A touch of the Dutch

Venezuela has the world’s largest proven oil reserves. Given this, you might reasonably expect that Venezuela would be rich and stable. But it’s neither.

In fact, it’s a much observed economic phenomenon that countries and regions with lots of natural resources, especially point-source resources like minerals and fuels (read: oil), tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This paradox is known as the resource curse, and there are lot of explanations for it, many of which seem to apply to Venezuela:

  • Dutch disease is the idea that when a country has lots of a resource it focuses its effort on that resource to the exclusion of the development of other industries, especially manufacturing and agriculture. This is definitely true of Venezuela. It imports two thirds of its food and has no real agriculture to speak of.
  • Industries like oil produce commodities that are sold on a global market. The price for them can change drastically. This creates boom and bust cycles for countries which rely on these prices, destabilising their economy.
  • This one is especially important: when there’s only really one source of wealth, everyone wants to get in on the action. This encourages rent seeking and corruption. Venezuela ranks as the most corrupt country in South America, and its immediate peers in corruption (Cambodia and Eritrea) are much poorer.

Development economists who study this stuff wouldn’t be surprised by the dysfunction we saw in Venezuela, or the increasing instability there. They’d also tell you that the best way to address the resource curse is through strong government (eg. Norway). But, because they’re economists, they wouldn’t be able to provide a clear explanation of how you’d get this sort of government. In the meantime, Venezuela’s sad situation makes senses, even if it’s nonsensical.

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