Home Topics Economy, trade & employment Venezuela: terminal crisis of the rentier petro-state?

Venezuela: terminal crisis of the rentier petro-state?

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Venezuela’s failure to develop an effective strategy to reduce its economy’s dependence on gas and oil threatens the social successes and future viability of the Bolivarian project.

Over the 15 years of the Bolivarian government in Venezuela, significant changes have taken place in the political culture, the social and organisational fabric, and the material living conditions of previously excluded low-income groups. Through multiple social policies (known as “missions”) aimed at different sectors of the population, levels of poverty and extreme poverty have been reduced significantly.

According to ECLAC, Venezuela has become – together with Uruguay – one of the two countries with the lowest levels of inequality in Latin America. People are better fed. Effective literacy programmes have been carried out. With Cuban support, the Barrio Adentro mission has brought primary medical care to rural and urban low-income groups throughout the country.

The state pensions system has been massively expanded to include millions of older people. The increase in university enrolment has been equally extraordinary. For the last few years, a housing programme for people with low incomes has been taken forward. Unemployment has been kept at a low level and informal-sector employment has been reduced from 51% in mid-1999 to 41% in mid-2014.

The amount spent on social investment between 1999 and 2013 is estimated to total some US$650 billion. According to the UNDP, Venezuela’s Human Development Index rose from 0.662 in the year 2000 to 0.748 in 2012, taking the country’s human development ranking from medium to high.

This has been a time of dynamic grassroots organising and participation, with the setting up of Water Committees and Community Councils, Health Committees, Urban Land Committees, Communal Councils, Communes… Most of this organisational dynamism was the result of government policies expressly aimed at promoting these processes.

Equally important has been the weight of Venezuela’s experience – particularly its constitutional reform process – in the progressive shift or turn to the left that has taken place in Latin America over these years. Its influence has also been important in the setting up of various regional integration mechanisms – UNASUR, CELAC, Petrocaribe, ALBA – that have strengthened the region’s autonomy and lessened its historical dependence on the United States.

Nevertheless, the social changes that have taken place were not the result of equally profound changes in the country’s economic structure. On the contrary, the last fifteen years have seen a consolidation of the rentier state model, with an increased dependency on revenue from oil exports. Oil’s share of total export value rose from 68.7% in 1998 to 96% in the last few years. The value of non-oil exports and private sector exports has fallen in absolute terms during this time. Industry’s contribution to GDP shrank from 17% in 2000 to 13% in 2013.

Translated for TNI by Sara Shields.

LAB adds:

TNI’s analysis is lent additional force by an interesting article by Larry Elliott and others in the Guardian on October 16. The authors  analysed the impact of the current dramatic fall in the price of crude on various countries, including Venezuela. We present an extract below. The full article, including sections on Russia, Iran and Saudi Arabia, can be read here.

The sudden slump in oil prices, which have fallen 15% in the past three months, has sent tremors through the capitals of the world’s great oil powers, many of whom could face testing budget crunches if the tendency persists.

Higher output coupled with weaker demand from China and Europe has driven the price of crude down to $85 – its lowest for four years. The US also now produces 65% more oil than it did five years ago following the boom in shale production. The rise has contributed to the global glut of crude and allowed the US to import 3.1 million fewer barrels of oil a day compared with its peak in 2005. Prices are now well below the level on which many oil exporters have based their budgets.

If prices remain weak – and many forecasters suggest they will – then from Moscow to Caracas and from Lagos to Tehran governments will start to feel the impact on macroeconomic policy.

Brent has averaged $103 since 2010 – trading mostly between $100 and $120 – so a continued period of $80 oil, or less, would have an impact across the world, and from multiple angles.

The lower price isn’t bad news for everyone. For example, India would not suffer much – commodities account for 52% of India’s imports but only 9% of its exports (paywall), and unlike Brazil, Russia or South Africa, India would reap immediate advantages from a fall in commodity prices.

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Venezuela

Even at $100 a barrel, Venezuela was eating into its currency reserves. Experts believe that $80 oil will deepen a fiscal crisis that is already threatening social unrest.

Venezuela relies on oil revenues to pay for imports, everything from car parts to basic foodstuffs, and this supply might be compromised if cash runs dry. Anti-government protests across the country left more than 40 people dead in February.

“If prices remain at current levels Venezuela will see its cash flows reduced by $16bn in the next 12 months,” said Alejandro Grisanti, head of Barclays Latin America economic research team.

“For a government that is reluctant to adjust and has the worst set of economic policies, this decline in (foreign exchange) income will bring higher inflation, more scarcity and lower purchasing power to the Venezuelans.”

Francisco Monaldi, of the Belfer Center, said if prices remained depressed for more than a year Venezuela would suffer more than other Opec countries.

“The economic adjustment required will involve giving up a lot of the gains in poverty reduction that the country had in the previous decade. Politically the government will get into a very difficult level of popular support.”

[The above section by Virginia Lopez in Caracas]…

The winners are the large net importers of oil and those that have high inflation rates, such as Turkey and India. Business costs will fall and consumers’ incomes will stretch further.

The losers are oil producers, which will see growth fall and budget deficits swell. Iran, subject to a crippling western embargo, needs an oil price of more than $140 a barrel to make its budget break even. Anything below $120 a barrel spells trouble for Venezuela and Nigeria. About $105 a barrel is Russia’s cutoff point. At today’s price even Saudi Arabia, the world’s biggest producer, is starting to feel the pinch as it has used a high oil price to fund generous public spending. It needs $93 a barrel to balance the books.

The problems are magnified for many of these countries because high oil prices have stunted the development of other sectors of the economy. In Russia, oil and gas accounts for 70% of exports. The country’s struggling manufacturing sector relies heavily on orders from energy companies.

Photos: main image: Larry Luxner/Tico Times; oil price chart: The Guardian