Venezuela's "Dutch Disease"

From Venezuela's Collapse: The Long Story of How Things Fell Apart, by Carlos Lizarralde (Codex Novellus, 2024), Kindle pp. 118-119, 126-128:

The early theorists of Dutch disease studied how real economies, including those with robust consumer markets, reacted to a commodity boom. These writers did not consider what might happen to a small, barely functioning country, which did not even have a modern state in place when the first oil gusher blew out. The existing capital in Venezuela was negligible, which means that other, less measurable, factors came into play.

Arturo Uslar Pietri was the first person to pick up on the cultural strands of Dutch disease well before American academics started modeling the phenomenon. He was a descendant of landowners and had seen first-hand the death of the cocoa and coffee industry upon oil’s arrival. More importantly, he could see what oil was doing to the country as far back as the 1930s and 1940s. In a feat of uncanny prediction, he also foresaw the tragedy of the 2010s.

His brief analysis of the new economy was offered in a now-famous op-ed piece, “Sowing Oil,” published in 1936. For him, conditions were such that the newfound riches “could make Venezuela into an unproductive and lazy country, a giant oil parasite, swimming in a temporary and corrupting abundance, and driven toward an inevitable and imminent catastrophe.”

The main issue, he feared, was that either oil would run out, or that something synthetic would replace it, as had happened to other commodities familiar to South Americans, such as rubber or indigo. His thesis mirrors what the early theorists of Dutch disease would later acknowledge. What the academics ignored but Uslar could sense all around him were the broader, less tangible ways in which oil would permeate and dull Venezuelan society.

Uslar wrote his op-ed to counter the increasingly influential views of Rómulo Betancourt, who thought that oil was, and should be, everything. Alluding to Betancourt, he writes in “Sowing Oil” that having the state focus exclusively on the rent from oil was the “suicidal dream of naive men.” He believed the oil money should be used to develop a vigorous national industry, including modern agriculture.

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While a lot has been written about how governments wasted oil revenues for decades, Dutch disease was very much a part of the private sector as well. Mid-sized and large companies that, in retrospect, had a real chance of global success, were never able to do anything about those prospects.

The shoe industry born in the Catia neighborhood of Caracas is a perfect example. The know-how of Sicilian and Neapolitan families that had emigrated from the old country to continue their shoe trade in Venezuela could never become globally competitive with a strong bolivar. Their companies were very prosperous for decades because the Ministries of Education and Defense would buy millions of shoes and boots. But the future was bleak without a consumer market big enough for the factories to reach substantial scale. The overvalued bolivar never let them export successfully, and cheap Chinese manufacturing eventually hit them hard. Later, they would be crushed by globally integrated and truly competitive retailers such as Zara.

The degree to which the out of context desarrollista policies failed the country is made evident by comparing two key Venezuelan companies and their Mexican counterparts. As early as 1979, well before NAFTA, Mexico’s Grupo Modelo managed to reinvent their weak and cheap working-class beer Corona into a “cool and light” alternative for American “Yuppie” consumers. The venture’s success turned Modelo into one of Latin America’s most valuable companies while Venezuela’s brewery Polar, awash in 1970s overvalued bolivars, did not take export markets seriously. Decade after decade Polar’s businesses expanded domestically, remaining tied to the price of oil and the swings of Venezuelan politics. Another Mexican company, Cemex, exploded out of humble beginnings to become the biggest cement company in the world. While its take-off did not happen until the 1980s, everything started with a financial consolidation, a series of acquisitions, and a listing in the local stock exchange in 1976. Right around that time, Cementos de Venezuela was happy to feed the building boom driven by the strong bolivar, a prelude to its eventual bankruptcy.

Rather than getting ready to expand through exports, the simplistic theory of import substitution allowed the Venezuelan private sector to use overvalued bolivar revenues to obtain dollar-denominated loans. Foreign banks at the end of the 1970s and the beginning of the 1980s were ready to lend dollars against future bolivars. On top of every other challenge, the borrowing proved catastrophic.