Given that Venezuela has the most oil reserves in the world, why isn’t the country as rich as Saudi Arabia? Also, why have so many of the major oil companies stopped operating there?
In: 8
This is a very late response, but the actual names haven’t been mentioned by anyone else.
There’s an actual name for this, it’s called the “resource curse” or the “[paradox of plenty](https://en.wikipedia.org/wiki/Resource_curse).” And a related economic pitfall called “[Dutch Disease](https://en.wikipedia.org/wiki/Dutch_disease).”
Basically resource-based wealth centered on exports means a huge influx of money into that *sector* of your economy. And a sudden boom in that area often results in underinvestment in unrelated industries. It’s an “all your eggs in one basket” problem, where any fluctuation in the demand for the resource you’ve built your entire country around means enormous shifts in your country’s economic well-being.
But the influx of cash doesn’t *just* slow the development of other industries. It often actively sets them back. Because capitalism. The new wealth raises the value of the country’s labor which makes exports more expensive. And higher prices on your exports means less customers means collapsing businesses. And in the end, that just amplifies the dependence on resource extraction, which amplifies the country’s instability.
The few countries that have avoided or overcome the resource curse have done it mostly through three methods. One, luck. Have an already-strong and stable industrialized economy that isn’t going to be heavily affected by a boom in related resource-based industries. Two, a different sort of luck. Have such an enormous amount of resources to extract that “instability” in the market is a nonissue. Or form a cartel to prevent any real instability from showing up at all. And three, *extremely* careful management of resource-based wealth angled at building up other stable sectors of the economy.
That third factor flies in the face of all the people saying “socialism.” The resource curse is not discriminating. Communist and capitalist countries alike are affected. The issue isn’t just management of the industry, but *poor* management of the wealth generated by it. And Venezuela fucked up bad on both. It didn’t do a particularly good job reinvesting in its economy and, when it nationalized much of the industry, it did so haphazardly. Rather than focusing on maintaining the stability of the oil business, they just kind of assumed it would continue to function just fine. But they botched it so badly that Venezuela has, in recent years, been so incapable of managing its own resources that it’s had to *import foreign oil.*
That’s already quite simplified, but the even more TL;DR version is this: when a single sector of your economy has a boom wholly independent of your other business, your state is at risk. You need to be extremely careful, lest you end up like West Virginia.
Given that Venezuela has the most oil reserves in the world, why isn’t the country as rich as Saudi Arabia? Also, why have so many of the major oil companies stopped operating there?
In: 8
This is a very late response, but the actual names haven’t been mentioned by anyone else.
There’s an actual name for this, it’s called the “resource curse” or the “[paradox of plenty](https://en.wikipedia.org/wiki/Resource_curse).” And a related economic pitfall called “[Dutch Disease](https://en.wikipedia.org/wiki/Dutch_disease).”
Basically resource-based wealth centered on exports means a huge influx of money into that *sector* of your economy. And a sudden boom in that area often results in underinvestment in unrelated industries. It’s an “all your eggs in one basket” problem, where any fluctuation in the demand for the resource you’ve built your entire country around means enormous shifts in your country’s economic well-being.
But the influx of cash doesn’t *just* slow the development of other industries. It often actively sets them back. Because capitalism. The new wealth raises the value of the country’s labor which makes exports more expensive. And higher prices on your exports means less customers means collapsing businesses. And in the end, that just amplifies the dependence on resource extraction, which amplifies the country’s instability.
The few countries that have avoided or overcome the resource curse have done it mostly through three methods. One, luck. Have an already-strong and stable industrialized economy that isn’t going to be heavily affected by a boom in related resource-based industries. Two, a different sort of luck. Have such an enormous amount of resources to extract that “instability” in the market is a nonissue. Or form a cartel to prevent any real instability from showing up at all. And three, *extremely* careful management of resource-based wealth angled at building up other stable sectors of the economy.
That third factor flies in the face of all the people saying “socialism.” The resource curse is not discriminating. Communist and capitalist countries alike are affected. The issue isn’t just management of the industry, but *poor* management of the wealth generated by it. And Venezuela fucked up bad on both. It didn’t do a particularly good job reinvesting in its economy and, when it nationalized much of the industry, it did so haphazardly. Rather than focusing on maintaining the stability of the oil business, they just kind of assumed it would continue to function just fine. But they botched it so badly that Venezuela has, in recent years, been so incapable of managing its own resources that it’s had to *import foreign oil.*
That’s already quite simplified, but the even more TL;DR version is this: when a single sector of your economy has a boom wholly independent of your other business, your state is at risk. You need to be extremely careful, lest you end up like West Virginia.
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