Introduction
The recent ousting of Nicolás Maduro from the presidency of Venezuela marks a significant turning point after more than 20 years of socialist governance that began under Hugo Chávez. This era has been marked by expropriation, economic mismanagement, and political repression.
As Venezuela navigates its uncertain future, economics can provide crucial insights. One critical lesson is the peril of relying too heavily on the oil sector for recovery. The country’s revitalization hinges on the quality of institutional and policy frameworks moving forward.
Currently, Venezuela’s judiciary, electoral bodies, public prosecutors, and police lack independence. The primary focus must be on restoring individual and political rights through reforming these institutions, enabling the Venezuelan people to hold their leaders accountable once again.
Additionally, reinstating property rights and fostering free enterprise are essential to unleash the creative potential of the Venezuelan populace.
Furthermore, the design of foreign-exchange policies and the management of oil revenues will be crucial in avoiding recurring cycles of dependency and stagnation.
A successful political transition, marked by meaningful electoral reforms and trustworthy assurances of fair competition, could pave the way for improved relations with the United States. This normalization might facilitate the lifting of sanctions and renewed engagement of private and foreign oil companies in Venezuela’s energy sector. Given the country’s vast oil reserves and deteriorating yet recoverable infrastructure, even modest institutional reforms could lead to substantial increases in oil production and export revenues. Such revenues would provide a rare opportunity to stabilize public finances, begin repaying outstanding foreign debts, and rebuild Venezuela’s standing in international capital markets.
However, this opportunity comes with significant risks. Foremost among them is the danger of Dutch disease—the tendency for resource booms to inflate the real exchange rate, undermining non-resource sectors and solidifying an undiversified economic structure. Venezuela’s past experiences serve as a strong warning; earlier oil booms led to exchange-rate appreciation and fiscal irresponsibility, which devastated agriculture and manufacturing and increased reliance on imports. Thus, any serious reconstruction plan must consider exchange-rate policy as a fundamental component of economic reform.
To avoid Dutch disease, it is vital to prevent sustained appreciation of the local currency, even with rising export earnings, as previously discussed elsewhere. A freely appreciating currency would render non-oil exports uncompetitive and hinder the revival of sectors critical for long-term growth and employment. This doesn’t necessarily mean reintroducing rigid exchange controls—whose disastrous impacts in Venezuela are well documented—but rather suggests the need for a thoughtfully constructed regime. Measures like sterilizing foreign-exchange inflows, accumulating external assets, and creating institutional frameworks to limit excessive domestic spending of oil revenues can help maintain a competitive real exchange rate.
Closely tied to effective foreign-exchange policy is the challenge of managing oil rents. The primary political economy question for post-socialist Venezuela will be ensuring these rents are not appropriated by entrenched interests, whether they be public or private. Without credible checks, oil revenues are likely to exacerbate corruption, clientelism, and fiscal irresponsibility, undermining democracy and economic freedom. Therefore, establishing a dedicated “sink fund” could be a potent solution. Unlike conventional sovereign wealth funds focused on maximizing returns or stabilizing consumption, a sink fund would have a clear and transparent purpose: the systematic repayment of Venezuela’s foreign debts over a specific timeframe.
Directing a significant portion of oil revenues into such a fund would yield multiple benefits. First, it would relieve immediate domestic spending pressures, thereby supporting exchange-rate stability and alleviating Dutch disease. Second, it would help restore Venezuela’s image as a sound borrower, which would subsequently lower future borrowing costs and enhance access to international financing. Third, by placing oil rents beyond the discretionary influence of daily politics, it would reduce opportunities for rent-seeking and affirm a commitment to fiscal discipline.
Over time, restoring fundamental protections for private property and free enterprise would enable economic activity outside the oil sector to rebound. At one point, Venezuela enjoyed a relatively diversified economy by regional standards, with significant capabilities in agriculture, manufacturing, services, and human capital-intensive industries. Although much of this capacity has been lost or relegated to the informal sector, it has not entirely disappeared. The Venezuelan diaspora, which has grown to millions, represents a vital source of skills, entrepreneurial experience, and global connections. If institutional reforms prove credible and enduring, many expatriates may choose to return or invest from abroad, thereby accelerating Reconstruction and diversification.
Perhaps the demands of a financially struggling populace for public transfers might be alleviated by enabling the private sector to generate profits and income. If this understanding is not embraced, rent-seeking behaviors could become irresistible, leading to another cycle where oil rents are squandered and political representation is distorted as government revenues become divorced from the welfare of Venezuelans and their economy.
In this broader framework, exchange-rate policy and oil-rent management should be seen as foundational elements for more profound transformations. The objective is not just to stabilize the macroeconomy but to create a society where economic opportunity is independent of political privilege. By preventing currency overvaluation, safeguarding oil revenues from exploitation, and prioritizing debt repayment over short-term spending, a post-Maduro Venezuela could establish the groundwork for sustainable growth and genuine reintegration into the global economy.
None of this will be straightforward; success will largely depend on both fortune and a genuine political commitment as much as on technical design. However, if the assumptions of political normalization, institutional reform, and renewed oil production hold true, prudent management of exchange rates and rents could ensure that Venezuela’s next confrontation with resource wealth leads to recovery rather than another squandered opportunity.
Leonidas Zelmanovitz is a Liberty Fund Senior Fellow and a part-time instructor at Hillsdale College.
