Venezuela: Escaping the Resource Curse

Abstract

As Juan Guaido inherited a debt and poverty-stricken economy characterized by hyperinflation as an ‘interim President’, the fear of his removal and dissolution of the Government engulfed him. He was worried about rising inflation, mismanagement of natural assets, rising fiscal debt, unemployment and poverty. He knew that the socialist policies adopted under the leadership of Chavez and Maduro had benefitted the citizens only for a brief period but had been the primary reason for the economy’s slowdown in the last decade. The economy underwent long periods of hyperinflation amounting to 130,060%, which has rarely been observed in any country worldwide ( Exhibit 1 , Exhibit 3 ). Venezuela is a classic case of a ‘petrostate’ exhibiting the characteristics of a ‘resource curse’. The expansionary fiscal policies, a large share of the government sector, subsidies, price controls, a ban on the private sector and erratic monetary policies contributed to the economic and political crisis. Juan knew the economy was bleeding, and almost seven million Venezuelans still fell into extreme poverty. He thought adopting a contractionary fiscal policy would increase unemployment, and many more would fall under the poverty line. On the other hand, expansionary monetary policy will further increase inflationary pressure. While sitting in his office, Juan thought, ‘Shall I go for a stringent tax policy to increase the government revenue or adopt the dollar as an official currency for curbing inflation?’