Venezuela’s Resource ‘Curse’ a Problem of State Control of Property Rights

The resource curse in Venezuela is not a problem of stock, but a problem of property legislation.

Why does Venezuela suffer the resource curse and Norway doesn’t? This is the typical question that any economist specialized in development has to face when asked about oil and economic growth in Venezuela.

According to recent literature, countries with natural resource wealth may have lower economic growth rates than those with relative resource scarcity. In addition to this thesis, another argument is states there is a nexus between resource richness and low democratic performance as it lowers the relative size of the working middle class and hinders public participation.

The data found in the World Bank series and the Democratic Development Index seem to confirm these this two hypotheses. Why?

The answer can be found in the constitution of Venezuela, specifically in the 12th and 156th articles.

“Article 12: Mineral and hydrocarbon deposits of any nature that exist within the territory of the nation, beneath the territorial sea bed, within the exclusive economic zone and on the continental shelf, are the property of the Republic, are of public domain, and therefore inalienable and not transferable. The seacoasts are public domain property.”

“Article 156: Is of the competence of the National Public Power: … (16) The governance and management of mines and hydrocarbons, the governance of vacant lands and the conservation, development and exploitation of forests, soil, water and other elements of the country’s natural wealth.”

In essence, the state has a legal monopoly on oil exploration, production and therefore, distribution which allows the government to manipulate public spending without taxation in other activities.

In Norway, the situation is quite different. Even when the state has some participation in the oil industry, they managed to isolate the perverse effects of the resource curse by using non-oil revenues as the primary source of the fiscal budget according to the Norwegian Ministry of Petroleum and Energy.

Now, Venezuela is facing an uncertain future after the double failure trying to sell CITGO and lowering the production quota in the OPEP, as a solution to low oil prices.

In conclusion, the main reason Venezuela faces the resource curse is the existence of a legal state monopoly that works against the competitive free market. The solution might be the elimination of the two articles, in order to open the industry to private investors and the reduction the influence of the state. This would result in stronger market pacification and would help free the Venezuelan economy from the volatility of the oil.

Gerardo Núñez is Coordinador de la Unidad de Investigación at CEDICE