Venezuela’s Economic Crisis: A Historical Perspective
Diego Restuccia University of Toronto & NBER
Canadiana Gallery University of Toronto March 25, 2019
Restuccia Venezuela’s Crisis University of Toronto 1 / 11 The current economic crisis
Severe drop in real economic activity: a contraction of 48% since 2013 (5 years), −16% in each of last 3 years In the United States, great depression 1929-33, 31% decline in 4 years; great recession 2008-09 5% decline, average post-war recession cycle ≈ −2.9% Current oil production ≈ 0.9 million barrels/day, contraction of 70% relative to level in 1998 and 75% from peak in 1970 Cash flow aggravated by supply agreements with Cuba and other Caribbean countries; debt for oil Severe decline in imports and consumption: Decline in production and exports mostly on imports and consumption... Venezuela has continued paying foreign debt and shipping crude oil in supply arrangements
Restuccia Venezuela’s Crisis University of Toronto 2 / 11 The current economic crisis
Inflation rate has surpassed 1,000,000% (12 month rate to November 2018 ≈ 1.3 million percent according to study by National Assembly) Rising poverty, inequality, crime... Other social outcomes... Alarming rising rates of (mostly eradicated) Malaria and other diseases Out migration: According to UN International Organization for Migration, 1 million people just to Colombia, 3 million total since 2014 (population ≈ 30 million)
Restuccia Venezuela’s Crisis University of Toronto 3 / 11 A historical perspective
Context of current situation: long history of poor economic policies, long before Chavez/Maduro regime Background: Bello, Blyde, and Restuccia, “Venezuela’s Growth Experience,” Latin American Journal of Economics, 2011 Restuccia, “The Monetary and Fiscal History of Venezuela 1960-2016,” Becker Friedman Institute, University of Chicago, 2019
Restuccia Venezuela’s Crisis University of Toronto 4 / 11 VEN real gdp per capita (rel. to USA)
0.8 2011 Benchmark Multiple Benchmarks 0.7
0.6
0.5
0.4
0.3 Relative GDP per capita
0.2
0.1
0 1900 1920 1940 1960 1980 2000 Years
Restuccia Venezuela’s Crisis University of Toronto 5 / 11 Crude oil production
60 1400 Labor Productivity Production 1200 50
1000 40
800
30
600 Millions of barrels 20 400 Thousands of barrels per worker
10 200
0 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 Years
Current production estimates ≈ 300 million barrels (0.9 million barrels/day), declining fast
Restuccia Venezuela’s Crisis University of Toronto 6 / 11 Key take aways
Unique growth experience: a “miracle” growth episode and a collapse within a short period of time Relative economic decline may have started earlier than first oil-price shock, much earlier than Chavez/Maduro regime Peak oil production 3.8 MM barrels/day in 1970, around the start of discussions for nationalization of the oil industry (formalized in 1976) Decline in oil production: 75% since peak in 1970, 70% since Chavez in 1998 Paradoxically, under CAPII increase in oil production of almost 60%, plans underway to double peak production
Restuccia Venezuela’s Crisis University of Toronto 7 / 11 Real GDP per capita and oil prices
106 120 2.3 Oil Prices GDP per Capita 2.2
100 2.1
2 80
1.9
60 1.8
1.7
40
Real US dollars per barrel 1.6 Real GDP per capita (1997 prices) 1.5 20
1.4
0 1.3 1960 1970 1980 1990 2000 2010 Years
Economic activity has moved with oil price cycles
Restuccia Venezuela’s Crisis University of Toronto 8 / 11 Real public external debt and oil prices
7 120 External Debt Oil Price 6 100
5 80
4
60
3 $/barrel
Billions of 1960 US$ 40 2
20 1
0 0 1960 1970 1980 1990 2000 2010 Years
External debt increased substantially during boom times Current total debt ≈ US$ 150 billion, 5 times total exports
Restuccia Venezuela’s Crisis University of Toronto 9 / 11 Counterfactual debt to gdp ratio
100 Data Counterfactual
50
0
-50 (%)
-100
-150
-200 1960 1970 1980 1990 2000 2010 Years
Elimination of transfers would have resulted in a positive asset fund of the size of Norway’s today
Restuccia Venezuela’s Crisis University of Toronto 10 / 11 Conclusions
No economic policies are viable today without a political regime change, but I am optimistic about the eventual recovery process Transition will be difficult given social pressures and dire economic situation Setting a different long-run path requires an understanding and correction of economic policies that lead to current situation Venezuela is not a rich economy and will never be purely on natural resources, but the oil industry can be a stepping stone to development, as indeed it was before nationalization This requires a stable and rational institutional setting and limited discretion of government in economic activity and allocations
Restuccia Venezuela’s Crisis University of Toronto 11 / 11