The struggle to put Venezuela back on the path to economic health: Don Pittis

As OPEC meets on Thursday, its most oil-rich member is collapsing into chaos.

While Saudi Arabia, Russia and even the United States and Canada make headlines as petroleum giants, it is actually troubled Venezuela that has the world's largest reserves of crude, something in the order of 300 billion barrels.

• PHOTOS | Venezuelans shut down streets in Caracas to protest Maduro government

Even at reduced current world prices, back-of-the-envelope calculations show that oil wealth alone shouldmake all Venezuelan familiesU.S. dollar millionaires.

Looking like a war zone

And yet last week we saw pictures from the country that looked likea war zone. Clashes between demonstrators and authorities have led to more than 40deaths.

Food riots descend into looting as families gohungry. Surrounding countries are being overwhelmed by refugees.

Some say the chaos means Venezuela under the military-backedgovernment of PresidentNicolas Madurocould beon itsway to becoming a failed statelike Somalia.

It seems clear that eventually Venezuelans must reach a political compromise, but whatever government is in charge, getting the country back on the road to economic health is crucial to ending the suffering of its people.

The country isso sharply divided that outsiders, includingFrance and the Vatican, have called for international mediation. But even international Venezuela-watchers are sharply divided on what has caused the country's economic troubles, and the ultimate solutions.

Economic sabotage

"For many years, the opposition has engaged in destructive economic sabotage, causing shortages through hoarding and speculation in a deliberate attempt to create economic instability," Sujatha Fernandes, an Australianspecialist in the Venezuelan economy, told me in an email conversation.

Nonetheless, she says, much of the current mess can be blamedon economic mismanagement by the Madurogovernmentfollowing the 2014 crash in oil prices.

Though they differ on many things, that is something Ken Frankel, president of the Canadian Councilforthe Americas, can agree on. But he scoffs at comparisons of Venezuela to Somalia.

"It's nowhere fair to compare it to Somalia. Venezuela does have infrastructure, a history of democratic rule and a lot of the basic elements of a modernstate and economic structure," says Frankel.

Rather than blaming the country's troubles on the pro-business opposition, he points to the undermining of the business sector first by the charismatic socialist leader Hugo Chavez and then by his successor Maduro.

Oil production actually declined sharply as the government chased foreign companiesaway and replaced qualified managers at the state oil company PDVSA with regime loyalists.

Desperate for cash

When oil prices crashed the government, which had maintained its popularity by transferring income from resource wealth to itspeople, became dangerously short ofcash. In desperation itsold off gold reserves, used oil infrastructureas collateral for loans andmade bad deals to sell future oil production at well below world prices.

But Frankel insists a full recovery is possible because Venezuela'senormous resourcewealth, including the world's second largest underground reserves of gold,meansthe country is simply suffering from a cash-flow problem.

"It's a liquidity problem as opposed to a solvency problem," he says.

The hardest question, he says, is how to restructure the economy while minimizing the pain and making thingsfair for the country's poorest.

'Pink tide'

York Universitypolitical economist Viviana Patroni,who specializes in Latin America, says ending the pain was the reason that Chavez was elected so overwhelmingly in 1998 as part of the socialist "pink tide" that swept what she describes as "the most unequal region in the world."

The Chavez idea was to transform some of thecountry's wealth into better health care, better education and better nutrition for thepoor.

"That's not so radical," she says.

But looking at Venezuela now, she can only think it was a failed experiment partly because Chavezwas unableto diversify the economy away from natural resources and partly because he failed to engage the private sector to help him transform the economy.

"What's broken is pretty much everything," says Kurt Annen, professor of economics at the University of Guelph,who studies development aid and Latin America.

Before it can do anything else, he says, Venezuela must stabilize its currency and get its hyper-inflationunder control. He says it has been done in the country's neighbour, Bolivia.

There, the government's first step to slash the the budget deficit, in Bolivia's case by cutting gas subsidies, resulting in a tenfold increase in pump prices. That is certainly an option for Venezuela where gas sells for pennies a litre.

The next step, says Annen, is to entice the private sector back to the country in order toboost oil production to its traditional levels.

"The current government may not be willing to slash the budget deficit as this will further erode the little political power they still hold," says Annen. Besides, he says, businesses are unlikely to trust assurances from this government. Any economic improvement almost certainly will require political change as well.

As several of the experts I spoke to suggested, those seeking change have one advantage. Conditions in Venezuela are so bad that people will be willing to accept a significant amount of pain to get the economy back on track.

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