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Forget everything about Venezuela’s economic crisis. Yes, radical leftist politicians have governed Venezuela for almost two decades and have run the economy into the ground. Yes, Venezuelans must now stand in line for hours to buy food and consumer goods such as toilet paper, and most have no access to basic medication. Yes, the currency is worthless and inflation is the highest in the world. And yes, violence and looting have become facts of daily life.
But Venezuela has been here before—again and again. Nations, like individuals, can be addicted to overspending, especially when spending is made easy. And with the richest oil reserves in the world, Venezuela’s ability to spend is limited only by how fast it can pump and by the price at which each barrel is sold. As their country faces a new economic disaster, Venezuelans should admit to themselves the sad truth: their country has a dangerous addiction to misspending its oil wealth.
Venezuelan history has a familiar pattern: populist leaders promise citizens economic miracles to get elected, and once in office they recklessly spend oil money to stay there. Yet after each failed economic experiment, politicians have promised another. Chavismo, the leftist movement created by former President Hugo Chávez, may be responsible for the current mess. But Chavismo is just one episode in a long history of irresponsible governments that have overspent when oil prices are high and saved nothing for lean times.
One source of the problem is that the avalanche of money inevitably leads to corruption, inefficiency, and waste. During the 1950s, the Venezuelan dictator Marcos Pérez Jiménez promised to modernize the country overnight. But his government became so corrupt and wasteful that Popular Mechanics famously labeled one of his pet infrastructure projects—a road linking the capital city of Caracas to the coast—as the “costliest freeway in the world,” with a price tag of $5.6 million per mile (or $50.6 million per mile in 2016 dollars).
Chavismo is just one episode in a long history of irresponsible governments.
In the 1970s, President Carlos Andrés Pérez also promised to quickly turn Venezuela into a developed nation, with predictable results. At the height of the oil boom in 1974, in an orgy of waste, he ordered the hiring of attendants and operators for every bathroom and elevator in government buildings. The country ended up broke and indebted when oil prices fell a decade later.
Chávez, echoing his predecessors, promised to make twenty-first-century socialism possible through government spending. In the period 1999–2014, the Venezuelan government earned more than $1.3 trillion from oil—equivalent to more than 13 times the Marshall Plan expenditures (adjusted for inflation) that allowed Europe to recover from World War II. Although his spending briefly helped the poor, when oil prices fell in 2014 the country was ruined again.
Venezuelans continue to vote for populists for a simple reason: they believe they deserve entitlements. These entitlements include tens of thousands of unsustainable government jobs; the cheapest domestic gasoline in the world (one can fill the tank of a Hummer for 50 cents); subsidized prices for food, electricity, water, and phone service; cheap public housing; artificially low interest rates; subsidies for businesses; low taxes; and an overvalued exchange rate that makes imports cheap. In short, Venezuelans believe they should enjoy life when oil prices are high, because they know that prices will eventually fall, leaving them with nothing.
Yet this addiction to oil wealth ruins policymaking. To pay for the promised entitlements, Venezuelan politicians spend the nation’s oil surplus; when the surplus is gone, to keep spending they first sacrifice investment, then take on debt, and finally just print cash. When inflation rises, as it must, politicians respond by fixing the prices for basic goods, making them unprofitable to produce and leading to business failures and shortages. Attempts to fix the exchange rate exacerbate the problem by increasing demand for dollars, resulting in dollar shortages that make it harder for the country to pay for imports and service its foreign debts. In 1989, faced with bulging debt, food scarcity, and a worthless currency, Venezuelans rioted in the historic Caracazo uprising that lasted weeks, left 300 people dead, and ended in military repression. Today, the country is facing an almost identical scenario.
Misspent oil riches, moreover, have deformed Venezuelan society. Oil wealth has done away with political accountability. The military has become a dangerous institution run by generals who have never fought a war but demand expensive new planes in addition to privilege and power over civilians. (When they become unhappy, they usually stage coups.) Business leaders have learned to expect high returns from selling imported foreign goods at a hefty markup, with little incentive to create, innovate, or produce. Consumers save no money because inflation devours their salaries, so they use credit cards to spend compulsively instead. In effect, Venezuela has become a nation with no future.
For years, other nations with abundant natural resources have seen Venezuela as an example of what not to do. Copper-rich Chile saves money in funds meant to pay for pensions and to cover government costs in bad times, and its budgets cover several years at a time to avoid wasting money on short-term political whims. Norway has used its oil money to create the largest state-run investment fund in the world, and Qatar, which was a poor pearl-fishing nation before discovering oil, has created the second-largest fund in much the same way. In the United States, Alaska’s oil fund goes even further by handing out dividend checks to its residents every year, turning them into watchdogs of how their oil wealth is managed.
For years, other nations with abundant natural resources have seen Venezuela as an example of what not to do.
Individuals manage addictions by attending meetings and going to therapy. Venezuela cannot kick its addiction to misspending cash by ignoring its problem—it, too, needs a program. It should develop a fund like Alaska’s that saves for the future and hands out dividends to its citizens, which would make politicians more accountable to voters. It should, like Chile, adopt stringent budgeting rules; and it should follow the example of its oil-rich counterparts in the Middle East by pegging its currency to the dollar to stop politicians from printing cash.
Venezuela has long been a morality tale for the world, an example of what can go wrong when abundant resources are poorly managed. And unless Venezuela changes its economic behavior, the world will continue to witness its ugly breakdowns. Now, in the middle of perhaps their worst crisis ever, Venezuelans should accept that they have a problem and adopt a more frugal, responsible approach to managing their wealth.