The unromantically named Investment Fund for Macroeconomic Stabilization (FIEM in its Spanish acronym), bound Venezuela to a disarmingly simple rule. First, you calculate the average price of a barrel of oil for the preceding five year period. Then, you check the day’s oil price. If the price today is higher than the average for the last five years, take the difference and put it in a savings account. If today’s price is lower than the five-year average, make up the shortfall from the money the savings account. That’s it!
FIEM’s genius was its simplicity: you can explain the gist of it to a moderately bright nine-year-old (in fact there were some operational complications but they don’t affect the headline concept). The system took the two key things everybody already knew about the Venezuelan economy – that it’s wildly dependent on oil revenues, and that oil revenues are volatile – and wove them together into a neat, elegant solution.
Of course, FIEM was a drag for politicians when oil prices were on the rise. As oil revenues started to pour into Venezuelan state coffers the early 2000s following their rock-bottom lows of the late 90s, the incoming Chávez administration couldn’t see the point of it. So under Chávez, FIEM was first ignored, then gutted, and ultimately more or less forgotten. (It was never formally abolished, though, and still exists in undead form, holding a mere $3m.)
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If Venezuela had just copied Norway’s investment strategy, it would have earned another $82bn in investment income, on top of the $146bn it contributed. The country would have withdrawn a few billion in 2009, when the global financial meltdown caused a brief collapse in oil prices, but even then, it would’ve started 2015 sitting on a mountain of cash: $223bn. More than enough to face up to its financial problems today.
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So let’s be clear: what Venezuela is going through now has relatively little to do with the vagaries of world oil markets, and everything to do with the the Chávez era destruction of its economic governance institutions. If wasn’t just foreseeable that a fall in oil prices could cause huge economic disruption, it was, in fact, foreseen. And it wasn’t foreseen in some vague, academic sense: the foresight had been baked right into Venezuelan fiscal policy.
