From Crisis to Prosperity: A Case Study of Economic Development Theory and a Proposal of a Path Towards Prosperity in Venezuela

Christopher Broe Hansen

Student thesis: Master thesis

Abstract

This thesis conducts an analysis of the crisis in the Bolivarian Republic of Venezuela through development economics. The purpose of this study is primarily to examine if theories of economic development can serve to examine economic disasters and secondarily investigate what can be done to solve the crisis and re-create Venezuela as a prosperous country. Regarding methodological choices, the case study strategy is adopted as this is a contemporary event on which the researcher has no control. Data for the thesis is based on interviews with Venezuelan economists related to the field, on secondary reports and data by major institutions, and on limited data supplied by the Venezuelan government. Due to lack of transparency on Venezuelan economic data, triangulation has been key to establishing validity in the study. The thesis first conducts a literature review on development theory, concluding that of the many variables used within the field, analysing the formal institutions, natural resources and macroeconomic management was particularly useful for understanding this case. It concludes that the economic crisis is a result of decades of deteriorating institutions and political stability, a reduction in the governance and talented management of their oil reserves, and a recent macroeconomic meltdown through excessive debt and a rapidly increasing money supply. My recommendations provide solutions to fix the Venezuelan economy. First, the government should partner with NGOs with expertise in humanitarian aid to ensure that the basic nutritional and medical recovery of the population does not become political. Second, they should remove all hidden expenditures and incomes to ensure that the government has full overview of the public budget. Third, they should abolish the price control system that has removed the supply of goods and replace it with a system of subsidies on basic goods, to allow access to these goods. Fourth, the dollar should be adopted, to remove exchange rate risks, hyperinflation, reduce transaction costs between them and the US. Fifth, they should seek to achieve a “haircut” on their debt with current bondholders, upon which they could obtain new funding through IMF. Sixth, changing the legal status and assurance of both property rights and petroleum exploration, would enable the necessary foreign capital to enter the country. Finally, they should identify a set of key industries upon which Venezuela can achieve structural change, alleviating their dependence on oil.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2019
Number of pages99