Peter Krupa

Hugo Chavez seems worried, and he damn well should be. More on that in a moment.

First, I need to explain the problems with basing an economy entirely on the market price of a single natural resource (like oil), and for that I will turn to the delectable Andres Oppenheimer and his savory latest work Cuentos Chinos, which I will liberally paraphrase from memory, as I left my copy in Costa Rica due to airline weight restrictions. Damn the damn airlines.

On the face of it, one might assume a country with stupendous natural resource wealth holds a ticket to prosperity for the its citizens, especially if prices are skyrocketing as with oil in the last few years. This can be true. Usually it’s not.

See, what happens is, the enormous income from the high-priced natural resource throws off the developing country’s currency value. Currency value goes up, and foreign investment goes down, because it’s no longer so cheap to make things. Not only that, the domestic “making things” part of the economy finds it harder to compete with other countries’ “make things” industries.

There are ways around this problem. One thing a Scandinavian government (I forget which one, I think it was Finland) did with its huge lumber resource was save some of the income and invest it in new domestic “make things” industries. First they made furniture, then technology, and today, there’s Nokia. The economy is off the juice, there are plenty of jobs, and things are booming right along. (Successful “make things” industries make much better profits than raw natural resources do.)

Most countries, however, don’t do this, which brings us to why Chavez should be worried. For the last seven years, Chavez has been spending money like Michael Jackson. While floating in a sea of oil wealth from fortuitously high prices, he was able to both spread the love in the form of hand-outs and other thinly-veiled populist measures, and ignore the domestic “make things” industry. Meanwhile, those populist measures were scaring the shit out of foreign investors and driving them out of the country. Venezuela’s informal economy is unfortunately booming, as thousands of legitimate small businesses have had to close up shop.

The Venezuelan economy, then, is teetering on the pin-point pedestal of high oil prices. No wonder, with oil prices dropping, that Chavez is calling for production cuts to push the price back above $60 a barrel. He’s worried. Even though $60 a barrel is an obscene price for oil, that’s the house of cards that is Venezuela’s economy.

Rather than take advantage of high oil revenues to mitigate their effect on the rest of the economy - and maybe even nudge Venezuela into the information age - Chavez hasn’t done much more than fuck around, squeezing private enterprise and political freedom while he was at it.

Sooner or later, rough times are ahead for the Venezuelan economy. It’s enough to make one wonder why, exactly, Chavez has been buying all those guns.