Dutch Disease and Its Significance for the Global South: The Case of Venezuela

By Annika Jain

Introduction

Dutch Disease is a well-documented economic phenomenon that arises when a country experiences a substantial increase in income from natural resources such as oil, gas, or minerals. This windfall typically leads to an appreciation of the national currency. While this may initially appear beneficial, it often undermines other sectors of the economy. 

Understanding Dutch Disease

The term "Dutch Disease" originated from the experience of the Netherlands in the 1960s, following the discovery of large natural gas reserves. The influx of foreign currency caused the Dutch Guilder to appreciate, making exports from non-resource sectors less competitive. In economic terms, this is known as real exchange rate appreciation, which hampers the tradable sectors, primarily manufacturing and agriculture, while non-tradable sectors such as services may expand. Over time, this reallocation of resources leads to deindustrialization and increased dependence on the resource sector (Corden and Neary, 1982).

Dutch Disease in the Global South

Many countries in the Global South are heavily dependent on the export of natural resources to generate foreign exchange. While resource wealth presents opportunities for development, it also poses significant risks. The appreciation of the national currency can stifle the growth of other industries, leading to limited economic diversification. Moreover, in the absence of strong institutions and effective governance, resource revenues often become concentrated among elites, exacerbating inequality and undermining long-term development (Sachs and Warner, 2001; Ross, 2015).

Venezuela: A Case Study

Venezuela provides a vivid example of Dutch Disease and its broader consequences. The country possesses the largest proven oil reserves in the world, estimated at over 300 billion barrels (U.S. Energy Information Administration, 2023). Venezuela’s economy has long been dominated by the petroleum sector. In the early 2000s, soaring oil prices generated unprecedented government revenues. At its peak, oil accounted for approximately 95 percent of export earnings and nearly half of government income (World Bank, 2019).

However, this dependence made Venezuela acutely vulnerable to external shocks. The appreciation of the bolívar during oil booms rendered non-oil exports uncompetitive, which led to the decline of domestic manufacturing and agriculture. When global oil prices collapsed from 115 dollars per barrel in 2014 to below 30 dollars in 2016, the Venezuelan economy entered a severe crisis. Hyperinflation ensued, with rates estimated at 2,350 percent in 2023, among the highest in the world (International Monetary Fund, 2024). Essential goods became scarce, and prices for basic items such as bread soared by over 300 percent in 2022 alone (Reuters, 2023). Despite its oil wealth, the government’s continued subsidies, such as petrol priced at less than one cent per litre, distorted consumption patterns and further strained public finances (OPEC Annual Statistical Bulletin, 2022).

The Role of Governance and External Factors

The severity of Venezuela’s crisis cannot be attributed to Dutch Disease alone. Decades of poor governance, corruption, and underinvestment in critical infrastructure have eroded economic resilience. Mismanagement of oil revenues and failure to invest in economic diversification left the country ill-prepared for price shocks. Furthermore, external factors have exacerbated the crisis. Since 2017, the United States and other Western countries have imposed extensive sanctions targeting Venezuela’s oil industry, government officials, and financial institutions. These sanctions have dramatically reduced oil exports, by some estimates from 1.5 million barrels per day in 2017 to fewer than 300,000 barrels per day by 2020, thereby depriving the government of vital foreign exchange needed to import food, medicine, and other essentials (U.S. Energy Information Administration, 2021; United Nations, 2023). As a result, the humanitarian situation has deteriorated, with United Nations data indicating that nearly 80 percent of Venezuelans lived in poverty as of 2023 (United Nations Development Programme, 2023).

Policy Responses and the Path Forward

While the official rationale for sanctions is to promote democratic reforms, their economic impact has disproportionately harmed ordinary Venezuelans. Many analysts argue that external interventions, combined with domestic mismanagement, have deepened the country’s economic decline (Ellner, 2020; Weisbrot and Sachs, 2019).

To overcome Dutch Disease and its associated challenges, Venezuela and other resource-dependent countries must implement comprehensive reforms. These include investing in economic diversification, strengthening institutions, and enhancing transparency and accountability in resource management. Establishing sovereign wealth funds and adopting prudent fiscal policies can help stabilize revenue flows and mitigate the effects of commodity price volatility. Furthermore, reducing reliance on a single export market by fostering international partnerships, particularly with other countries in the Global South, can enhance economic resilience and promote sustainable development (Frankel, 2010; Cust and Mihalyi, 2017).

Conclusion

Venezuela’s experience underscores the dangers of Dutch Disease when compounded by poor governance and external pressures. Without a strategic approach that addresses both internal weaknesses and external challenges, resource wealth alone will not translate into broad-based prosperity. For Venezuela and similar nations in the Global South, sustainable development depends on effective leadership, institutional reform, and the pursuit of economic diversification.

References

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• Sachs, J. D. and Warner, A. M. (2001). “The Curse of Natural Resources.” European Economic Review, 45(4-6), 827-838.
  
  

• Ross, M. L. (2015). The Oil Curse: How Petroleum Wealth Shapes the Development of Nations. Princeton University Press.
  
  

• U.S. Energy Information Administration (2023). “Country Analysis Executive Summary: Venezuela.”
  
  

• World Bank (2019). “Venezuela Economic Update.”
  
  

• International Monetary Fund (2024). “World Economic Outlook Database.”
  
  

• Reuters (2023). “Venezuela Faces Bread Price Surge Amid Inflation Crisis.”
  
  

• OPEC Annual Statistical Bulletin (2022).
  
  

• U.S. Energy Information Administration (2021). “Impact of Sanctions on Venezuela’s Oil Industry.”
  
  

• United Nations Development Programme (2023). “Poverty Report: Venezuela.”
  
  

• Ellner, S. (2020). “The Political Economy of Venezuela’s Crisis.” Latin American Perspectives, 47(5), 5-20.
  
  

• Weisbrot, M. and Sachs, J. (2019). “The Economic Impact of Sanctions on Venezuela.” Center for Economic and Policy Research.
  
  

• Frankel, J. A. (2010). “The Natural Resource Curse: A Survey.”
  
  

• Cust, J. and Mihalyi, D. (2017). “Resource Revenue Management in Developing Countries.” Resources Policy.