State-run oil is a gift to Venezuela’s rulers, a curse to its people

To understand Venezuela’s current condition, consider its 20th-century history. Prior to the discovery of oil in 1914, Venezuela’s average income per capita was marginally above subsistence.

After oil was discovered, and partly due to the presence of American and British oil companies, Venezuela’s per capita GDP grew rapidly. By 1957, per capita income had risen to 50 percent of the U.S. per capita income.

{mosads}In 1959, Venezuela became a democratic nation. Soon, GDP growth slowed down. From 1958 to 1980, the growth rate of per capita GDP averaged a paltry 1.18 percent. The average growth rate between 1981 and 1998 was a negative 2.77.

Venezuela became a growth disaster, a condition shared by 14 sub-Saharan countries and Nicaragua, which endured a civil war during the period. What happened to bring Venezuela’s economy to a halt? The answer will help explain Venezuela’s current predicament today.

The problem is that Venezuela’s democratic leaders were socialists. That is, the government owned the natural-resource wealth of the country — its oil, natural gas, steel and aluminum, as well as its coal, gold, diamond and iron mines. As a result:

• A central planning agency was established;
• leasing new tracts of private lands for oil extraction was halted; 
• the Organization of Petroleum Exporting Countries (OPEC) was founded, with Venezuela a founding member;
• the central bank was nationalized;
• price, interest rates and exchange rate controls were implemented;
• businesses were burdened with heavy regulations;
• high tariffs were adopted in the 1960s; and
• inflation and attendant devaluations broke loose, as the judiciary branch entered into the slippery-slope dynamics associated with corruption.

The lackluster performance of the economy increased poverty and precluded the emergence of a middle class. That made the electoral victory of Hugo Chavez in 1998 possible, along with the subsequent ascension to power of Nicolàs Maduro. From an economic standpoint, both leaders exacerbated all the vices of their predecessors between 1958 and 1998.

The Venezuelan experience illustrates that a government supported by the exploitation of a rich natural resource cannot co-exist with liberal democracy for long. Several factors conspire against the viability of democratic rule under such conditions.

What’s more, a poor government is easier to tame and becomes subject to the rule of law. Rule of law is the essence of liberal democracy. Indeed, equality before the law and one-person-one-vote go together.

As English historian Paul Johnson asserts: “Both are needed, but young states find in practice that legal equality, enforced by courts, which fear no one, is the substance, formal democracy often the mere shadow.”

Historical evidence illustrating that impoverished government becomes subject to the rule of law includes England’s Glorious Revolution of 1688, by which William of Orange became King William III.

What made it possible were the gradual impoverishment of the English crown and the increasing role of the parliament, coupled with the continuing enrichment of commoners.

Conversely, there are conspicuous historical instances of fiscally independent governments that suffocated potential democratization. In Spain, absolutism intensified with the discoveries of precious metals extracted from the colonies.

In the 17th century, the French king was the wealthiest monarch of Europe. His wealth, based on income from his royal domain, became a major obstacle to subduing his power.

Modern examples are oil-producing countries in the Middle East. Their governments, owners of the oil wealth, are fiscally independent. Mexico, Ecuador and Russia are marked by a morass of extractive economic and political institutions, which obstruct the establishment of rule of law, sustained economic growth and political development.

Whether the state or the people own the country’s wealth, and whether the state obtains its revenues by taxes or through patrimonial rents will determine the arrival, persistence and flourishing of democracy. I do not know of any flourishing democracy where the government is socialist.

Another aspect of socialist governments inimical to democracy is the massive amount of power bestowed on the state, making it a breeding ground for corruption, a growth-retarding factor. Finally, companies owned by states are generally inefficiently managed, forestalling sustained growth.

Hugo Faria is a lecturer in economics at the University of Miami and a senior research consultant at Econintech, a Venezuelan organization affiliated with the libertarian Atlas Network.