Amid strong political protests, Venezuela is experiencing an economic crisis without precedent in recent history. What might the recovery be like? Slow and difficult, or quick and painless? People in my generation tend to think back to the nearest parallel: the economic recovery of 2004. I think that distorts our expectations, tilting them towards “quick and painless.”
Because, economically, 2004 was a good year. Scratch that, it was a great year. After the deep downturn of 2002-2003, the economy bounced back very quickly. In the years that followed, consumption experienced an expansion that had eluded us since the seventies.
The temptation, then, is to think that 2017 is basically just a new 2003. The only problem is, it’s not. 2017 finds us amid the worst economic recession since we’ve had national accounts: you may have to go back as far as the Federal War to find a similar collapse.
The question naturally arises: how long will it take to climb out of this hole? To my mind, if we’re extremely lucky, we might get there in four years. Likely, much longer.
Look, I understand that for a country that has wasted so much time and resources, it’s difficult to accept the idea that we will not get out of the woods until 2021. And that’s in the best scenario, if we launch a very robust recovery in 2018.
In the best case scenario, the end of this recession will leave us with an economy 30% smaller than it was when it all started. To climb back from the bottom, the economy would need to grow at least 44%, given that the baseline number is now smaller. That implies four years growing at 9.6% per year just to climb back to the level of 2013.
Even now, we tend to underestimate the size of the hole we’re in, because we find it hard to wrap our minds around how dire this contraction has been.
The temptation, then, is to think that 2017 is basically just a new 2003. The only problem is, it’s not.
Some countries go through war and do better than we’ve done since 2013. Literally. In the first four years of its civil war, El Salvador’s economy shrank 20,3%. Irak, in the first 4 years of its war with Iran shrank 25%, Iran even managed to grow 1,2% during the same period.
Is it possible to make it all up in just four years? There’s some precedent in Venezuela for growth rates that high. We managed it between 1953 and 1957, and again after the 2002-2003 crisis. So we’ve done it. It’s not impossible.
Is it feasible? This is the question.
You can jump-start an economy when you have lots and lots of idle capacity: factories just waiting for a switch to be flicked to produce again. That, more or less, is where we were at the end of 2003: a lot of production had ceased for political reasons, and growth was just a matter of restarting lines that were sitting idle.
You could do that because, at that point, the industrial sector and especially the oil sector, had not suffered a permanent loss in production capacity. Together with rising oil prices, this set the recovery game on “easy.”
But that’s nothing like the situation Venezuela faces today.
The long recession has inflicted deep wounds on the private sector. It’s also erased what vestigial memory public companies once had of how to run properly: the CVGs, Corpoelecs and CANTVs of 2017 are pale shadows of what they were in 2004. Even PDVSA back then, though purged, retained the institutional memory of how a professional oil company should run. That’s all gone now.
The big recovery of 2004 was above all a recovery in capital utilization. In the future we will not have this advantage. The loss of production capacity due to the current recent recession is permanent.
Why? Because when a recession is this long, firms don’t go to sleep: they die. Machinery doesn’t sit idle, it rusts and is ruined, or has become technologically obsolete. Even the companies that have managed to hang on will bear the scars of a long disinvestment process. When all has been said and done, the Venezuelan economy will have to be rebuilt, not reactivated.
We managed it between 1953 and 1957, and again after the 2002-2003 crisis. So we’ve done it. It’s not impossible.
That’s why the next recovery will require new investment, especially in the oil sector. This means oil multinationals pouring dollars into the country – something that’s unlikely under the current law.
The second element that fueled the recovery after 2004 is also unlikely to repeat itself today: nobody is forecasting an oil boom similar to that one.
If there won’t be a big spare-capacity use rebound and no oil revenue to finance a consumption boom, what are we left with to propel the recovery?
The same set of tools other countries have climbed back with: structural reform. We need to make deep changes in our economy to regain growth. This sort of recovery is slow; it requires more effort and more political will. This path might be slower and harder, but is likely to be more stable. Our two previous attempts at this (the Gran Viraje of the early 90s and the more timid Agenda Venezuela in the mid-90s) failed. We need to stabilize the economy, then give it a third try, and get it right this time.
Recovering from the current devastation will be the greatest challenge that our generation will face, probably the greatest challenge any generation has had to face since 1958, if not 1936. We must not downplay the risks and difficulties the future will bring. The recovery will be long; it will require deep changes, efforts and, above all, commitment. Downplaying what lies ahead will do us no favors.
But first things first: we need a new government. Until we have that, all the rest is academic.