Venezuela and Saudi Arabia: Sharing the Wealth

On Monday, hundreds of thousands of Venezuelans began the time-consuming process of validating their signatures on a petition demanding a recall referendum on the elected president, Nicolas Maduro. Food riots are breaking out all over the country, and the capital, Caracas, has the highest murder rate of any city in the world. Many citizens expect a revolution.

Half a world away, Saudi Arabians don’t have to worry about referendums, or indeed about national elections. But no Saudi Arabian citizen goes hungry, and the capital, Riyadh, has a lower murder rate than Toronto. And nobody expects a revolution.

But why compare Venezuela and Saudi Arabia? They don’t have anything in common, do they? Well, actually, they do.

The two countries have the biggest oil reserves in the world, and oil exports account for more than 90 percent of their national incomes. They have about the same population (Saudi Arabia 27 million, Venezuela 30 million), and more than half the adults in each country depend directly on the government for their jobs or at least their income. But one country is rich and one is poor. Why?

The Venezuelan oil boom started back in the 1930s, but very little of the money reached the poor majority. Saudi Arabia only started earning real money from its oil in the 1960s, and the ruling al-Saud family got very, very rich – but they did ensure that enough money trickled down to raise the living standards of the whole population.

By the 1990s almost every Saudi citizen had a decent home, ample food, and access to education and health care. Less than half of Venezuela’s population did, so in 1998 the radical ex-military officer Hugo Chavez was elected president and began to carry out what he called the “Bolivarian Revolution”.

It was really just what the Saudi Arabian regime had been doing for decades already, dressed up as “socialism”. Chavez’s regime created fake jobs in the government and the oil industry as a way of putting money into the hands of the poor, gave direct subsidies to those unable to work, and provided free health care and education for all.

Within ten years Chavez’s “revolution” had given Venezuela’s former poor the same basic living standard and social services that Saudi Arabia’s former poor already enjoyed. So far, so good – but then it started to fall apart.

Massive corruption sabotaged Venezuela’s oil production: it has more oil than Saudi Arabia, but it pumps only a quarter as much. More and more of the country’s heavily subsidised food ended up on the black market, starving the government-run supermarkets of supplies but enriching government employees.

Then the oil price collapsed, from $110 per barrel in June 2014 to only $26 by January 2016. It’s back up to around $50 now, but that’s still less than half what the Venezuelan and Saudi Arabian governments (and all the other oil exporters) used to get for their oil. So Venezuela is on the brink of revolution – but Saudi Arabia is not.

Every year Saudi Arabia saved a portion of its oil income, and when the price crashed it had $750 billion in cash reserves to draw on. It has run through $150 billion of that reserve since mid-2014, but it can probably keep popular living standards high until the price eventually recovers.

Venezuela had no cash reserve, and so the fall in the oil price meant instant, acute crisis. Chavez died in 2013, and his (legitimately elected) successor, Nicolas Maduro, has none of his charisma. Even if he did, the lack of any cash cushion made a collapse in living standards inevitable, and he could not now get re-elected.

The opposition parties won a large majority in last December’s congressional election, and are now pushing for a “recall” referendum that could drive Maduro from the presidency long before his term ends in 2019. He is resisting fiercely, and is even threatening to abolish Congress if it persists in opposing him.

The Venezuelan crisis may well end in major bloodshed, whereas Saudi Arabia is cruising through an equally big shortfall in national income relatively untouched. What can we learn from this remarkable contrast?

Nothing of universal signficance, but we can certainly offer some tentative advice to Third-World countries that suddenly get rich from oil. Don’t be a democracy if you can help it, because the corruption will be massive and the political perspectives very short-term. Have a royal family that plans to be in business for a long time.

The monarchies will be corrupt too, but the ruling families will keep it within bounds. They will redistribute the wealth as well or better than the democracies do, because it is in their interest to have satisfied, loyal subjects. And they will do long-term planning (like saving for a rainy day) because they think in terms of generations – their generations.

Not that they are really likely to stay in power forever.
To shorten to 725 words, omit paragraphs 8 and 9. (“Within…employees”)