Caracas Chronicles

Between 1936 and 1978, the Venezuelan economy grew faster than any other anywhere on earth. From 1978 onward, it shrunk faster than almost any other in the world. What happened?

The standard explanation is all about corruption.

Most economists, however, see it differently. The wonkish take centers on the instability of the world oil market. Starting with the 1973 oil crisis, what had been a relatively stable energy market went all out of whack. Prices became much more variable.

For oil exporters, the result was dizzying macroeconomic instability. Money would flood into the country during booms, internal consumption would grow fast, and in time, the economy would overheat. When the bubble burst, demand would collapse and severe recessions followed. Each turn of this merry-go-round would leave people poorer than the last.

The fault is not just with impersonal global forces, though. Since the 1970s, every government Venezuela has had has mismanaged the oil cycle, and all in the same way. Instead of evening out the highs and lows, they accentuated them. Instead of saving during booms, they went into debt to spend even more than they were taking in. Instead of going into debt during busts to stimulate the economy out of crisis, they were forced to spend less because, by then, they had tapped out their creditors.

Lots of petrostates have suffered through this kind of mismanagement, and all have ended up poorer than they started.

Now, it’s happening again. Once again oil prices are sky high. Once again the government is rushing to spend every dollar it gets its hands on, and then some. Once again the economy is overheating.

For now, times are good – just like they were in 73, 79, and 91. GDP is way up. Nothing surprising about that. The question is, what happens when the bust comes? Care to hazard a guess?