Venezuela becomes a classic case of "Resource Curse" with President Chavez declaring "Economic War" against Capitalism

Huge Chavez,the Socialist President of Venezuela who had tried to build an alliance against the USA with some success finds himself in a tight corner .His socialist policies which consists of declaring war on the bourgeoise classes has made economy into a complete basket case.Price controls,exchange controls,expropriating private property and arresting “capitalist enemies” of the state has resulted in common people facing huge hardships with shortages of basic food items like sugar,corn etc.Venezuela is a perfect example of how  misdirected ideology can turn an decent economy into a train wreck.Venezuela’s oil dependent economy which was riding high on $150/barrel oil a couple of years ago has squandered away its wealth through bad leadership.Now that the economy is contracting,instead of taking the blame on itself, Government propaganda is weirdly justifying the GDP contraction as the death of capitalism

The crazy policies being followed by Venezuela’s socialist President Chavez  has led Venezuela to be the only Latin American country facing a GDP contraction in Q1  2010 with a sky high inflation rate of 30%.Here are some of main instruments the government’s vain attempt to control the economy.

1. Currency Controls – The government has instituted a complex and bizarre system of currency exchange controls which has led  4 different exchange rates of dollar against Bolivar ( Venezuela’s currency).
2. Nationalization – The government has extensively nationalized the private sector taking control over large sections of the economy taking over coffee plantations,rice fields and sugar plantations
3. Bond Controls and Persecuting Brokerages – Hand in hand with currency controls,the authorities have also taken control of bond trading.The currency controls had made the private sector looks towards bonds as a way to secure hard currency for imports.The government had conveniently overlooked this loophole until they decided it was no longer convenient.The authorities extensively raided brokerages dealing in bonds and even arrested 4 directors of a previously preferred brokerage

Resource Curse

Venezuela has fabulous oil deposits with estimates of Oil Reserves being 78 Billion Barrels which at the current rates translates into more than $5 trillion of wealth.But despite such huge wealth,paranoid leadership has transformed the country  into the worst run South American economy.Deluded by the oil wealth,Huge Chavez squandered away the oil revenues by spending lavishly on the Military ,providing aid to sympathetic countries and pleasing his voter base.In a classic case of “Resource Curse” ,Venezuela with much greater natural resources is vastly under-performing its much less endowed neighbors.Venezuela has historically suffered from bad leadership with both right wing and left wing ideologies failing to bring prosperity.With the country going down the road where no recovery is possible,foreign countries are fishing in these troubled waters to win over valuable resource rights.