Venezuela Before Chávez: Anatomy of an Economic Collapse
You have 55 highlighted passages
You have 56 notes
Last annotated on May 20, 2017
The twentieth century saw the transformation of Venezuela from one of the poorest to one of the richest economies in Latin America. Between 1900 and 1920, per capita GDP had grown at a rate of barely 1.8 percent; between 1920 and 1948, it grew at 6.8 percent per annum. By 1958, per capita GDP was 4.8 times what it would have been had Venezuela had the average growth rate of Argentina, Brazil, Chile, and Peru (calculations based on Maddison 2001).Read more at location 314
richest country in Latin America and one of the twenty richest countries in the world,Read more at location 317
In the 1970s, the Venezuelan economy did an about-face. Per capita non-oil GDP declined by a cumulative 18.64 percent between 1978 and 2001.Read more at location 319
Venezuela’s development failure has made it a common illustration of the “resource curse”—the hypothesis that natural resources can be harmful for a country’s development prospects. Indeed, Venezuela is one of the examples Sachs and Warner (1999, 2) use to explain the idea that resource-abundant economies have lower growth.Read more at location 322
Easterly (2001, 264), for example, cites the Venezuelan decline in GDP in support of the idea that inequality is harmful for growth.Read more at location 325
Becker (1996), in contrast, has argued that the same growth performance actually shows that economic freedom is essential for growth.Read more at location 326
Many existing explanations do not pass these tests. For example, Venezuela’s failure to grow is often attributed to its lack of progress in carrying out free-market reforms during the eighties and nineties. While Venezuela is indisputably far from a stellar reformer, existing data do not support the hypothesis that it is substantially different from many other countries in the region in this respect (at least until 1999). According to Eduardo Lora’s (2001) index of economic reform, the Venezuelan economy by 1999 was more free market–oriented than were the economies of Mexico and Uruguay, and its speed of reform (in terms of proportional improvement in the index) was actually the median for the region between 1985 and 1999.Read more at location 331
Alternatively, consider the hypothesis that Venezuela’s growth problems are due to the exacerbated rent-seeking that was generated by the concentration of high-resource rents in the hands of the state. If this explanation is correct, then how do we account for the fact that Venezuela was the region’s fastest-growing economy between 1920 and 1970, a period during which the role of oil was dominant and fiscal oil revenues were significantly higher than during the nineties?Read more at location 337
there has been a growing awareness of the limitations of cross-country economic data to help us understand why some countries are rich and others poor (Rodrik 2005). Internationally comparable country-level data are necessarily limited in their scope and depth.Read more at location 354
One answer, recently given by Hausmann, Rodrik, and Velasco (2004), relies on exploiting local instead of global information.Read more at location 367
The essence of those methods is that instead of asking whether a policy such as trade protectionism is good for growth—a question that simply lacks a well-defined answer in a complex world—it asks more general questions such as: Does the effect depend on other variables? Is it at least not harmful for growth? Does the “average” country benefit or lose out from trade protection?Read more at location 387
Venezuela’s growth performance can be accounted for as the consequence of three forces. One is declining oil production. The second is declining non-oil productivity. The third is the incapacity of the economy to move resources into alternative industries as a response to the decline in oil rents that has occurred since the seventies.Read more at location 430
why Venezuela found it so difficult to develop an alternative export industry, in contrast to other countries that suffered declines in their traditional exports.Read more at location 433
the specialized inputs, knowledge, and institutions necessary to produce oil efficiently are not very valuable for the production of other goods.Read more at location 435
Osmel Manzano’s piece “Venezuela after a Century of Oil Exploitation” tackles the issue of accounting for the oil sector’s performance.Read more at location 440
The key question here is why a country that boasts massive amounts of oil reserves decides not to take advantage of them and instead to maintain limits on production. Manzano argues that this policy was framed in an era in which oil was believed to be near exhaustion,Read more at location 441
These principles may have made sense in the sixties, but they were no longer reasonable after new exploration revealed that the country had indeed quite massive amounts of reserves, while changes in consumption patterns and greater efficiency of extraction techniques led to the oil glut of the eighties and nineties.Read more at location 443
“Public Investment and Productivity Growth in the Venezuelan Manufacturing Industry” by José Pineda and Francisco RodríguezRead more at location 452
does public investment generate higher productivity, or does the public sector tend to invest more in localities where productivity is growing?Read more at location 455
They find that the contribution of public investment to productivity growth in the Venezuelan manufacturing sector is substantial: according to their estimates, non-oil per capita GDP would be 37 percent higher than its present value had the government not allowed the stock of public capital to decline after 1983. This explanation suggests that the misallocation of public expenditures is a substantial contributor to the Venezuelan economic collapse.Read more at location 457
While minimum wages, firing restrictions, and mandated nonwage benefits often have a reasonable justification in terms of the provision of social insurance, they can also generate substantial distortions to the reallocation of labor across firms. In countries with a large unregulated economy, these can generate considerable incentives to shift to the informal sector. Indeed, between 1990 and 2001 Venezuela was the country with the highest growth rate in informal sector employment in Latin America (Bermúdez 2004). Omar Bello and Adriana Bermúdez’s chapter, “The Incidence of Labor Market Reforms on Employment in the Venezuelan Manufacturing Sector, 1995–2001,” attempts to estimate the cost of these increased regulations using the same panel of manufacturing firms.Read more at location 462
In “Understanding Economic Growth in Venezuela, 1970–2005: The Real Effects of a Financial Collapse,” Matías Braun looks at another possible suspect for the collapse in aggregate productivity. Between 1989 and 1996, Venezuela suffered a series of deep credit crunches from which it never fully recovered. Therefore, even though the size of Venezuela’s banking sector was consistent with what one would expect for the country’s level of income up to the 1980s, by the mid-2000s the sector was between four to six times smaller than one would expect.Read more at location 471
Daniel Ortega and Lant Pritchett’s “Much Higher Schooling, Much Lower Wages: Human Capital and Economic Collapse in Venezuela.” This chapter looks at the hypothesis that lack of schooling may be a contributor to the collapse. The authors’ answer is a resounding “no.” Venezuela’s growth in schooling capital was substantially higher than the median country and even faster than the median East Asian country!Read more at location 480
A second “no” comes from Samuel Freije’s study “Income Distribution and Redistribution in Venezuela.” The increasing relevance of distributive conflict in Venezuela has fueled speculation that the growth in poverty and inequality is at the root of the implosion of Venezuela’s political system. Freije finds that while Venezuelan inequality has increased, its increase is consistent with what one would expect given the collapse in capital accumulation and the growth in informalization. Further, Venezuela in the 1970s was a relatively equal economy by Latin American standards, so it is difficult to tell a story in which inequality is a causal determinant of the collapse.Read more at location 487
In contrast to much conventional wisdom, Moreno and Shelton contest that Venezuela actually carried out significant fiscal adjustments after the onset of the debt crisis.Read more at location 495
the post-1983 response was actually quite reasonable. Falling oil revenues were met with efforts to raise new sources of revenue and cut expenditures.Read more at location 497
Poor fiscal policy may be a consequence instead of a cause of the collapse,Read more at location 501
Dan Levy and Dean Yang’s “Competing for Jobs or Creating Jobs? The Impact of Immigration on Native-Born Unemployment in Venezuela, 1980–2003,” which looks at how changes in immigration patterns have affected patterns of job creation in Venezuela.Read more at location 503
a contrast between Colombian immigration, which tends to raise Venezuelan unemployment, and European immigration, which does not.Read more at location 506
European immigrants generate considerable positive externalities that offset their direct effects on labor supply and wages. It also suggests that the reversal in European migration that occurred because of the growth collapse could have generated a feedback loop in which the initial collapse caused the loss of a vibrant immigrant community and its spilloverRead more at location 507
The Venezuelan collapse was not only economic. Up until the 1990s, Venezuela boasted a stable democratic political system that was commonly viewed as an example to follow by other developing middle-income countries.Read more at location 510
