“‘I sometimes think,’ said the Eternal, ‘that the stars never shine more brightly than when reflected in the muddy waters of a wayside ditch.'”
Maduro
On January 3rd, the US Delta Force captured Nicolás Maduro, the dictator of Venezuela, in an overnight operation in Caracas that caught Maduro off-guard. The action was planned for months and executed flawlessly without a single US casualty.
Time.com reports: “President Nicolás Maduro of Venezuela and his wife, Cilia Flores, were seized in a pre-dawn raid in Caracas by American special operations forces, the culmination of months of covert intelligence work and steadily escalating military pressure ordered by President Donald Trump to oust the authoritarian leader. The operation, officials said, unfolded in less than half an hour overnight but drew on weeks of rehearsals and a vast armada of aircraft and intelligence assets that tracked Maduro’s behavioral habits.”
Maduro and his wife were transported to New York to face drug‑trafficking charges. It appears to be the stuff that military action movies are made of.
No doubt there will be a movie soon.
Venezuela has the largest proven crude oil reserves in the world. The crude is heavy and requires petroleum refineries that can handle it. Venezuela does not have the capacity and depended on the US gulf coast refineries.
Resource Curse
Given its natural resource endowment, Venezuela could have been one of the richest economies in the world. But as is unfortunately quite common, some countries are doomed to fail because of what is called a “resource curse,” or the “paradox of plenty.”
This is the surprising phenomenon where countries rich in natural resources — such as oil, gas, or minerals — tend to experience slow or even negative economic growth, weaker development outcomes, higher corruption, and high inequality. The intuitive expectation is that abundant resources would bring prosperity, but the opposite often occurs.
This is due to factors like over-reliance on a single commodity (vulnerability to price swings), weak institutions and corruption. Resource revenues can fuel rent-seeking rather than productive investment and the neglect of other economic sectors. Venezuela is a textbook example of the resource curse.
Dutch Disease
Closely related to the resource curse is what economists call “the Dutch disease.” It occurs when a sudden boom in one sector (typically natural resource extraction) causes the national currency to appreciate sharply. This makes other export sectors (like manufacturing or agriculture) less competitive internationally, leading to their decline or stagnation. The term originated from the Netherlands’ experience after discovering large natural gas reserves in the 1960s, which boosted the guilder but harmed manufacturing exports.
Many countries suffer from resource curse and Dutch disease, but good institutions, economic diversification, and prudent management (like Norway’s sovereign wealth fund) can help avoid or mitigate them.
Institutions
Institutions matter fundamentally for the health of an economy. The constitution is an institution that provides the foundation upon which other institutions such as the government and the economic order (free market or command-and-control) are built.
Institutions are built by people. If the country has the good fortune to have good leaders, then it prospers regardless of how much or how little its resource endowment is. Conversely, poor leadership invariably condemns the people to misery.
Some countries escape the resource curse. Norway, richly endowed, is a great example. In contrast to that, many African countries suffer immensely. Then there’s Singapore. It got lucky that Lee Kuan Yew was in charge since its inception. He recognized that Singapore had very little in terms of natural resources. Therefore, it had to rely on being productive.
Venezuela
The pity is that the people of Venezuela have been suffering for decades. It relied on world crude oil prices, and its fortunes rose and fell with it. During the tenure of Hugo Chavez, oil prices were high and the people enjoyed lavish subsidies from the Chavez administration, corrupt though it was.
Maduro took control upon the death of Chavez in 2013. That coincided with the precipitous decline of oil prices and with it the decline in the living standard of Venezuelans. It’s a fascinating story of how to destroy an economy using the age-old socialist formula.
See this video for a quick review of the story: “How to bankrupt a country in 5 easy steps.” It may not be the most accurate but it should do for now.
With that, let’s move on to opinion. All things considered, it was time for Venezuela to have an external shock. The system was stuck in a very low equilibrium and an external shock often improves matters.
It was unlikely that any Venezuelan leader would have the foresight to change the trajectory of the economy. Trump has taken the first step of taking control of Venezuela. He wants the US to manage its oil resources. Is that good for Venezuelans? I think it is.
At the very least, the people will get some relief. Granted that the US is not a benevolent power and further granted that the US military-industrial complex will be the major beneficiary of the capture of Venezuela’s oil wealth, it is undeniable that the people will not be any worse off than they are now.
In a perfect first-best world, Venezuelan leaders would have been benevolent and would have managed their national wealth for the benefit of their people instead of being a dictatorial kleptocracy. Since it is a second-best world, what they had was a kakistocracy — where the least qualified and the most corrupt hold power.
The situation is bad. But we have to ask: It’s bad compared to what? Furthermore, we have to keep in mind that in our imperfect real world, there are no perfect solutions, only trade-offs.
Random Draw
Life’s a random draw. That’s true at the level of the individual and at the level of the collective. Some countries draw good cards. Singapore did. So did the United States at its founding. Other countries have no such luck. India drew a terrible hand in 1947. Over the decades, I estimate a couple of billion Indians have needlessly suffered immensely.
Venezuela is a small country. Current estimates place it around 30 million people. That’s the same as its population a decade ago. People were forced to migrate to neighboring countries in search of relief in the recent few years. The damage has been limited compared to the damage that India has suffered. But I digress.
Oil
Venezuela’s prospects have improved because of Trump’s move. Trump of course is not benevolently motivated. He is too stupid and too megalomaniacal for that. Whatever his motivations, Trump has finally done something that is good for the world. Thank goodness for small mercies.
Oil is a valuable resource but it does have an expiry date. I expect that in about 20 years or so, the demand for oil will fall to the point that very little of it will be extracted. The major source of energy will nuclear (fission and fusion). Therefore, it is in the interest of oil-rich countries to extract and sell as much oil as they can.
The exploitation of Venezuelan oil will be good for the people. Not just that, it will be good for the world economy. It will boost world economic growth.
Stuff in the ground is not wealth. It’s just stuff. Stuff becomes wealth when it is used for productive purposes. Chevaz and Maduro buried the economy. Time to dig it out and free the people to enjoy their inheritance.
Let’s close with a song.
Thank you, good night and may your god go with you.
Atanu Dey : Life is a Random Draw 