September 3, 2018 Print

Venezuela has one of the largest repositories of oil in the world, so why is its economy collapsing? Two new research papers produced by Venezuelan think-tank Centro de Divulgacion del Conocimiento Economico para la Libertad (CEDICE Libertad) provide unique insights into this question. By examining the way Venezuela's oil industry operates while comparing and contrasting that with the oil industries of Norway and various Middle Eastern countries, these papers isolate a few basic causes of the dissonance — a lack of stable, democratic, and market-oriented institutions.

“With the support of Atlas Network, CEDICE Libertad develops its Venezuelan Oil Industry Project, looking to bring to the public discourse the discussion about oil property rights in Venezuela,” said Rocío Guijarro, general manager of CEDICE Libertad. “The initiative also aims at influencing Venezuela oil property policies and law reforms to reduce the government monopoly on oil activities and to open them to the Venezuelan private sector.”

Venezuela vs. Norway: The differences institutions make

The first paper, “How much do Venezualans know about their oil industry,” by Isabel Pereira Pizani compares Venezuela's political culture and guiding principles to those of Norway. The oil industries of both countries are owned by the government and yet Norway’s industry generates long-lasting wealth while in Venezuela economic turmoil continues to grow. Pizani suggests that — even though the industry is run by the government — in Norway there are free-market principles incorporated in procedures and in the cultural ethos which allow for profit and prosperity.

“The hypothesis we assume in this analysis proposes that the differences between the impact of the oil industries of Norway and Venezuela, despite both being State-owned...is not the result of technical or environmental problems,” writes Pereira Pizani. “In our criterion, the effect is linked to problems relating to the strategy drafted and objectives set; the control structure, the management and valuation of the human resources, a series of elements which prefigure a connection or separation of these industries as public companies to their respective societies.”

Pizani suggests that institutions which promote accountability are critical for a successful industry. In Norway everyone can see how the the government is operating the oil industry — what regulations there are, who has been appointed to run various parts of it, and what the revenues and costs are. In Venezuela there is no accountability to the people by the government.

“The motto of the current government that now ‘the petroleum is of all of us’ lacks any basis whatsoever since something that I know nothing about and which ignores me as a citizen could not possibly be mine or owned by me,” continues Pereira Pizani.

Another institutional difference between the two nations is the lack of a democratic history in Venezuela. Because of the long, stable history of democracy in Norway there is a natural expectation that the government can be held accountable to the people. Since the oil industry is owned by the government that expectation is carried over. This idea is not dissimilar to the free-market principle of customers driving business decisions and market forces. Because Venezuela does not have this sort of history the industry is run with much less of an expectation of accountability and for such a return-on-investment.

“The major difficulty this decision contained was that, while in Norway the political institutions throughout over a century had been completely democratic, in Venezuela these institutions lacked the clout and fortitude to grant an all-inclusive nature to the oil industry,” continues Pereira Pizani.

‘Dismantling the Myth of Wealth from Mineral Resources’

The second paper — “Dismantling the Myth of Wealth from Mineral Resources” by David Ludovic Jorge makes a similar case as Pizani’s paper but uses Middle Eastern countries for counterpoints. There is a common misconception that if a country is rich in natural resources they will automatically become a wealthy nation. Jorge refutes this notion by examining the current state of Venezuela and Middle Eastern countries such Saudi Arabia and Kuwait as well as Norway. The findings suggest that countries with institutions which facilitate economic incentives are much more likely to be wealthy than those that do not.

Venezuela has a long history of preferential treatment for state-owned organizations and has continued to give them majority support over other, more industrious companies. While there is government ownership and heavy subsidy of the oil industry in countries in the Middle East and Europe, there are incentives and procedures which promote quality-based competition for those government funds.

“The empirical survey revealed that the most thriving oil-based economies are those which instead shore up the various stages of the oil industry (from exploration to commercialization) in private efforts through several mechanisms and modes of public-private interaction in which the incentive for economic freedom and private property as well as economic institutions bear great importance,” writes Ludovic Jorge.

Ludovic Jorge’s conclusion echoes that of Pizani’s: it is economic freedom, not the amount of natural resources of a country, that determines wealth rather than.

“...poverty is generated...not due to the abundance or scarcity of natural resources, but above all due to the proper interaction between political and economic institutions which give rise to incentives for generating wealth…” continues Ludovic Jorge.

These two papers from CEDICE Libertad call for the introduction of classical liberal principles of free markets, secured property rights, and individual empowerment in Venezuela. Atlas Network is proud to partner with CEDICE Libertad as they continue to champion the cause of liberty in Venezuela.

 

Read “How much do Venezualans know about their oil industry” (link includes Spanish and English version).

Read “Dismantling the Myth of Wealth from Mineral Resources” (link includes Spanish and English version).

CEDICE Libertad is a long-time grantee of Atlas Network.