Reflections from Latin America

Some excerpts from an instructive article, The Curse of the Petro-State:The Example of Venezuela, By Ibsen Martinez.

What makes oil a poisoned chalice?" Why do so many people lead such poor lives while sitting on King Midas' throne, especially during an oil boom? That is a question millions of Nigerians, Algerians, Indonesians, Iranians, Mexicans and Venezuelans have been asking themselves for decades without getting a convincing explanation.

More often than not, oil booms plague certain oil-rich countries with all sorts of calamities and the calamity of extreme poverty can be the most demoralizing for an oil-rich Third World country's population.

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What exactly is a petro-state? It could be described as a mining country with weak institutions and a malfunctioning public sector. Its most important feature are laws that grant subsoil rights to the government, from which spring the extraordinary size and duration of the "petro-rent" which is much, much greater than the profits which can be made in the private sector.

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As Karl points out in chapter three of her book, "(b)ecause oil revenues poured into the state and not into the private enterprise, each new discovery or price increase enhanced the role of the public sector". So it is only natural that new agencies and jurisdictions are born. And since it is the state, not the private sector, which has first access to the petro-rent, rent-seeking becomes the name of the game for everyone, including of course the small private sector. Deadly fights over who controls the country's oil revenues become the only important issue in domestic political life. These "wars" over petro-rents annihilate already weakened institutions, favor the concentration of power, promote the bending of the law, and, last but not least, increase corruption which is already all-pervasive.

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Petro-states apparently cannot cope with oil booms without running into almost unrepayable debt and without undermining democracy in the end. Such seems to be the curse of the petro-state: "you shall never attain economic diversification and your people will grow poorer and angrier at you with each passing day." Since the Arab oil embargo in the 1970s, the number of Venezuela's poor has climbed to almost 65% of a population of 22 million. Today, most Venezuelans agree that it was the harvest of inequality, frustration and political unrest, generated by the oil booms of the mid-1970s and 80s that made possible Lt. Col Chávez's ascent to power in 1998.

Complete article.