The Economic Failure of Venezuela

[Music] this is Venezuela once the richest country in all of Latin America it is now home to the greatest economic downturn for a single country in modern times in terms of countries that had it easy Venezuela by all counts should have been top of the list it is home to the largest oil deposits in the world easily beating out typical oil giants like Saudi Arabia Kuwait and the United Arab Emirates but they squandered it a lot has been said about the political issues surrounding the downfall of Venezuela and don't get me wrong there have been plenty of political issues but in this video we will just focus on the fundamental economics behind Venezuela's unprecedented rise and it's devastating fall Venezuela has always had a relationship with oil the whole country is almost floating on an ocean of petroleum it was known that even in times before the Spanish acquisition that the indigenous population of the country used the oil tars that seep from the ground to waterproof their canoes or keep fires going throughout the night Venezuela has always had a taste for the stuff but it wasn't until the 1970s that it became front of mind in the eyes of the world when then President Carlos Andres Perez effectively nationalized all oil production in the region now we have seen before that nationalizing oil production is not necessarily a bad thing in the case of Norway it meant that a lot of oil revenue was returned to the country itself which is great the venezuelan process though was a lot more bureaucratic and despite having huge oil reserves the country's output was severely limited it also wasn't a huge help that the country was a member of OPEC a group of oil-rich States that basically had a pact to not flood the market with oil to keep prices high and you might ask well isn't that a monopoly isn't that illegal and yes it did acting no man drop allistic and anti-competitive ways but these were sovereign states they are in many senses above the law oil production in Venezuela was at this time almost completely handled by the pdvsa which stands for in a butcher this Petrolia stirs Venezuela which was a state-owned oil company which had a monopoly on oil production in the country this was very similar to Norway state oil corporation now called Ecuador it was a business in structure and nature but its only investor was the government and all the profit was for the government where Venezuela's government enterprise differed though was the incredible levels of corruption oil company officials would frequently misuse government money that was intended to go towards investment into oil production what this meant was that during the 1970s almost no new oil fields were brought online which for an oil company that is literally given free access to the largest oil fields in the world is pretty terrible this started to turn around though when this man Hugo Chavez took office in 1999 he sought to turn around the inefficiencies in the state's oil company he started setting quotas for the company to meet and came down hard on corruption and bureaucracy built into the lumbering inefficient semi government agency this all came to a head in 2002 when the employees of the company went on strike effectively complaining that this state-owned oil company was actually been expected to produce oil crazy I know Chavez saw to this by basically kicking the workers out and installing new workers into the company that were loyal to him and his plans for the oil revenues that would flow the oil production of the company boomed and the Venezuelan government was able to ride the high of the early 2000s oil prices to massively increase the government's income the government of Chavez was also very economically left-leaning and so a lot of this revenue was distributed to the people of the country through government welfare programs this is so far actually not too bad it actually sounds pretty great it even sounds very similar to what happened in Norway a country that has been discussed and mostly praised many times over on this channel before but this is where it all went wrong while most oil-rich countries recognize that oil doesn't last forever Venezuela decided to go on a spending spree taxes were lowered and government spending was massively increased this government spending for the most part didn't actually go towards productive infrastructure or even something like a sovereign wealth fund could have provided the country with a long-term foundation of wealth no instead this was spent on government handouts that did work to improve the quality of life for the average Venezuelan but it did so in an extremely unsustainable manner similar to someone winning the lottery and then buying a truckload of caviar to feed the local homeless shelter I mean sure it kind of does the trick and you would be extremely popular but canned food would probably last longer and be an overall better investment for the greater good the vast oil production also led to a very serious economic phenomenon that would go on to plague the nation dutch disease was a term coined in 1977 following the decline of the manufacturing center of the netherlands after discovery of a large natural gas field in the country it is a term used to describe the impacts that poorly handled oil and resource wealth can have on an economy and dutch disease hit in Venezuela hard when a country like Venezuela starts exporting oil its currency shoots up in value because people need to purchase Venezuelan country to purchase Venezuelan oil this may seem like a good thing but an artificially stronger currency causes issues elsewhere in the economy suddenly it becomes very cheap for Venezuelans to import foreign cars and foods and cigarettes in the light because their dollar has shot up in value this means that local industries start to suffer because it becomes cheaper to import something than it is to buy locally especially given their position in Latin America surrounded by countries with very low cost of living this really hurts local industries that have to compete with cheaper foreign competitors it gets even worse though because suddenly Venezuela can't export anything either because their currency has increased in value suddenly their goods are artificially more expensive and less competitive on a global market on top of this local industries are starved of workers and investments as labor and capital is redirected towards the far more profitable oil industry a successful natural resource boom can effectively smother all other industries to death with its own success and this trap is so common that has its own name Dutch disease was particular bad in Venezuela because the government didn't really do anything to diversify the economy a lot of oil-rich countries try to reinvent themselves the united arab emirates wants to turn itself into a center for business and tourism norway wants to turn itself into the world's largest hedge fund and even countries like iran make sure that they support local industries venezuela basically said yes sustainable industry is great that who cares we're rich let's make it rain like there is no tomorrow by 2008 all export industries apart from oil had collapsed there would have been massive unemployment issues but the government just threw cash at people to make the issues go away Dutch disease and reckless government spending also caused other major issues in the economy crowding out is another major issue that can be caused by an overzealous government spending in this case the government of Venezuela was throwing money around the economy pretty aimlessly this of course made them wildly popular amongst their citizens but it also caused systemic issues in the nation itself when government-run enterprises and workers get all the money that they ever need it makes it incredibly hard for private enterprises to compete likewise the insane amount of borrowing that Venezuelan government was doing at the time made it very hard for local businesses and individuals to get access to credit because the government was kind of just swallowing up all of the money that was available there this also stifled a lot of free enterprise in Venezuela why would I start a business if the government will just open a competing business run it at a loss and drive me out of work this happened a lot as the government kind of went crazy with its government owned enterprises moving into utilities roadways health internet and telecommunications but also more obscure industries like tourism and finance buying up private banks and making them state-run which was financially crippling to purchase and then so poorly run that none of these businesses ever made a profit by this time they even started going into debt yes debt to fund their excessive government spending at this point the country was literally a lottery winner who quit their job spent all of the money and then mortgages the home they bought with their winnings in order to buy more lottery tickets but it was fine of course this doesn't matter we always have more oil and oil is a limited resource its price will go up forever the declining oil price then brought the whole house of cards crashing down by this point the country was so heavily leveraged that any impact on their oil revenues would cause serious financial hardship on the state when this became a reality the poorly managed government bureaucracy did what a poorly run government bureaucracy does and tried to print its way out of trouble causing massive inflation on the currency which in small doses might have actually been fine that this very quickly turned from quantitative easing into straight-up hyperinflation and the rest as they say is history venezuela's story is of course very upsetting giving the level of human misery it has caused in the turmoil of the nation the ongoing protests government crackdowns and questionable elections have caused political condemnation on the global stage which has led to trade sanctions been placed on the nation with major trading partners like the United States which is the last thing a crippled country needs and it is further suffocating an already struggling economy it is a good case study though when it is compared to other nations or plans that have followed similar paths where you have studied the economic proposals of people like Andrew yang on his channel before and many channel commoners rightfully ask what his proposed government welfare would mean for the overall health of the economy especially in relation to inflation beyond this the whole story of Venezuela doesn't sound too dissimilar from the story of Norway's oil boom how did one country end up as a poster child for economic responsibility and the other end up as a failed state well the key as always is in the details Norway used its oil wealth for social welfare the same as Venezuela it wanted to make sure that our citizens of the nation benefited from the wealth of the nation that Norway did it no far smarter way investing the money into a fund that will continue to generate revenue for the mination long after the oil is gone Venezuela just pumped oil out of the ground and kept the party going living paycheck to paycheck and going into debt to boost its living standards right here right now with very little thought for what would happen in the future when the oil runs out or its value declines Yang's plans are glorified government welfare but the revenue isn't coming from a Golden Goose it is coming from the inherent ability of the nation to generate wealth not just pump it out of the ground any economic entity that finds itself relying on a single source of income is in a potentially precarious situation it gets worse the bigger you get as well from individual relying on just a day job is probably fine for a household relying on a single income is not great but it works in many instances for a company only having one source of revenue is very very reckless and for a nation blind purely on one form of income and doing very little to create wealth otherwise is just a recipe for disaster like we have seen in Venezuela hi guys thanks for watching I hope you enjoyed the ladies video we have an exciting announcement the discord server for this channel will now be hosting live debates after the videos that go up on Saturday if you want to be part of these debates please get in contact with the moderated team on the server otherwise if you enjoyed this video please like and subscribe I will be hanging out on that discord server that is linked in the video description after this video is up to answering questions that you may have and otherwise I do my very best to reply to all comments in the comment section below thanks guys bye

Channel: Economics Explained

Views: 977,852

Rating: 4.849 out of 5

Keywords: the economy of venezuela, the economics of venezuela, the economy of venezuela explained, the economics of venezuela explained, venezuela economics explained, economics explained venezuela, venezuela economy explained, venezuela economy, venezuela economy economics explained, venezuela economics, how the venezuelan economy works, venezuelan economics, venezuelan economy, venezuelan economy explained, venezuelan economics explained, economics explained

Id: 7_mThYXDr_s

Length: 12min 32sec (752 seconds)

Published: Thu Nov 14 2019

Reddit Comments

[u/slideguy1013]

Sanctions

End of video

[u/PerplexingPantheon]

Seems like a fairly accurate analysis to me.