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What Norway might tell us about Venezuela’s economic crisis

It is common to blame Venezuela’s current crisis on the price of oil. Despite sitting atop the world’s largest proven oil reserves, the Venezuelan economy is in a shambles and the country is gripped by chaos. When the price of oil fell precipitously in 2014, so too did Venezuela’s access to foreign exchange. Without this money, Venezuela has been unable to buoy the country’s national oil company and the social programs and food subsidies that support the sitting government.

While oil plays an important part in Venezuela’s tragedy, and most agree that President Nicolás Maduro’s policies have exacerbated the situation, much of the world’s critical attention is misplaced. The roots of Venezuela’s problems run much deeper than the current administration. The experience of another petroleum-rich state, Norway, suggests that Venezuela’s problems are not so much oil, a national oil company, or social support policies; Venezuela suffers from poor management practices, and this cursed mismanagement is long-standing.

Beware of volatile prices

While the recent fall in oil prices was dramatic, it was not unprecedented. Like other natural resources, the price of oil is cyclical in nature: periods of rising prices are frequently followed by periods of falling prices, as illustrated in Figure 1. Consumers have experienced significant oil price shocks before (e.g. in the 1980s and around 2008), and will do so again in the future. Prudent management of a petroleum economy requires policymakers to prepare for the next change in prices.

Figure 1. The Price of oil from 1861-2015. Data from BP Statistical Review of World Energy, 2016.

For countries that rely heavily on petroleum production, a radical price drop threatens a reduction in economic growth, an expanding government budget and national trade deficits, and an increase in the risks of financial and macroeconomic instability. To protect against these threats, policymakers must ensure that the domestic economy is not overly dependent on that resource, and build up financial reserves that can be marshalled when prices drop. In short, a robust economy needs more than one leg to stand. There are several ways to do this but each requires the capacity for strategic long-term planning. The Resource Curse stands as proof of the difficulty many states have in achieving these strategic objectives.

Norwegian Experience

Recently, Bjørn Letnes and I examined Norway’s response to the recent oil price shock. Our intent was to demonstrate that oil need not always be a curse and that states can avoid the Paradox of Plenty. Norway wielded a variety of tools in response to the new price environment, and many of these tools are not immediately available to other countries (e.g. a flexible exchange rate and a corporatist wage bargaining framework). But the foundation upon which these policies rest is available to all petroleum-producing states and consists of two main components: a) the need to maintain viable economic (export) alternatives to petroleum and b) the capacity to secure responsible fiscal policies that anticipate the volatility of petroleum prices.

Key to the Norwegian response was a dramatic fall in the value of the Norwegian krone (which shadowed the fall in global oil prices). This had an immediate effect on the Norwegian export sector, whose prices suddenly became more competitive on international markets. Idle factors (capital and labor) from the petroleum sector flowed into these growing export markets. While moving jobs and investments takes time, and some local markets were harder hit than others, a depreciation of the krone provided existing exporters with the sort of kick-start needed to turn over the Norwegian economy. It is important to emphasize that a non-oil export sector has been nurtured from the very start of Norway’s oil adventure and hence was ready to pounce when the exchange rate improved. This is the core economic challenge of resource dependence, as the most valuable export sectors in a country tend to be hurt by the currency appreciation accompanying oil wealth (when times are better).

Figure 2. Data from Norwegian Petroleum (2017).

At the same time, Norway has amassed a fortune in the world’s largest sovereign investment fund: its Government Pension Fund, Global (GPFG). More importantly, Norwegian politicians have agreed to a rule that isolates the government’s budget from the volatility of oil prices and limits the amount of oil money filling the government’s coffers (to inoculate against Dutch Disease). Hence, when oil revenues dry up, the government can turn to the GPFG to keep funding its ambitious social policies and to encourage developments in the mainland (non-oil) economy.

In light of Norway’s response, we might think again about the nature of the economic crisis in Venezuela. Venezuela’s problem should not be linked to the existence of a national oil company, extensive social programs, or even food subsidies; after all, Norway enjoys all these economic artifacts, and successfully avoids the Resource Curse. Venezuela’s current problems can be traced back to its over-reliance on oil and short-sighted fiscal policies—and these problems can be traced farther back in Venezuela’s history. In particular, Venezuela lacks an (alternative) export strategy and the savings (and economic breathing room) it needs to respond to the crisis. This is not to excuse Maduro for his misplaced policies, as many believe they have worsened the situation. Rather, it is a call for better long-term management strategies for the future, and a recognition that these can be done in a socially-responsible manner.

Featured image credit: Oil Rig by Catmoz. CC0 public domain via Pixabay.

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