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Venezuela’s disaster and the curse of oil

Written By | Jun 21, 2017

WASHINGTON, June 21, 2017 — “Rich Venezuelans eat sushi, guzzle cocktails amid chaos,” reads the Yahoo headline. And that neatly summarizes the continuing disaster that is Venezuela.

Those who believe that national wealth is a function of natural resources might have a hard time understanding Venezuelan poverty. Venezuela has the advantage of the world’s largest oil reserves. It sits on an ocean of wealth inconceivable to most of the world’s nations.

Venezuela’s natural wealth goes beyond oil. It is a nation of breathtaking beauty and enormous biological diversity; it is seventh in the world for the number of known species within its borders. It should have been a Latin powerhouse in agriculture, tourism, energy and industry.

But after decades of troubled democracy, Venezuela was transformed into a socialist playground, and oil turned out not to be an advantage or a blessing, but a curse.

Oil dominates Venezuela’s economy. The oil crisis of 1973 left Venezuela awash in money. The oil industry was promptly nationalized, and public spending exploded. So did public debt. When oil prices collapsed in the 1980s, so did Venezuela’s public finances and much of its economy.

Oil rebounded, and upon ascending to the presidency, Hugo Chavez began to spread that wealth around. The poverty rate fell from 50 percent to 27 percent. He poured money into public education. He did everything a good socialist would do with his country’s wealth, and his people genuinely embraced him.

But there is more to socialism than spreading the wealth. Socialists turn out to be mere humans, as fond of the good things in life as any capitalist pig or corporate fat-cat. Socialist revolutions are an Animal Farm, and socialist pigs are indistinguishable from any other swine.

Oil dominates Venezuela’s exports, and it accounts for half of all government revenues. When the money flowed freely, the oil sector became an irresistible trough.

Venezuela turned out to be just like any other socialist country. Wealth doesn’t come from building businesses or satisfying consumer wants. It comes from proximity to political power.

The Soviet Union had its nomenklatura, the class of people with high positions in the arts, education, the government and the Party. They didn’t earn much more than anyone else; the general secretary of the Communist Party and the president of the USSR nominally earned only about twice what a bus driver earned. But that bus driver lived in a government-provided two-room flat in a concrete apartment block on the outskirts of Moscow; the nomenklatura lived in elegant old, government-provided apartments inside the Garden Ring.

The bus driver bought cheap, Soviet-made suits at GUM; members of the nomenklatura paid the same price for Armani suits sold at special stores that only they could shop in. The bus-driver’s wife worked as a crane operator and stood in line for hours before and after work in the often vain hope of getting a couple of bruised tomatoes. The nomenklatura wife worked in the Ministry of Culture and never had to stand in line for the abundant tomatoes at the special markets.

Every socialist country has its version of the nomenklatura. China’s leaders occasionally feel embarrassed by the excesses of the children of high party officials and even executes them on occasion, but after lying low for a while, the rest irrepressibly come out to play.

The closed societies and closed economies of Cold-War communist states meant that their nomenklatura had to take their wealth in inconveniently non-portable forms. Modern socialist states like China and Venezuela are connected to the global financial system, and their nomenklatura are actual cash millionaires and billionaires.

Yahoo quotes sociologist Colette Capriles of Simon Bolivar University, “Wealth in Venezuela is generated by state revenues that depend on the oil sector. The state redistributes that revenue.” She recognizes the Venezuelan nomenklatura when she notes that those proximate to power have gotten rich because of it.

“This form of socialism has produced some very powerful millionaires. Most of them are government officials or people close to them—and currently they are one of the main things holding up the government.”

What Capriles doesn’t say, and perhaps doesn’t want to, is that every form of socialism gives those close to power access to vast wealth, and this wealth makes them staunch supporters of their government.

There’s a lesson there that shouldn’t be lost on Americans, who should be slow to sneer at this socialist rent-seeking and socialist corruption. Whenever government has the power to distribute rewards, it attracts people just like those high-living millionaires in Caracas. Even in the United States.

Men and women often go to Washington with dreams in their hearts and stars in their eyes, hoping to do good. They don’t always manage to do good, but they do manage to do very well.

After a lifetime of service and a public servant’s paycheck, Harry Reid left the Senate a multimillionaire. Maxine Waters’ daughter has made almost $750,000 working for her mom’s election committee. Diane Feinstein’s husband’s real estate firm may have earned a billion dollars in commissions from selling U.S. Postal Service buildings as part of an exclusive contract with the U.S. government.

Congress is awash with millionaires, and Washington is awash with people who funnel government—that is, your—money to private firms. Our government has the power to make people rich, and so it attracts its own sort of nomenklatura.

Venezuela isn’t just a failure. It’s a socialist failure. But just about every government in the world carries the seeds to become Venezuela. To the extent that we keep the weeds that germinate from those seeds under control, it is by means of strong institutions and a sense of propriety and restraint.

America’s institutions remain in place, and they appear to remain strong. But we’re doing our best to kick them until they collapse. Likewise, America remains a place of relatively restrained rent-seeking, but people across the political spectrum have worried that our sense of restraint shows signs of decay.

Democracy, civil society and capitalism seemed to be what the whole world wanted 20 years ago. But they turn out to be remarkably frail in the face of a popular will to break them. That’s as true in the United States as it is in Venezuela.

Jim Picht

James Picht is the Senior Editor for Communities Politics. He teaches economics and Russian at the Louisiana Scholars' College in Natchitoches, La. After earning his doctorate in economics, he spent several years doing economic development work in Moscow and the new independent states of the former Soviet Union for the U.S. government, the Asian Development Bank, and as a private contractor. He has also worked in Latin America, the former USSR and the Balkans as an educator, teaching courses in economics and law at universities in Ukraine and at finance ministries throughout the region. He has been writing at the Communities since 2009.