Will Venezuela diversify its economy away from oil? Investment Monitor

It is no secret that the country of Venezuela has had to face many obstacles to its socio-economic growth. Since 2014, the country has suffered a humanitarian crisis which caused an estimated six million people to flee the country. Perhaps ironically, the country’s greatest asset, its immense oil reserves – the largest in the world – played a significant role in the country’s downfall.

Many consider Venezuela a prime example of the so-called “resource curse”. This is when a resource-rich country falls victim to mismanagement, leaving the wealth created by natural resources in the hands of a few, usually those who run the country. Common symptoms include corrupt politicians and leadersslow economic growth, a resource-dependent economy and great disparity between social classes.

The story of two presidents

Unfortunately, Venezuela meets all of these criteria. After the 2019 elections – which many considered illegitimate – the country had two politicians claiming the country’s presidency, Nicolas Maduro and Juan Guaidó.

In correlation with its complex and unstable political landscapeVenezuela’s economy has been under sanctions imposed by the United States and other countries since 2014. In 2017, there was a disturbing assembly in which Maduro attempted to rewrite the constitution in an effort to to obtain new presidential powers, which led to former US President Donald Trump imposing new sanctions aimed at blocking the interests of key figures in the Maduro government. Yet other sanctions, meant to stifle the flow of investment in Venezuela’s state-owned oil and gas company, PDVSA, were put in place by Trump in August 2019 following the disputed election and ensuing civil unrest.

During a trip to Colombia in August 2019, former US Vice President Mike Pence said, “We will not sit idly by as Venezuela crumbles into dictatorship.” Despite these efforts, however, Maduro still looms large in all aspects of Venezuelan life.

All about oil

Sanctions targeting Venezuelan oil have had a significant impact on the country. In fact, a 2020 Washington Bureau Latin America Report found that US sanctions alone cost the Venezuelan state an estimated $17 billion to $31 billion in lost revenue between 2017 and 2020.

Yet even with the sanctions in place, Venezuela continued to profit from its oil exports, and in 2020, despite the sanctions, it accounted for almost all of the country’s exports, at 97%. This shows how the resource curse is at work in Venezuela, given that the country’s economy is almost entirely dependent on its oil reserves.

However, the sudden stop in investment following the sanctions imposed on Venezuelan oil has led to a sharp drop in production, as shown in the graph above. These sanctions have undoubtedly hurt the Venezuelan economy and its dominant oil sector.

When the US government announced in May 2022 that it was taking interim steps to ease a limited number of sanctions – namely, allowing the US-based Chevron Corporation to negotiate a license authorizing “transactions and activities necessary for the security or preservation of assets in Venezuela” but not to drill or export – the noose around Venezuela’s constrained economic outlook has loosened slightly.

However, further substantial sanctions withdrawals are unlikely, even in the wake of an energy crisis following Russia’s attack on Ukraine.

Yet even with the silver lining that Chevron’s decision could pose for the politically divided country, and even if more sanctions were to be eased, Venezuela still has an important economic equation to solve. How could an unsanctioned Venezuela lift its resource curse and begin the process of diversifying its economy?

Obstacles to the progress of the Venezuelan economy

When they asked the experts to name promising sectors in Venezuela – with the exception of oil – all were quick to point out the multiple obstacles the country’s economy would face even if all sanctions were to be lifted.

The humanitarian crisis facing the country and the resulting absence of strong education and health sectors are big problems. “Investments in education are crucial to creating a workforce,” says Victor Hugo Rodriguez, founder, president and CEO of financial services firm LatAm Alternatives.

He adds that ensuring that the young Venezuelan population can speak English should be a top priority to enhance the attractiveness of future investments, saying: “Due to the plug and play connection of an Internet connection, [if more Venezuelans spoke English] this could offer a remote workforce that could benefit both internal and external labor markets.

According a report by NordicTrans – a Nordic language translation company – Spanish, Chinese and Portuguese are the most commonly used languages ​​in Venezuela, although there are a number of indigenous languages ​​used throughout the country. In addition, Imminent – ​​a translation research center – ranked Venezuela’s English proficiency as “very low” at 73rd out of 112 countries in the world and 15th out of 20 countries in Latin America.

A Venezuelan vacation?

Such language barriers prevent a promising sector of sunny Venezuela from reaching its potential, that of tourism. Rodriguez thinks the country’s natural beauty – which boasts eternal snow on the Pico Bolivar and Pico Humboldt mountains, and a plethora of sandy beaches – could help it diversify its economy away from oil.

Although language isn’t the only barrier holding back Venezuela’s tourism sector – there are high levels of crime, poor health infrastructure and civil unrest to consider – Michael McCarthy, adjunct professor at the University George Washington, a researcher at the Center for Latin America at American University Studies and CEO of Caracas Wire (a consultancy specializing in the Venezuelan crisis), agrees that tourism could hold promise for the country.

“If it’s Infrastructure has been rebuilt and modernized, tourism for sure [could be a good fit for Venezuela]but the infrastructure network – roads, railways, water and sanitation systems, ports – needs major injections of investment for once high-quality transport networks to regain their importance as underlying sources of trade stability,” he said.

Is change coming?

The two experts also underline an urgent need for investments in agriculture and health care in Venezuela. Yet even if these improvements were to be made, McCarthy believes the sanctions have still damaged relations between Venezuela and potential foreign investors so badly that any journey to “normality” will be slow.

“Sanction-based economic pressure makes it difficult for Venezuelan companies to convince internationals that they can safely invest capital,” he says.

Therefore, any hope of seeing these improvements materialize seems a long way off, especially when there is no real resolution to the likely near-term political instability. While vast oil reserves mean the Venezuelan economy will always have great potential, and the country’s location could provide an important foothold for companies looking to serve both Latin American markets and North America, even here, a lack of required levels of skilled labor must be addressed significantly.

Venezuela undoubtedly holds great potential away from its old industry, but the country has fallen so far behind others in Latin America and the Caribbean in tourism, service sectors for the English-speaking world and even farming, that the terrain he has to do seems daunting. Foreign investment could help it on this journey, but until the country reaches a certain level of political stability — and has a government willing to make a concerted effort to repair its crumbling infrastructure and improve education levels — then this will continue to be an “oil or nothing” case for Venezuela.

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