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The Fall of Venezuela’s Oil-Based Economy
Currently, Venezuela is in an economic crisis. According to the International Monetary Fund (IMF), Venezuela’s inflation rate will exceed 10 million percent by the end of 2019. This high inflation has destroyed Venezuela’s economy, causing poverty and unemployment rates to rise. In turn, it has also created mass food and medical supply shortages across the nation. Venezuela was not always in a state of crisis; it was once a thriving country backed by a booming oil-based economy. If one understands the fall of Venezuela’s oil-based economy, they will know how Venezuela’s current crisis came to be.

Fruitful Origins

Back in the 1920s, people found some of the world’s largest deposits of oil in Venezuela. Upon this discovery, Venezuela embarked on the path of a petrostate. As a petrostate, Venezuela’s economy relies almost entirely on oil exports. The government overlooked domestic manufacturing and agriculture, choosing to import basic goods instead of producing them within Venezuela. With strong support for an oil-based economy, Venezuela rode on its economic boom until the end of the worldwide energy crisis of the 1970s.

The 1970s energy crisis involved international oil shortages due to interrupted supplies from the Middle East. In place of the Middle East, Venezuela became one of the top oil suppliers worldwide. Oil prices thus skyrocketed due to limited suppliers and oil production in Venezuela increased to meet rising demand. Venezuela added about $10 billion to its economy during the energy crisis, providing enough wealth to cover the importation of basic goods. It was even able to begin more social welfare programs.

The Fall

Once the energy crisis ended in the early 1980s and oil prices stabilized again, Venezuela’s economy saw its first notable decline. Oil production did not decrease in spite of lowered oil prices and demand, resulting in a capital loss for Venezuela’s economy. The production of oil is an expensive endeavor which requires high capital investment in the hopes of that even higher sales can offset the investment. Therefore, while oil production remained high, Venezuela failed to build off of the investment, losing capital immediately.

This loss of capital marked Venezuela’s oil-based economy’s initial fall, as Venezuela risked its well-being on the unstable oil market. Just prior to the drop in oil prices, Venezuela went into debt from purchasing foreign oil refineries. Without investing in domestic agriculture or manufacturing, the Venezuelan government became economically strapped; it could no longer pay for its imports and programs, and especially not its new refineries.

In order to pay for its expenses, Venezuela had to rely on foreign investors and remaining national bank reserves. Inflation soared as the country drilled itself further into debt. It was not until the early 2000s that oil prices began to rise again and Venezuela could once more become a profitable petrostate — in theory. Under the regime of Hugo Chávez, social welfare programs and suspected embezzlement negated the billions of dollars in revenue from peaked oil exports.

By 2014, when oil prices took another harsh drop worldwide, Venezuela did not reserve enough funds from its brief resurgence of prosperity. Ultimately, the country fell back into a spiral of debt and inflation.

Lasting Effects

The fall of Venezuela’s oil-based economy sent shockwaves throughout its population, affecting poverty and unemployment rates and causing mass food and medical shortages. Estimates determined that in April 2019, Venezuela’s poverty rate reached nearly 90 percent nationwide. A notable factor of its widespread poverty, some suggest that Venezuela’s unemployment rate was 44.3 percent at the start of 2019.

Unemployment is rapidly increasing in Venezuela as both domestic and foreign companies lay off workers — with some companies offering buyouts or pension packages, and others just firing workers without warning. As Venezuela falls further into debt and its inflation rises, there is not enough demand within the country for foreign companies to stay there.

As previously mentioned, the earlier Venezuelan government chose to rely on imports rather than domestic production for its basic goods. Now, in 2019, the country suffers from its past mistakes. Unable to afford its imports, food and medical supply shortages are rampant across Venezuela. According to recent United Nations reports, over a 10th of the nation’s population is suffering from malnourishment. In addition, malaria — which the country virtually eliminated several decades prior — is reappearing as there are more than 400,000 cases nationwide.

A Way Out

While the fall of Venezuela’s oil-based economy may be detrimental to the nation’s overall stability, there is a way out of ruin: the International Monetary Fund, an international agency that exists to financially aid countries in crisis. In the fight against global poverty, the IMF is a vital tool that can prevent countries from reaching an irreparable state.

If Venezuela defaults on its debt and seeks funding from the IMF, Venezuela would be able to invest in domestic agriculture and other infrastructure. Therefore, if the oil industry continues to decline, there will be a fallback for supplies and potential exports. While this is not a panacea to the fall of Venezuela’s oil-based economy, it is a way for the nation to prepare for any future declines in oil prices and begin to work toward prosperity.

– Suzette Shultz
Photo: Flickr

Why Is the Democratic Republic of Congo Poor
The Democratic Republic of the Congo (DRC) is one of the richest countries in the world in terms of natural resources. It sits on an estimated $24 trillion worth of natural resources, including 3.2 trillion cubic feet of natural gas, large deposits of iron ore, platinum, diamonds, gold and uranium, as well as 106270 square kilometers of arable land. Despite all this, its citizens make, on average, only $800 per year, and 63% live under the poverty line. Given its vast mineral wealth and natural resources, why is the Democratic Republic of the Congo poor?

 

Colonization, Political Instability, and the Resource Curse: Why is the Democratic Republic of the Congo Poor?

 

Due to the DRC’s great wealth of natural resources, it has consistently been exploited by imperial European powers throughout its history. When first discovered by the Western world in the sixteenth century, millions of Congolese men and women were stolen from their homeland and shipped around the globe to act as slaves for European industry.

Later, when slavery was eventually abolished throughout most of the developed world, the Congo was still not safe from pillage. When tires became a staple due to the rise of cars and bicycles, the rubber was taken from the Congo. When World War I was fought, 75% of the copper used in bullet casings were mined in the Congo. And when the United States dropped two nuclear bombs on Japan in World War II, you can bet the uranium came from the Congo too.

During this period, which lasted from 1879 to 1959, the Congo region was controlled by the Belgian empire. However, colonial exploitation alone cannot be the only answer to the question “why is the Democratic Republic of the Congo poor?” Due to the abundance of uranium in the region, the Soviet Union and the United States carried out proxy wars in the Congo by supporting vying factions during the Cold War.

Since then, the Democratic Republic of the Congo has been subject to a slew of dictatorial rulers, often with foreign support. After the Rwandan genocide of 1994, over a million Hutu took refuge in the Congo (then called Zaire), bringing with them both disease and rebellion.

After more than a decade of war, the Democratic Republic of the Congo gained enough stability to attempt a democratic government, though the election itself was rife with violence and conflict. There still remains a large faction of Rwandan rebels, and more than 800,000 people were displaced from their homes because of military operations meant to stop the rebel groups.

Another answer to the question “why is the Democratic Republic of the Congo poor?” can be found in the current president, Joseph Kabila. Not only is he suspected of stealing large portions of foreign aid, but he also provides those who do give aid access to the mineral resources of the DRC, at great expense to his own people, a repetition of the history of the country, which has been exploited by powers both foreign and domestic for centuries. These powers have worked hard to make sure the people of the Democratic Republic of the Congo remain poor, unhealthy and disenfranchised; unable to take control of their own country and the incredible resources it possesses.

Connor Keowen
Photo: Flickr

Education in BotswanaBotswana, one of Africa’s most stable countries, is the continent’s longest continuous multi-party democracy. The country is relatively free of corruption, has a good human rights record and is the world’s largest producer of diamonds. Trade has transformed it into a middle-income nation. In addition, education in Botswana has developed rapidly after the country became independent on September 30, 1966.

Although the Ministry of Education in Botswana spends around 30% of public spending on vocational and academic learning, education is only free from the age of 6 to 13.

Richard Khumoekae, Botswana National Front Youth League (BNFYL) President, suggests that Botswana should adopt a model of basic education especially because it currently values natural resources (diamonds, in particular) more than human resources.

Despite the criticism, the Botswanan government has continuously attempted to improve the educational system. Education is the top priority in the national budget. As it relates to primary education, the government aims to make sure that children are literate in both Setswana and English. The primary education curriculum also includes mathematics, science and social science.

Botswana’s “ten-year school programme,” adopted from the idea of Patrick van Rensburg, a South African educationalist, includes both primary and junior secondary levels, focuses on teaching children vocational and practical skills. Primary education is fully funded by the government, and most of the cost of secondary education is also funded by the state. These continuous attempts of the government to improve the education system in Botswana have led to a high literacy level, as more than 95% of the population between 15 and 24 years old can read and write.

Botswana, as a diamond-rich country, managed to overcome a so-called “resource curse”: the notion that countries with abundant natural resources do not perform as well economically as those without. It was one of the fastest-growing economies, with an average growth rate of nine percent per year, between gaining independence in 1966 and 1980. This was mainly due to its successful education reforms.

According to a recent statement, the government of Botswana is looking to diversify away from diamonds, because the precious mineral, like all-natural resources, is not going to last forever. The government is also looking for other ways to increase employment for the youth population.

According to Botswana’s education policy documents over the last 4 decades, the ideal system for education in Botswana promotes four principles: democracy, development, self-reliance and unity. One of the main objectives of the national education is “to attain competence in progress of education.”

Although Botswana still has to make sure that education becomes more compulsory, even for education level above primary, the country continues to make progress for future generations.

Gulyn Kim

Photo: Flickr

Poverty in Libya

Like many countries in Africa, Libya qualifies as suffering from the “resource curse, a phenomenon that occurs when countries that have large amounts of natural resources also have a high poverty rate. The country itself contains the largest oil reserves in Africa and the ninth largest in the world, but according to the CIA World Factbook, about one-third of Libyans live beneath the poverty line.

When Libya’s oil reserves were discovered in 1959, the most of the profits were quickly appropriated by the government of reigning monarch King Idris. The Libyan Revolution was launched ten years later by a coup d’état led by Muammar Gaddafi, who quickly gained power and ruled until two years ago when an uprising that coincided with populist movements throughout the Middle East region ended his 42-year autocratic rule. Today, a number of factors stand in the way of eradicating poverty in the new Libya.

  1. An interrupted economy. While Libya’s economy has been largely stable due to vast oil reserves, it suffered greatly during the six-month civil war. The year 2011 saw a 60% loss of GDP for the country, in no small part due to the foreign energy companies that withdrew workers during the fiercest conflicts. For a country where 95% of exports are generated by energy industries, this loss was a serious blow. While 2012 showed oil production’s return to pre-revolution levels, the loss of workers still threatens to slow growth. African Economic Outlook asserts that the major challenge for new Libyan leadership is “sustainable management” of the energy resources the country has.
  2. Ill-equipped health care systems. By the end of 2011, the newly formed Ministry of Health in Libya requested aid from the World Health Organization (WHO) for its health system. With less than 1500 primary care facilities for a population of over 6.5 million (as of February 2012), medical and health care has become a serious concern, especially in the aftermath of civil war. Many foreign health workers left the country during this time as well, deepening the health care void for remote and rural areas. For those who remained in the country during the civil war, the need for mental health and psychological support was particularly great. Libya’s Deputy Minister of Health Adel Mohamed Abushoffa expressed this need to the WHO in early February 2012: “We have a real shortage of psychiatrists. We currently have just fourteen in the whole country.”
  3. Lack of infrastructure. Even though state projects in the 1970s and 1980s promised much for infrastructure, Libya’s National Transitional Council (NTC) noted that even before the 2011 revolution, neglect had left the country with very poor infrastructure. NTC head Ahmed Jehani told the BBC in late August 2011 that a decade at least would be necessary to rebuild roads and regions damaged by the war. While some pre-revolution proposals for railways and improved ports may be resumed, uncertainty remains about whether work under these contracts will be continued.

While Libya’s new government faces political challenges of ideology, unification, and extremism, it also has greater opportunities than ever to collaborate with aid agencies and foreign investors to address these major problems and begin to eradicate poverty in such a resource-rich country.

– Naomi Doraisamy

Source: World Health Organization,The National,Mondaq,CIA World Factbook,BBC,African Economic Outlook
Photo: Dawn

resource-curse-foreign-investment
“What is a house without food?” A report from the NGO Human Rights Watch poses this question straight from the lips of a resettled farmer in Mozambique. The report examines Mozambique’s coal mining boom due to foreign investment, documenting the resettling of farmers in resource-rich areas that causes food insecurity.

In Mozambique in particular, the mining companies Vale and Rio Tinto displaced local communities from 2009-2011, a move that majorly disrupted daily life for almost 1400 households. For many of these displaced families, the investment in natural resources that should have brought increased profits to the region and country instead jeopardized regular access to food, water, and income opportunities.

The Paradox of Plenty

Statistically, countries with a high amount of natural resources experience lower economic growth and a slower development rate than countries with less natural resources. This is known in economic theory as the “resource curse,” or the paradox of plenty. Multibillion dollar companies investing in these countries’ economies promise a “trickle-down” effect that rarely — if ever — improves the quality of life and average daily income.

A number of phenomena are linked to the “resource curse.” From a historical perspective, regions with visible high amounts of natural resources are seen as more attractive targets for conquest and imperialism. With this precedent of constant push and pull of conquering countries, the host region’s development of governance and infrastructure is stunted. These regions, while relatively stable in governance now, developed with a major disadvantage in the modern economic environment.

Another chief indicator of the “resource curse” is rampant corruption on both state and local level. Extractive industries often collude with corrupt governments to allow them mining or logging rights to land claimed by indigenous people. In the Indian state of Andhra Pradesh, indigenous communities who should have been protected by constitutional law from exploitation of their land were bypassed entirely when their state leaders covertly gave foreign companies leases to mine bauxite.

While corruption on the ground level could theoretically be bypassed entirely if a foreign company advocated for the rights of the people in the surrounding region, the “resource curse” is certainly not limited to an individual country’s ability to manage its own natural resources. While Rio Tinto and Vale did implement relocation plans approved by the Mozambican government, company representatives did acknowledge the poor arability of the land to which households were relocated.

Growth Poles

Even so, the World Economic Forum sees foreign investment in the natural resource sector as a key part of making Africa’s economies more globally competitive. Growth poles — simultaneous investments coordinated in many sectors to support self-sustaining industrialization — are posed in the Africa Competitiveness Report 2013 as a way to make investing in the host country profitable.

A WEF project entitled “The Madagascar Integrated Growth Poles Project” tested the concept of growth poles, partnering both public agencies and private corporations (including Rio Tinto) to develop infrastructure, provide skills education for both the engineering and hotel industries, and improve the process of business creation. These projects improved the overall business environment in Madagascar, according to the WEF. In 2005, private investment in Madagascar was US$84 million; this number increased to US$1045 million in two years.

What sets “growth poles” apart from isolated foreign investment is dedication to expanding the market in the host country. While the largest investments may initially be extraction of natural resources, they serve as profitability assurance for other firms to invest – both international and domestic.

Responsible Foreign Investment

The key to responsible foreign investment in a country experiencing the “resource curse,” is the balancing of the investor’s profits and economic development for the host country. Partnership of MNCs (multinational corporations) and NGOs hold the most promise, because while companies – both in-house and international – ultimately invest in natural resources for the bottom line, aid and development ventures can improve the standard of living in the communities most affected by natural resource development.

Furthermore, in order for foreign investments to improve developing countries, they should not be isolated or exploitative. These ventures must be planned so as to strengthen and not undermine existing enterprises in the host country. Foreign business investments that help host countries the most are ones that promote and supplement investment in all sectors.

Responsible implementation of foreign investment in Africa’s natural resources is rare. If WEF’s Growth Poles Project is any indicator, there are ways to improve a country’s chances against the “resource curse.” MNCs Rio Tinto and Vale certainly have the resources and precedent to face Mozambique’s mining backlash with an increased dedication to developing growth poles in the region, and in their other investments, to improve development.

– Naomi Doraisamy

Source: BBC,Human Rights Watch,World Economic Forum,World Watch
Photo: AEFJN