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I followed the news on Venezuela during the last few months and I find it disturbing to what degree the crisis has grown by now. I am wondering what political and/or economical reasons are behind the recent crisis. Especially I am asking myself the question where all the oil money is going.

Wikipedia says:

Venezuela has the largest oil reserves, and the eighth largest natural gas reserves in the world, and consistently ranks among the top ten world crude oil producers.

A country with this kind of resources should not have any problem providing enough drinking water and food for its citizens.

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To go back in history some, Venezuela was turned into a largely socialist country by the immensely popular Hugo Chavez. It was under his regime that Venezuela flourished, largely due to oil revenues (when oil was around its all-time high). At the same time, he consolidated power

“For years, President Chávez and his followers have been building a system in which the government has free rein to threaten and punish Venezuelans who interfere with their political agenda,” said José Miguel Vivanco, Americas director at Human Rights Watch. “Today that system is firmly entrenched, and the risks for judges, journalists, and rights defenders are greater than they’ve ever been under Chávez.”

After Chavez died, Nicholas Maduro took over. Maduro has not enjoyed the wide support Chavez did. Worse is that the price of oil dropped.

Venezuela, its oil-dominated economy in crisis, can barely afford the dollars to import foodstuffs and manufactured goods. In a disastrous move, the country long since bet everything on the price of oil remaining high and allowed its other industries to be run into the ground.

Venezuela has nothing else significant in its GDP, besides oil. Worse is that Venezuela is deeply in debt, while failing to control socialist spending

With oil prices low and the government's cash dwindling, price controls have become a huge problem. The state still subsidizes food far below normal prices to appease the poor. Maduro has printed money at breakneck speed, and the bolivar has plunged in value, wiping out jobs and income.

At the same time, Maduro's hostility to foreign business has created a corporate exodus. Pepsi (PEP), General Motors (GM)and United (UAL) are just some of the companies that have cut back or left entirely. Unemployment in Venezuela this year could reach 25%, according to the International Monetary Fund.

Inflation is only getting worse. In 2010, one American dollar was worth about eight bolivars. Today it's worth over 8,000 bolivars, according to the unofficial exchange rate, which many Venezuelans use because government rates are considered far overvalued. Prices could rise an astounding 2,000% next year.

So to sum it up

  1. Chavez ran up the tab with loans and socialist programs
  2. Higher oil prices helped hide the cost of these programs
  3. The price of oil dropped, but the populist programs still continue
  4. Venezuela no longer has the resources to buy goods that it needs, leading to shortages of what it can bring in
  5. The political crisis is over keeping Maduro and socialism, or getting new leaders who will make painful choices to correct the problem
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    This is a good answer, but does seem to point the blame at 'socialist programs'. There was nothing inherently good nor bad about those programs. Money could have been spent on anything and they still would be in this mess. The main issue was that the government didn't try to diversify revenues and prepare for fluctuating oil prices. – user1530 Jul 27 '17 at 23:07
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    @blip as well as corruption, corruption is a value independent of socialist programs also. – Leon Jul 28 '17 at 8:23
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    @blip: I would say that at least one specific facet of the socialist programs are partially to blame for Venezuela's predicament: the price controls, which were set low, in some cases below the cost of production, especially of necessities, which led to Venezuelan businesses shutting down. Rather than lift the price controls, Venezuela started massively importing, which was fine when they could use oil to pay their import debts, until the price of oil fell. TLDR: Price controls effectively made Venezuela dependent on a single (government-controlled) economic sector. – sharur Jul 28 '17 at 23:04
  • @sharur that's a good point. – user1530 Jul 29 '17 at 0:53
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    @blip: For an analogy, say you win the lottery (IOW find you have a lot of oil) when you're just out of high school, so you don't bother with college or vocational training, but spend your lottery money on partying (IOW socialist programs). Then when you turn 40 or so, you discover that the money's run out. What do you do? It's not so much that Venezuela's socialist programs were all that bad in themselves (see Norway for a parallel case), but that spending transient oil wealth on them prevented the building of a sound economy that could continue to support them. – jamesqf Jul 29 '17 at 19:29
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The answer blames socialist programs for Venezuela's current problems. Many north European countries have these programs and more and yet are rich. There must be another difference.

Yes, there's the resource curse, also known as the Dutch Disease - but Norway has made a huge success for Norwegians on oil (OK, about the only country that has) and the key difference is that oil profits (a tax rate of nearly 90% on the oil - 10% still made Shell very rich) is being held in a sovereign trust by a non-corrupt government. Institutions.

This video from The Story of Life on why, out of nearly 200 countries, about 25 are rich and the rest are poor and most will probably remain that way. https://www.youtube.com/watch?v=9-4V3HR696k . But it's not a new thesis. I think most theories would agree, the 2 most important factors dwarfing all others are institutions and corruption (and I reckon they're almost the same, have good institutions and there'll be little corruption, have high corruption and the institutions will be corroded).

Unlike Norway, Venezuela has high corruption that haemorrhages wealth into overseas accounts and fragile institutions that at best is incapable of confronting that corruption.

Transparency International ranks Venezuela in the top 20 most corrupt nations, ranking equal 8th with 3 other countries. https://en.wikipedia.org/wiki/Corruption_in_Venezuela

Chavez was elected in Dec98 on the platform to write the constitution to address corruption. It wasn't, and that's why it's poor and will remain that way until that is addressed.

Answer is: corruption, corrupt bureaucracies, corrupt businesses & corrupt institutions.

(I'd like to think well of people, and thus I think Chavez may have had good intentions, but 2002 coup rattled him. His army was corrupt and he had to adapt and became as corrupt as his army to regain it - impressive from a Machiavellian point of view - sad for Venezuela)

  • The army forced him to become corrupt? – Andrew Grimm Jul 30 '17 at 8:43
  • My bad, I should have explained better, and my brevity above may have sounded like the army forced him to become corrupt. He was a bit bent, as was his admin, before the coup, but I do think he became more so post coup. (edit - I hit enter - I'll add more re why I think so) – Dave McRae Jul 30 '17 at 8:59
  • 2002, after strikes and demonstrations about his corrupt appointments to PDVSA (the national oil company), and 19 people dead, the military removed Chavez from power, arrested, and denied his request for asylum in Cuba. With some fancy footwork by Chavez that no doubt benefited some decision makers in the military (plus president Carmona not handling being president well) Chavez was re-instated 47 hours after he was removed. A few senior (4) officers where imprisoned/resigned but replacements to those posts probably did better than OK. – Dave McRae Jul 30 '17 at 9:11
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In addition to the existing answer, one of Venezuela's problems is the state of its oil industry. While there's some uncertainty (the government certainly isn't being very open about this), probably several billion USD in maintenance and new field development is overdue. Not only has the oil price fallen, o have the volume.

Of course, with the current government in place, foreign investments are unlikely. Domestically, there's even less chance of finding such funds.

To give you an idea: Venezuela promised OPEC in June 2017 that they'd cut production by 95000 barrels a day, but the actual production dropped by a staggering 129.000 barrels a day. (Source:Bloomberg)

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