All that Glitters is Not Gold: An Examination of the Resource Curse’s role in the Political Status Quo of Venezuela

On August 3, 2024, the government of Venezuela announced that incumbent Nicolas Maduro had won his third six-year presidential term. By September 8, the rival presidential candidate Edumundo Gonzalez had gone into exile in Spain. Four days later, the United States had levied new economic sanctions that would further cripple an already struggling economy—one so poor that it has led to the migration of more than 7.7 million Venezuelans abroad. Despite being the economic sickman of Latin America, Venezuela contains one of the largest and most easily accessible oil deposits in the world. The very cure to their disease lies beneath their feet. However, in the larger historical context it seems their diagnosis extends beyond a high unemployment rate and a weak currency. Venezuela is suffering from “the resource curse,” which occurs when a country becomes over reliant on the extraction of one abundant natural resource to holistically provide for the nation’s economy.  By relying on one resource, this often leads to the misallocation of capital as well as underdevelopment of institutions within the nation, making it vulnerable to crisis when the global price of that good becomes volatile. In Venezuela, the commitment of the nation’s fortune to oil revenue decades ago has allowed shifting energy market conditions, corruption, and mismanagement to leave a would-be prosperous nation on the brink of failure.  

In the early twentieth century, the first oil deposits discovered in Venezuela prompted an influx of British and American capital and private investment into the country. By 1935, oil production accounted for 90 percent of the nation’s exports.  This development piqued the national government’s interest in becoming more involved with the oil industry and its profits; it just needed an opportunity to enter the industry. That opportunity arrived at the beginning of World War II, when the Allied Powers required unprecedented amounts of energy to fuel the war effort. In 1943, the Venezuelan government passed the Hydrocarbons Law which mandated that any foreign oil company must give the central government 50 percent of their oil profits from Venezuelan wells. This act set up Venezuela for an exponential increase in government revenue. Over the next forty years, Venezuela rode the wave of steady global oil prices and by the 1970s had the highest income per capita in all of Latin America– a major developmental milestone. The crowning achievement of that period was becoming a founding member of OPEC in 1960, securing its spot as a leader in global energy markets. In 1973, the breakout of the Yom Kippur War drove the price of oil sky high. Riding this high, the Venezuelan government nationalized the oil industry in 1976. It seemed then that as long as the world needed oil, Venezuela would remain rich.

All that glitters is not gold. Venezuela’s forty year high gilded over many of the problems the country was facing. First, the national government was spending the oil revenue as fast as they could make it, resulting in high public debts.  In addition, embezzlement and mismanagement ran rampant in the government bureaucracy. The Venezuela Investment Fund (FIV) was initially meant to be the “safety deposit box of the nation.” Oil revenue was meant to be saved or invested in two types of projects. The first kind were domestic projects meant to diversify the nation’s economy such as petrochemicals, Naval Engineering projects, and other forms of resource extraction. The second form was in international investments that would ensure the oil fund was not solely backed by the Venezuelan Bolivar. However by the late 1980s, most of the country’s oil revenue was being invested in metallurgy and electricity projects. These investments often both legally and illegally lined the pockets of politicians who were supposed to be conducting oversight of the use of government funds. In addition, the profitability and clear government backing of the nation’s petroleum industry disincentivized investment and entrepreneurship in other industries such as manufacturing and agriculture. The concentration of the country’s economic and labor capital in one industry made it over-reliant on imports for essential industries such as agriculture. It was easy to overlook the cracks in the Venezuelan economy when oil profits were steady and high; however, the 1980s oil glut sent the country into an inflationary spiral. The fallout from putting all its economic eggs in one basket was so dramatic that the government chose to adopt austerity measures outlined by the IMF to receive a bailout. Venezuela was left in turmoil trying to negotiate its post-oil boom future, until Hugo Chavez entered Miraflores Palace. 

Hugo Chavez was a failed coup leader that came to formal power by becoming President in 1998. Chavez, who promised to use Venezuela’s oil wealth to alleviate the country’s poverty rate, was able to do so successfully through the establishment of “Bolivarian missions.” These were a series of social programs that provided healthcare, literacy, and food distribution programs to the country’s poorest segment of society, free of charge or at a significantly discounted price. In reality, these programs were funded by the nation’s oil revenue. Initially, Chavez was successful in lobbying the organization of Petroleum Exporting Countries (OPEC) into making the price of a barrel go up from $22 to $28. However, his policy success was soured after strikes by workers of PDVSA–the government owned oil conglomerate–resulted in Chavez laying off 18,000 workers. The mass exodus of experienced talent from the oil industry precipitated a steady decline in oil production for the country. To compensate for this, Chavez built up trading and banking ties with Russia, China, and Cuba. These partnerships were tested as Venezuela built up a significant amount of debt with these trading partners over the years. In China’s case, Venezuela became the receiver of 45 percent of  China’s entire policy bank loans. While costly, Chavez was able to mortgage the economic stability of his nation in exchange for votes and approval by the electorate. He was even able to parlay his popularity into a successful constitutional referendum to abolish term limits in 2009. 

Upon Chavez’s death in 2013, Nicolas Maduro continued Chavez’s policies, which he has used to shield his regime from external sanctions and internal threats. Since coming to power in 2013, protests, economic, and civil unrest have been hallmarks of Maduro’s tenure. Just three years into his tenure, Maduro suppressed an in-demand recall referendum and in 2020 faced a failed coup attempt. In between 2016 and 2020, the citizens of Venezuela have struggled with inflation, suppression of civil liberties, and an inability to get basic goods that has only been compounded by U.S. sanctions and oil shocks, such as in 2016. For the average Venezuelan, Maduro's tenure has been an 11 year long rollercoaster that has measurably reduced their quality of life, as the UN estimates 66% of the population requires humanitarian assistance. As of the publication of this article, Nicolas Maduro seems to have successfully secured another presidential term despite having insufficient votes. His reelection means that the status quo will most likely continue and leaves little hope for the people of Venezuela to see a noticeable improvement in their lives. 

Venezuela’s mismanagement of its natural gifts should serve as a cautionary tale for nations believing they can avoid the resource curse. While the wealth available from large quantities of easily accessible natural resources can be tempting, if the economy is not managed well and does not use the wealth created to diversify the economy for the future, political and economic leaders can cause cascading effects that, in turn, enable the future economic and political destabilization of the country.