Venezuela: The petro-state threatens to put paid to the Socialist dream

The shine of the black gold aggravates the failures of an oil-dependent economy

For Hugo Chavez, the U.S. “empire” and the “consumerist values” are the two greatest enemies of his attempt to guide masses to the paradise of the 21st century Socialism. But the Venezuelan petro-state, fueled by record oil prices, has become the big threat.

Works by Terry Lynn Karl (The Paradox of Plenty), Michael Ross (Does oil hinder democracy?), Asdrubal Baptista (El capitalismo rentistico), Jeffrey Sachs, and Andrew Warner (National resource abundance and economic growth) provide an insight of the impoverishing cycle where oil-producing countries use to get bogged down; and Venezuela is no exception.

When oil prices skyrocket, a huge amount of foreign exchange flows into oil-exporting countries; as a result, the currency value increases, imports become cheaper, and agriculture and manufacture lose competitiveness.

The result is an import boom and a loss of industrialization, thereby making it more difficult to achieve the goal of diversifying the economy and decreasing dependence on oil.

Between 2004-2007, Venezuelan imports increased by 188%, whereas industry and agriculture have grown much less than the other sectors.

Another constant is that the stream of petro-dollars makes state goals and size swell, resulting in higher public spending and triggering a number of different effects: the economy grows rapidly due to higher consumption, but the failure of production to keep pace with demand makes inflation grow.

Spending increase usually gets out of control and subsequently budget deficit and more debt come along.

From 2004 to June 2007, Venezuela’s oil exports amounted to USD 166.62 billion; the number of ministries increased; the Government nationalized telecommunications and electric power companies (CANTV and Electricidad de Caracas, respectively), and the cable railway (Teleferico Avila Magica); public spending increased several times over and, according to the Central Bank, the public sector balance registered a USD 2,69 billion deficit in 2006.

At the same time, inflation in Venezuela, with a 15.3% increase over the last twelve months, is the highest in Latin America.

El Universal