Venezuela is the classic case of what economists call the "Dutch Disease:.
By 1929, the dramatic development of the Venezuela oil industry had begun to dominate all other economic sectors in the country, however, agricultural production began to decrease dramatically. This sudden increase of attention to oil and neglect of the agrarian sector caused the Venezuelan economy to suffer from a phenomenon known as the Dutch Disease.
This "disease" occurs when a commodity brings a substantial increase of income in one sector of the economy, causing a strengthening of currency which in turn harms exports of manufacturing and other sectors. Agriculture accounted for about one-third of economic production in the 1920s, but by the 1950s this fraction dramatically reduced to one-tenth. This sudden increase of oil production restricted Venezuela’s overall ability to create and maintain other industries. The government had ignored serious social problems, including education, health, infrastructure, agriculture, and domestic industries, causing Venezuela to fall well behind other industrialized countries,
http://en.wikipedia.org/wiki/History_of_the_Venezuelan_oil_industryAnd that was BEFORE Chavez took over. Oil is both the curse and blessing to Venezuela. it provides the money to run the country, but then kills any other part of the economy.
No one has been willing to address this issue in Venezuela since at least the 1920s for to do so is to step on to many toes.
What is needed is simple:
1. Increase domestic Oil prices to world market prices. Right now domestic prices are the cheapest in the world. This is opposed by many of the upper middle class for it means they will have to pay more for the gasoline in their cars. Now, they never cite that claim, instead they cite the poor housewife who will see the price of the oil she uses to cook with go up.
2. Tax imports that reflect the effect of being a huge oil exporter. i.e if it CAN be produced in Venezuela, the import tax should be so huge that domestic production is protected, no matter how the actual currency goes. The US did this in the late 1800s when the US was the #1 oil exporter and the US was a net Debtor nation. The government needs to protect domestic industry and farming even if it means a huge increase in the price of food and household goods. Over the last 50 years the Government of Venezuela has refused to do so, for the tariff needed would be so high the items would double or triple in price and the Upper Middle Class wants their cheap cars and other luxury items. The poor also tend to object for it means higher prices for items useful in the home, kitchen ware, tools, even washers and dryers in addition to Refrigerators and Stoves. This is needed to offset the economic effect of being a net oil exporter.
Notice I mention why Chavez did not do it, and why previous governments have not done it. You have a sizable portion of the population who will oppose it, especially on the short term basis. The opposition is NOT proposing the above either, for they do know what support they have will disappear if they do so.
The Government should also consider the advice of an opposition Economist, default:
http://www.bloomberg.com/news/2014-09-07/venezuelan-default-suggested-by-harvard-economist.html
The advantage of the default on those bonds is it frees up money for purchase of goods. You can NOT borrow money, but that seems to be the case at the present time anyway, so just default on the bonds and use the money to buy actual goods.
Thus the Government has options, but none of them are nice for they have to step on toes, mostly of the opposition, but some of their supporters.
Now, the present Government and the opposition wants the other to support the above before they do. The reason for this is simple, when the above occurs (and it is more when then if) whoever does it will be hated. Chavez refused to do it for that reason AND the Governments before him refused to do it for the same reason.
It is easy to do what is popular, it is hard to do what is needed and what is done hurts most of the people (or hurts the upper class, which in Venezuela controls the opposition). You get no credit for doing what is needed (instead you get attacked). By the time the results are in, you are long out of power and whoever is the opposition is claiming the benefit of what you did.
The Present Government needs to start a campaign describing what is the problem and the above solution. Tell people it will hurt, but in the long run everyone will be better off. You have to keep telling people what is needed AND tell them you can NOT do it without their support. Thus as long as people oppose the above actions, do not do them but keep hamming home what is needed. Sooner or later the people will catch on and accept what is needed, then you do it and the people accept it.
Right now the people of Venezuela are NOT ready to accept the above required changes, thus except for the default (which the Government can do without popular support), the Government has to stand still and keep preaching to the people what is needed. As the economy goes down hill, the people will look for answers to the problem and slowly come around to embracing what is needed. The opposition may win an election in the mean time, but they are NOT willing to impose the above so the economy will continue to decline under they rule. Thus sooner or later you will get back in power with the people's permission to impose the above.
It will NOT be a short fight, but if done right, Venezuela will cure itself of the Dutch Disease.
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