goods.

FAILED PETROSTATE?

Venezuela was the founding father of OPEC (Organisation of the Petroleum Exporting Countries) in 1960. Oil prices fell to as low as $30 per barrel in 2016. Venezuela became a perfect example of failed petrostate. Petrostates can be defined as a state with a weak public sector, state that undermines democracy. Poor governance, lack of economic diversification, no other mechanism of productive investment where government income is totally depended upon export of oil in a resource-rich country. Petrostate is vulnerable to dutch disease because of an unhealthy dependence on the export of oil. As a  result, the economy is too much dependant upon unpredictable global prices. They rely on resource income rather than on taxes.

How to avoid?

To avoid a situation like Venezuela Crisis, a state should have functional political institutions before the discovery of a resource because if a country strikes oil or another resource before it develops state infrastructure, it becomes a curse. Moreover, oil earnings should be used in a responsible way that generates long term growth. Otherwise, the country can slip into poverty as in the case of Venezuela. Since the oil industry is in government control, there can be constant fights who will control the oil revenues, and, cases of rent-seeking and concentration of power can ultimately lead to rampant corruption.  

To put an end to Venezuela crisis and bring the country out of its misery, foreign actors can play a major role. As of now they should not behave like bystanders but should come up with a mechanism to bring back the peace, otherwise, they may face the ripples of its economic crisis.

Venezuela should be a prosperous country. Instead, it is gripped in a deep crisis. It seems the fault squarely lies with its current president and its disastrous economic policies. Hungry Venezuelans even joke about being on “Maduro diet”.