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VENEZUELA - The Oil Curse.

The Dutch Disease, or what APS Energy Group President Pierre Shammas called "The Oil Curse" when Saddam Hussein's Iraq invaded Iran in 1980, is caught whenever a commodity brings a sudden rise in income in one sector of the economy which is not matched by increased income in the other sectors. The sudden sectoral surge causes severe problems in the other sectors, distorting growth in services and other non-tradables which cannot be imported, while discouraging production of tradables that are imported. The reason for this disparity is that the greater income rapidly raises the demand for imports, since domestic production cannot meet demand quickly enough, and raises the demand for services which the local market has to supply because services cannot be imported as easily as tradables can. Higher demand for imported goods and local services, in turn, causes a rise in prices - which ought to cause domestic output to rise but does not as the flow of foreign exchange into the economy has caused an inflation of wages and prices.

One can clearly observe the oil curse in the Venezuelan economy - even now that high oil prices have pushed its GDP up - or in the economy of Algeria, once a breadbasket for the French empire. It is seen when one looks at the extent to which the rise in oil income was followed by a corresponding fall in agricultural output delaying industrialisation. While agricultural output made up about one third of Venezuelas GDP in the 1920s, it shrank to less than one tenth by the 1950s and to less than 6% now. Industrial output declined from 1990 to 1999 from 50% of GDP to 24% in 2003 (compared to the whole of Latin America, which declined from 36% to 29% in the same period). Constant devaluations of the national currency, the bolivar, and subsequent rises in inflation have hit Venezuela's economy since the oil boom of 1979-81.

The sudden rise of oil income caused a serious problem in the government's fiscal policies. New revenues caused the illusion that the oil income could be used to industrialise the country through massive infrastructural projects, to "sow the oil", as President Perez used to say. The quadrupled income caused government spending to even surpass the newfound revenues. When the oil income began to decline again, it was not as easy to reduce state spending. As a result, the state went deeper and deeper into debt. Between 1970-94, foreign debt rose from 9% to 53% of GNP. While oil prices and revenues declined, so did per capita income and the Venezuelan economy as a whole, and poverty increased. In 1996 Venezuela was one of the very few countries in the world where per capita income was lower than it was in 1960.

Reliance on oil has fostered a rentier and clientelistic mentality among Venezuelans. The idea was that one could do well in Venezuela as long as one had access to its oil wealth. So rather than engaging in creative entrepreneurial activity, Venezuelans were encouraged to ally themselves with the state, seeking either employment or contracts, with the government (PDVSA) being a monopoly on Venezuela's oil income.

Political analyst Terry Lynn Karl describes the consequences of oil as follows: "In the manner of a petro-state, rent seeking had become the central organizing principle of the [country's - such as Venezuela's] political and economic life, and the ossified political institutions in existence operated primarily to perpetuate an entrenched spoils system. Both state agencies and political parties had given up their programmatic roles to become machines for extracting rents from the public arena".

Venezuela's oil wealth has caused the state to appear to have magical powers, to be able to accomplish just about any feat at no cost to the population. Thus transformed into a petro-state, the Venezuelan state came to hold the monopoly not only of violence, but of the nation's natural wealth. By manufacturing dazzling development projects that engender collective fantasies of progress, it casts its spell over audiences and performers alike. The government seizes its subjects by inducing a condition of being receptive to its illusions.

The result of the clientelistic and magical nature of the state was that the government would become very bureaucratic. Of the people employed in the public sector (about 50% of the total working population), about 45% are employed through the government.
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Publication:APS Review Downstream Trends
Date:Oct 31, 2005
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