Venezuelan Paradox

Monday, April 11, 2016 | 0 comments »

If tomorrow there was a sand shortage in the Sahara it would befuddle many. A close second is how after many years of expensive oil prices Venezulea (highest proven  reserves in the world) is now asking the ladies to stop using hairdryers so that the country can negotiate an awful energy shortage. How did they get here?

The short answer is most electricity capacity in Venezuela comes from hydro - and the country is suffering drought. So blame El Niño (as President Maduro does).

The longer answer is a striking lack of investment in power capacity: despite the knowledge that consumption has risen by half over the 10 years to 2012 planners have engineered an increase in capacity of under 30%. Cue a negative externality and pleas for wet hair ensue.

In what appears to be a story of deferred pain, investment by the private sector electricity companies (and others) dried up when the late President Chávez was elected in 1998. Subsequent nationalization actions did not encourage private capital. Concurrently, consumption subsidies and price freezes on electricity boosted demand.

Told this way current travails appear more a case of poor economic management by socialists.

However, dig a bit and it is perhaps most accurately a story of a divisive political history and corruption stretching back to (at least) the nationalization of oil companies in the mid-1970s. With the subsequent oil price shock in 1978 the Venezuelan economy became a very fine example of Dutch Disease.

Arguably the key consequence of a four-fold increase in government revenue following the OPEC prices rises was an increasing cancer of corruption eating into the two dominant political parties of the day. Worsening cronyism and patronage in electoral competition became the norm; and this in time led to Hugo Chávez coming to power on the very reasonable manifesto of anti-patronage, anti-corruption and anti-poverty.

So, as with statistics, the cause (and answer) to the problem depends on which section of the time-series one starts the analysis from.

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