The Truth behind Venezuela Defaulting & what we can learn from it.

Venezuela, once the wealthiest country in Latin America, is now experiencing the most significant economic decline ever witnessed by a single nation in modern history among those that had previously thrived. Despite having the world's largest oil reserves, surpassing traditional oil powerhouses like Saudi Arabia, Kuwait, and the United Arab Emirates, Venezuela failed to capitalize on this advantage. While political problems have played a role in the country's downfall, it is essential to concentrate on the basic economic factors that led to Venezuela's remarkable ascent and subsequent catastrophic collapse.

Venezuela has always had a strong connection with oil, as the entire country seems to be sitting on a vast reserve of petroleum. Even before the Spanish colonization, it was known that the indigenous people utilized the oil tars that naturally surfaced to waterproof their canoes and maintain fires throughout the night. Although Venezuela has always had an affinity for oil, it wasn't until the 1970s that the world started paying close attention, when President Carlos Andres Perez nationalized all oil production in the region. While the nationalization of oil production can have positive outcomes, as seen in Norway where a significant portion of oil revenue was reinvested in the country, the Venezuelan process was more bureaucratic. Despite having substantial oil reserves, Venezuela's oil output was severely restricted. Moreover, being a member of OPEC, a consortium of oil-rich nations that agreed to control oil supply to maintain high prices, further hindered Venezuela's production capacity. This raised questions about the legality of such practices, as they seemed monopolistic and anti-competitive, but as sovereign states, these countries often operate above international laws.

During this period, oil production in Venezuela was predominantly managed by the PDVSA, a state-owned company with a monopoly on the country's oil production, similar to Norway's Equinor. While structured as a business, PDVSA's sole investor was the government, with all profits going to the state. However, Venezuela's government enterprise was marred by rampant corruption. Officials of the oil company often misused government funds meant for oil production investments. Consequently, very few new oil fields were developed in the 1970s, a significant shortcoming for an oil company granted access to the world's largest oil reserves.

The situation began to change when Hugo Chavez assumed office in 1999. He aimed to address the inefficiencies in the state's oil company by implementing production quotas and cracking down on corruption and bureaucracy within the sluggish semi-governmental agency. The turning point occurred in 2002 when company employees went on strike, protesting the expectation for the state-owned oil company to produce oil. In response, Chavez replaced the striking workers with individuals loyal to him, leading to a significant increase in oil production and government revenue during the oil price boom of the early 2000s. Chavez's government, which had a strong left-leaning economic stance, allocated a significant portion of this revenue to social welfare programs for the country's citizens. Initially, this seemed positive and reminiscent of Norway's approach. However, the downfall came as many oil-rich nations understand that oil resources are finite.

Venezuela made the decision to engage in a spending spree by reducing taxes and significantly increasing government expenditure. However, instead of investing in productive infrastructure or establishing a sovereign wealth fund for long-term wealth creation, the government opted to allocate the funds to handouts. While these handouts did enhance the quality of life for the average Venezuelan, the approach was highly unsustainable. It can be likened to winning the lottery and using the money to buy a large quantity of caviar to feed the homeless – a gesture that may yield popularity but lacks long-term viability. Opting for canned food, on the other hand, would have been a more sustainable and beneficial investment for the greater good.

Moreover, the significant oil production in Venezuela resulted in a severe economic issue known as Dutch Disease. Coined in 1977, the term refers to the negative impacts that mismanagement of oil and resource wealth can have on an economy. Venezuela experienced the harsh effects of Dutch Disease when its oil exports caused a rapid appreciation of its currency due to the increased demand for Venezuelan currency to purchase oil. While it may appear beneficial at first, an artificially stronger currency can lead to challenges in other sectors of the economy. The sudden increase in the value of the dollar makes it highly affordable for Venezuelans to import foreign goods such as cars, food, and cigarettes. Consequently, local industries suffer as importing becomes a more cost-effective option compared to buying domestically, particularly since Venezuela is situated in Latin America surrounded by countries with the lowest living costs in most of the world. This situation significantly impacts local industries that must compete with cheaper foreign alternatives. Furthermore, the situation worsens as Venezuela's ability to export diminishes due to the strengthened currency, resulting in their products becoming more expensive and less competitive in the global market.

Additionally, local industries face shortages of both workers and investments as resources are diverted to the more profitable oil industry. A successful boom in natural resources has the potential to smother all other industries, leading to their demise due to the overwhelming success of the resource sector. This phenomenon, known as the Dutch disease, was particularly severe in Venezuela because the government failed to take any steps to diversify the economy. Many oil-rich nations are striving to transform themselves: the United Arab Emirates aims to become a hub for business and tourism, Norway seeks to establish itself as the world's largest hedge fund, and even countries like Iran are supporting local industries. In contrast, Venezuela disregarded the importance of sustainable industries, opting instead to rely solely on its oil wealth without concern for the future. By 2008, all non-oil export sectors had collapsed, leading to significant unemployment issues which the government attempted to alleviate by distributing cash.

The Dutch Disease, along with reckless government spending, also contributed to various significant economic challenges. A major issue is the crowding out effect of private sector due excessive government spending, which can result from an overly enthusiastic approach by the government. In the case of Venezuela, the government was distributing money throughout the economy in a rather haphazard manner, gaining popularity among its citizens but also causing systemic problems within the nation. When government-owned businesses and employees receive abundant funding, it becomes extremely difficult for private enterprises to compete. Additionally, the excessive borrowing by the Venezuelan government at that time made it challenging for local businesses and individuals to obtain credit, as the government was essentially absorbing all available funds. This situation significantly hindered free enterprise in Venezuela, as entrepreneurs questioned the viability of starting a business when the government could easily establish a competing entity, operate it at a loss, and push them out of the market.

This scenario occurred frequently as the government expanded its reach into various sectors through government-owned enterprises, including utilities, roadways, health, internet, and telecommunications, as well as less conventional industries like tourism and finance. They acquired private banks, turning them into state-owned entities, which not only proved to be financially burdensome to acquire but were also poorly managed, leading to perpetual losses. Eventually, the government resorted to borrowing money to sustain its extravagant spending habits, resembling a lottery winner who squandered their winnings, went into debt, and mortgaged their home to buy more lottery tickets. Despite relying on the belief in the perpetually increasing value of oil as a finite resource, the plummeting oil prices triggered a collapse. The country had become heavily indebted, making any decline in oil revenues a severe blow to its financial stability. In response, the mismanaged government attempted to solve the crisis by printing more money, resulting in rampant inflation. Initially seen as a potential solution, this strategy quickly spiraled into hyperinflation, leading to the inevitable downfall of the economy.

Venezuela's situation is deeply distressing due to the significant human suffering caused by the country's unrest. The ongoing protests, government crackdowns, and controversial elections have drawn global political criticism, resulting in trade sanctions imposed by key partners such as the United States. This further exacerbates the challenges faced by the already struggling economy of Venezuela. It serves as a valuable case study when compared to other nations that have taken similar paths. For instance, analyzing the economic policies of figures like Andrew Yang prompts important questions about the potential impact of proposed government welfare on overall economic health, particularly with regard to inflation.

Furthermore, the narrative of Venezuela closely mirrors that of Norway's oil boom. How did one nation become a model of economic prudence while the other descended into a state of failure? The answer lies in the nuances. Both countries sought to ensure that their citizens benefited from the national wealth generated by oil. However, Norway took a more strategic approach by investing the proceeds in a fund designed to generate long-term revenue even after the oil reserves were depleted. In contrast, Venezuela simply extracted oil without foresight, living lavishly in the present and accumulating debt to elevate living standards without considering the future implications of dwindling oil reserves or declining value.

Yang's proposals may resemble government welfare schemes, but the crucial distinction lies in the funding source. Rather than relying on a single revenue stream like a "Golden Goose," Yang's plans are rooted in the nation's inherent capacity to create wealth rather than merely extracting it. Any economic entity overly dependent on a sole income source faces vulnerability, with larger entities at even greater risk. While individuals relying on a single job may be sustainable, households depending on a single income stream face challenges. For companies, sole revenue sources are precarious, and for nations fixated on one income stream while neglecting other wealth-generating avenues, the outcome is a recipe for disaster, as evidenced by the Venezuelan situation.