Venezuela's ongoing collapse

VenezuelaBeforeChavez510X340Venezuela is mired in a deep crisis, but you already know that.

Each new day brings with it another batch of bad economic news. When it isn’t high inflation that the government desperately tries to hide, or sharply increasing poverty figures, it’s some other story about an industry on the verge of collapse. One day it’s newspapers, the next day it’s car manufacturers.

But you already know that as well.

As bloggers, we need to document and comment on all of this, but to be honest, it isn’t easy. How many more versions of the “chavismo-is-a-terrible-social-experiment” post can we write? Do our readers really need to be convinced that the country is going down the drain?

As it becomes perfectly clear that chavismo is a failure, we need to take a step back and acknowledge that this is another stage of Venezuela’s alarming collapse, a process that began in the 1970s, and one we have been unable to stop.

This week I had dinner with FRod, and one of the things he reminded me of was that his little tiff with Ricardo Hausmann is ironic given how they edited a book together on this exact topic. (See FRod’s latest retort here, as long as you can get by the Financial Times’ ridiculous paywall)

The book is called “Venezuela Before Chávez: Anatomy of an Economic Collapse,” and it provides insight into the process that led to Chávez, a dramatic socio-economic collapse seldom seen in the history of the world. It is important to re-visit these events to better understand them, and to make sure we understand that the chavista beast has its roots in bigger, deeper failures of Venezuelan society as a whole.

So, if this is simply the latest incarnation of an astonishing economic collapse, what are its roots?

Hausmann and Rodríguez begin by reminding us that Venezuela was once a success story:

“By 1970, Venezuela had become the richest country in Latin America and one of the twenty richest countries in the world, with a per capita GDP higher than Spain, Greece, and Israel and only 13% lower than that of the United Kingdom.”

Starting roughly in 1970, it all went downhill. Why?

There are many answers in the book. Prior to Chávez, Venezuela collapsed because of declining oil production, which in per capita terms meant that each Venezuelan produced less and less oil, and therefore earned less and less from oil income. Temporary price surges made us believe again in the “illusion of harmony,” but once oil reverted to the mean, as it seems to be doing now, the mirage disappeared.

But it doesn’t stop there. Another reason for Venezuela’s collapse is that productivity in our non-oil economy also collapsed. The reason for this is that all the know-how that we obtained in producing oil was not transferred to other sectors, so our technical prowess did not really spill over. There are also macroeconomic conditions at work here – the natural tendency to having an expensive local currency being key.

The book also discusses some of the other important trends in Venezuela’s collapse: an inability for political actors to get together and increase oil production; a collapse in financial intermediation, which prevented firms from adopting technology and expanding; chronic underinvestment in infrastructure due to declining public spending in this sector; regulations that prevent the labor market from adjusting, making it difficult to fire unproductive employees or snatch away talented ones by paying them more; and a political system that rewarded broad-scale patronage over a consensus-based, strategic, targeted approach to development.

I think the book is a commendable effort in forensic development economics. Looking at this laundry list of culprits, one can only conclude that they are still present, stronger than ever.

If labor regulations were tight before Chávez, they are now asphixiating. If the increase in oil production was difficult before Chávez, now it would take a miracle if our wells didn’t dry up. And let’s not even talk about our crumbling infrastructure.

As we absorb the pain of this new crisis, we need to come to terms with its nature. It is the latest onslaught of a deeper malaise. The seeds of the current collapse can be traced back to the vices our economy brings with it from a generation ago.

Changing the government but simply ignoring the factors that led to this collapse would not accomplish anything. The problem goes beyond Maduro and company. While they are obviously a huge part of the problem, the end of chavismo would not necessarily cure our country.

We need to make sure the leaders who wish to replace Maduro understand the nature of the problem, and offer a recipe for escaping this trap.