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.

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  1. My guesstimate is that it will require 20 years for Venezuela to recover the same GDP per capita that it had in 1999. Obviously some sectors of the economy will recover faster, such as tourism and other relatively low capital investment sectors. The other sectors of the economy that do the heavy lifting, such as steel and aluminum production, the energy and petroleum sector, and other high capital heavy industries will take a long time to recover. Investors will want to see demonstrated stability in the country before they invest the tens of billions that will be needed.

    Much depends on how competent and proactive the new government is. If the new government tries to go the “Chavista Lite” route and tries to maintain all the controls on the market, Venezuela will lose the remainder of its human capital and will languish in poverty many decades to come. If they get really smart about it and do all the right things, perhaps it could take only 10 years.

  2. Same page. I see the same things, admittedly in distant overview, that you mention in a very concise article. stressing the principal factors.

    If I may add something, just from an economics point of view, academically speaking, then:
    1) immediately open up the capital markets. That means dumping the ridiculous government control of private purchases through regulated foreign exchange, Immediately facilitate private purchases of needed seeds, fertilizers, and insecticides, of replacement parts. Everything.
    2) Guarantee, unconditionally, safety of capital. A lot of multinational companies have lost a total well into the billions of euros or dollars, and it may be difficult to convince them to trust Venezuela again. Try to return property expropriated. Capital, like water, seeks out the lowest levels of investment with the highest potential return. Rrrrecuperation de capital inverrrrtido (not that he would ever say that). Amazing how it works.
    3) Get decision makers and law writers in government to drop barriers to foreign capital and foreign ownership. Foreigners with capital do not seek to plunder the country – that would not be good for their business. Chavismo killed off the goose that laid the golden eggs; private foreign interests want to grow more geese to lay yet more golden eggs. They do not seek government office – that isn’t their line of business. They hire, train, and pay wages. They need local supporting services and a stable population to hire from. (People they train may well leave to start their own businesses.) They favor a strong educational system since it makes it easier to find and recruit talent locally, at lower expense than “imports”, and with national familiarity. It is the higher-ups in government that have to become convinced of that, and there will very likely be opposition from Venezuelans who are accustomed to private guisos of their own, and do not want the efficiency of foreign capital leveling the markets to equilibrium which cuts into their otherwise fat margins. Licensed business are notorious for that.

    It seems to me that opening up those capital flows and investment opportunities could greatly speed the recovery. If Bridgestone and Clorox and Kimberly Clark, for example, could be persuaded to return, they have capital on hand to rebuild immediately, but they are not likely to put up with corrupt customs officials who won’t release machines sitting on the docks because they haven’t been paid their “aguinaldos”, and they are unlikely to put up with government officials with their hands out.

    Besides machines that rust, you have people who were managing those operations, and fully functional in Venezuela – the human capital – who may now be happily relocated in Chile or Argentina or Brazil. Asking them if they’d like to return might prompt some to take early retirement.

    As you have said very clearly:
    “But first things first: we need a new government. Until we have that, all the rest is academic.”
    The term “structural reform” gets bandied about; Venezuela needs a solid and pervasive legal system, and an end to corruption. Venezuela could be exporting all kinds of stuff for big private profits, which the government taxes top maintain infrastructure.

    Economic analysis, just looking at the economics, brings one to the conclusions you have distilled.

    • Yup, those are some of the “right things” that should be done. One of my pet points is the need to shift revenue collection down to the state and municipal level. City and state politicians need to be responsible to the tax paying citizens who vote them in or out based on how they perform. We cannot continue to have local government beholden to the federal government for funding. Political power including tax collection needs to be decentralized.

      But, “first things first”…

      • Roy, that’s a really good idea! Man, if we could get more of that done here in the U.S.,and get the federal government out of things, it would give people more of a free market choice about which state they want to live in. I’ve never really looked at state budgets and the “share” of federal taxes they get. Now I’m wondering how that would work out, what side-effects might come in, how much difference there would be among states, and all that. A lot of people are very upset that federal money goes to wasteful high-tax CA and their “sanctuary city” crap.

        • Gringo

          If they are upset about California getting federal money, they should probably educate themselves and stop watching Fox News. California pays far more in federal tax than it receives. (For every tax dollar it sends to the Treasury, it only gets back 80 cents). It’s one of just 11 states with a deficit between what it pays the feds and what it gets back.

          It’s actually mostly “Red” states that are the “debtor” states, as in states that get more federal money than they contribute in taxes. This link has some info but there is plenty more if you are interested.

  3. Listening to Delcy’s idiotic speech in Cancun, I was struck by her comment about Mexico having “riquezas” and yet being poor. As shown by cases like Singapore, it’s not the mineral wealth that creates a successful economy, it is the country’s policies that make the difference.

    • Indeed. Can anyone name a single self-governed country over the last 100 years that has done less with more than Venezuela? I can’t.

      • You made a false assumption which is that “self-governed country” . Actually, there has been in the past countries that were completely destroyed and sacked by their invaders.

        This govt only responds to a foreign goverment and not to any venezuelan group (less significant are the venezuelan people which are treated like sh*t in its own rich country). The army is a mercenary group with uniforms.

        The oil boom happend and the outcome is that VEN which was the best country in latam back in 1998 now the misery is undescriptible.

        It’s not about policies, it’s not about abilities, it’s not about the skills of the people ruling, mistake a lot of people make when saying “este gob es incapaz de sacarnos de la crisis”, which is similar to ask a garrapata to cure the damage it has done.

        In the nineties despite an oil price around 10$ (heavy sour oil), despite all the turmoil and coups, despite all the corruption, the country was still able to bring up infraestructure. Pdvsa and the upgraders, orimulsion and so on.

        When you search for new public imfraestructure in the country in the last ten years (from june 2007 to 2017) with an oil price around 60-80$, there is no other comparable period in terms of not only doing nothing but additionally the level of destruction of all the infraestructure.

        Furthermore, the education, first becoming an education for mediocres starting with the supression of Cenamec in 2003, and the continuos attack on the universities and the professionals that come from the universities, the destru tion of the iupfan and ince, the fraud of the universidad bolivariana and now a public education which was destroyed on purposed. As the ministro chavista “no lo vamos a sacar de la pobreza para que se vuelvan escuálidos” which means if they become independent, if they produce their own resources or if in any way they start approaching a clase media then they become our enemy.

        Yes. Is not a self governed country. Not anymore. La garrapata manda y no es de VEN.

        • Except Chavez was elected and supported by a clear majority of Venezuelans. Heck, even my woman who’s about as anti-Chavismo as anyone I know, admits to have voted for him.

          If he were alive today, I’m not convinced he would be defeated at the ballot box. He’s still a god to a large swath of this country.

          • Most of the people that voted for Chávez in 1998:

            1) Didn’t imagine that he would implement a fascist-communist regime.

            2) Didn’t know he was a pawn working for the Castros.

            3) Didn’t think he would obliterate Venezuela’s economy in order to become stupidly rich.

            They were also deceived by the most come-flor campaign in the history of Venezuela, it was only a couple of weeks before the elections that Chávez ever said anything remotely questionable in his speeches, before that, he was sweeter than a bucket full of honey.

            You are ignoring too the facts that the communist agents had inviltrated the government decades before to stop any possible reform that would give any semblance of economic freedom to people, and the relentless campaign from the media against democracy that claimed that democracy was equal to corruption or the brainwashing of several people in the country against democracy and favoring communism by cuban agents.

    • Also refering to Delcy’s idiotic speech in Cancun, She refer “a Swift Response from the Venezuelan troops. Did she refer to Jonathan Swift”s “a Modest Proposal” or something else. Did she actually mean that after they are done with dogs and Flamingoes, I guess they have to get the more ovens ready for the young ones.

    • Also in refernce to Delcy’s idiotic speech in Cancun. Did she refer to Jonathan Swift”s “a Modest Proposal” or something else (like troops). After they are done with dogs and flamingoes , I guess they have to get the ovens ready for kids.

  4. The first and most important step to recover anything in Venezuela is stripping chavismo of all its power, only then there could be any chance for any strategy to recover Venezuela’s economy.

  5. The biggest obstacle is the quality of “human capital”. We have a population that is used to not working productively, a lot of parasites, a population that thinks that “work” is a bad word, that other people are supposed to “give them” a living, that they only have “rights”. Who the hell is going to change the labor law to actually make people work? To make a worker accountable? Nobody can politically mess with “workers rights” and help “the rich”?
    Nobody in their right mind will invest money in something productive like agriculture, tourism or industry.
    Short term speculation, yes. Nothing else.
    We are a failed state and i am afraid it will stay that way. Society is rotten to the core.

    • Agreed. If the average Venezuelan didn’t feel entitled before chavez, he certainly does now. At least that’s my take on the campesinos with whom I’ve worked for years. And they also have no qualms about stealing from those who do produce, including their neighbors.

      As for the labor laws, they’re designed to encurage one to work for two or three years, quit to receive the accrued prestaciones and utilidades, do nothing for six months, and then start anew looking for work….no skills acquired, no seniority. We know how that works out.

      • Same crap with students, a teacher can’t fail them. Companies can’t fire workers. So no productivity. Even private schools have gone to hell.
        On your example the worst part is that during the time they are employed, they produce very little on purpose, don’t want to make the boss rich.

    • Disagree. There are lots of countries in the world whose citizens are much more lazy than Venezuelans and yet have far higher productivity. Productivity is not a reflection of individual workers’ capacities. It is an aggregate of overall efficiency of the countries economic systems and infrastructure, and the investment in the capital goods that multiply the output of each worker.

      The idea that Venezuelans are naturally lazy and corrupt is a myth that was started by and to the benefit of Chivismo. They wanted everyone to think that they deserved Chavismo. That sort of thinking must stop. People have to say, “No! We don’t deserve this s__t! We demand better.”, and that is what is happening now.

      • In Venezuela “work” is defined in terms of being present, not actually doing work. Even with the old laws workers couldn’t be fired for doing little or nothing during working hours. That is what kills productivity. If you actually work, you are enriching your boss. So the mission is to do as little as possible, it has always been like that, now it has gotten worse. If you hire a cleaning lady for a day, you are lucky to get four hours of cleaning. Have you ever had workers in Venezuela?

  6. The companies that had their assets seized have adjusted capacity at other locations.
    Latin America, with ongoing instability and high crime rates throughout, is not a very attractive area for foreign investors.
    The oil infrastructure requires a massive infusion of capital, while oil prices are depressed and there is a glut of oil on the world market. All of OPEC’s cuts have been replaced by US shale drillers. Another negative is that the new Canadian pipeline will bring a heavy crude to the US refineries that are designed to process the Venezuelan heavy oil.
    There are not a lot of incentives for the major oil producers to make the kind of investment in the Venezuelan oil infrastructure that it so desperately needs. Reducing the cut the government receives from oil production may be necessary. This will result in a slower recovery as less money will be coming into government coffers. It may be the only solution though. The refinery capacity is so degraded that Venezuela may be importing finished products for years to come.
    The corruption in Venezuela is so thoroughly ingrained in society, it is going to be very challenging to remove it.
    Will the complete police departments be replaced? The customs officials? Will the Collectives be completely dismantled?
    Growing domestic demand may spur the return of consumer product producers like Kimberly-Clark. Even then, the consumers need money to spend.
    I would expect most companies to choose to export to Venezuela rather than return as manufacturers.
    Mexico has seen hundreds of billions of Dollars in foreign investment while Chavismo has been destroying Venezuela.
    There is so much that needs to rebuilt, it is overwhelming. Many of the most educated and knowledgeable people required to do this have migrated to other countries. Overcoming the effects of brain drain is daunting.
    You are correct that this must begin with a new government. The new government is a single (although big) step on the journey to a prosperous Venezuela.
    The patience and resolve of the Venezuelan people is critical in order to keep another Chavez from coming to power.

  7. Amigo Francisco, some one said it above : The Quality of the human capital!

    You are missing the point completely in your write up. Lots of technocratic babble. My apologies for the harsh critique.

    Venezuela is no longer the country it once was. There is no national plan! there is no leadership, the “opposition” gores from distraction to distraction while the country is run to the ground still thinking in pajaritos preñados, and elections and rule of law.

    First, assume reality. You have been invaded and taken over my a myriad of criminal and foreign interests.
    Secondly, understand that 2 million Venezuelans with education and modern values have left the county.
    Thirdly, be aware of the deep transition in energy sources playing out in the world out side.
    lastly, the occupation has damaged the collective psyche of the pueblo and the state to control it, big time.

    From the viveza criolla, we have moved down to the mind of dehumanized oppressors.

    Once you realize these things, you will be at least working on reality and able to formulate a plan for recovery.

    I know many Venezuelans abroad are not only hoping to return, but actually working on reconstruction. Fine.
    Mineral riches and some surviving infrastructure may help in the recovery.

    But your piece misses the quid on the matter. The need to rehabilitate the values of society.!!!
    Can you please follow up with your thought on this?

  8. It’s been mentioned but I want to reiterate the “human capital” component. Of the many Venezuelans I’ve met in Peru, Colombia and the States, the most common vocation by far was engineer. Also doctors, computer programmers, etc. Just getting most of the 1.5 million people — many of whom are highly productive — who fled chavismo to come back may be more effective than the FDI strategy.

    The white-nationalist right wing in America which has soured on trade loves to point out protectionist policies of the 19th century, but fail to point out that the population grew 30% every 10 years.

    What would it take you or Quico to go back?

    • Those are the exceptions. A lot fewer than 1.5 m.
      Just go to a restaurant in Venezuela and count employees per table and you will see the “quality” or workers. And service will suck.

        • Now they make that. They worked as “hard” when they made a lot more. Venezuela is a country where even people who work on commission or paid by work performed don’t move their asses. Theory is one thing, reality on the ground is another.

        • I was referring to the professionals, the total diaspora might be 1.5 m. As in Cuba, the elite left first, now the “non elite” is leaving. I live in Miami, the new Cuban arrivals could be inhabitants of any Venezuelan barrio. Same thing is happening with Venezuelans, the quality of emigrants is going down because there are less good people left there. Even if 500.000 return, there are few opportunities left. I personally think that only people who are really having a hard time economically will return, the rest won’t. Just like Europeans that went to Venezuela (like my father), the established themselves and very few went back.
          In Miami we our reputation is made of arrogance and innocence, the famous “vivo pendejo”. Quite a few compatriots live off swindling money from new immigrants. Another lot lived off buying crap here and reselling it in Venezuela (those are screwed), another lot lived off money from their business in Venezuela (those are screwed up too). So the real good diaspora is a lot smalles than we think.

  9. How long will it take to engender respect for the rule of law, respect for justice, and respect for others’ rights in this culture?

  10. Make the Venezuelans the direct owners of the oil, and share out 100% of the net oil income to all of them. The state could perhaps put a 10% withholding tax on each individual oil dividend, and perhaps 5% could go to satisfy the creditors that should never have financed this government to begin with.

    Then let the ingenuity of millions of Venezuelans bloom, instead of trusting some few besserwissers and their íntimos.

    So just go out there and ask the question:

    “¿Cree usted que ya esta bien que los-quítate-tú-pa-ponerme-yos de siempre sigan partiendo y repartiendo nuestras resultas petroleras, para quedarse ellos con la mejor parte, y que al fin llego el momento para que dichas resultas le sean entregadas a todos los venezolanos por nacimiento por igual? ¿Si o No?”

    • It may seem like a good idea till you do the math. Being generous, Venezuela produces about 913mm barrels per year and about 500mm barrels go in domestic consumption and debt repayment. Operating costs are about $8/bbl at the last count (2014) and capital investment for production MAINTENANCE – not build – is over $8bn p.a.. Venezuelan oil is discounted against benchmark prices because of quality; let’s call it $40/bbl net sales price for barrels freely sold at present day benchmark prices. So the sum looks like this:-
      Gross revenue = (913 – 500) * 40 = 15675 million dollars
      Operating costs = 913 *8 = 7300 million dollars
      Maintenance capital = 5000 million dollars
      Net revenue before tax, interest and partner payments = 3375 million dollars
      Net revenue per person per year assuming population of 30 million = $112/person/year

      Venezuela needs much more than oil production.

      • Do you think domestic consumption would be allowed at current prices if everyone had a piece of the cake? And I am thinking of a Pdvsa II, with little or no intentions of paying Pdvsa I’s bondholders. And you think that operating costs plus maintenance costs in a real functioning would have to come at higher than $16 per barrel as you indicate?

        Mr. even if it only was $112/person year what makes you think government could do better with that money?

  11. A lot of pessimism here, but I think it is all warranted. The main problem is trust.

    Any large private investor carrying out a country risk assessment in the near term – even WITH a change of government will find little to give them encouragement.

    Anyone still in Venezuela who is less than 30 years old has been brought up knowing only Chavismo, corruption, lack of respect for the rule of law and the politics of envy, class division and paternalism. Educational standards and the value of qualifications have plummeted. Many of the best and brightest moved out of Venezuela long ago and are settled elsewhere.

    On stability, the institutions in the country have shown themselves to be too weak to resist a slide into autocratic rule and lawlessness in every sense of the word. The judiciary today jumps at the capricious whim of the Executive, and oficialismo has breached faith with almost every sector of the economy.
    What reliance can a private investor place on being able to enforce a contractual commitment by a future government?

    Trust, once lost, is difficult to regain.

      • Indeed every word is true, the situation is truly desperate. So let us do something that really changes the game… meaning “let the ingenuity of millions of Venezuelans bloom, instead of trusting some few besserwissers and their íntimos.”

  12. My household is full of recent expats who see no future in returning to Venezuela. Including my wife’s uncles, who until Chavez nationalized their concrete business, were employing Venezuelans and paying them living wages.

    Venezuela could “give back” their business (abandoned and stripped of anything of value only months after it was nationalized) and promise them the moon and stars, and still they won’t go back. The bribes and protection payouts were a part of the game before the Chavistas took their company… they can’t imagine that government authorities aren’t going to let go of the gravy train that lined their pockets. And what guarantee do they really have? Venezuela isn’t famous for its long democracy and efficient governance.

    Fool me once, shame on you. Fool me twice, shame on me.

  13. My company is in offshore oil. Our business in Venezuela was destroyed by Chavez. Now we mainly operate in West Africa. We still get a lot of CV’s from Venezuela mariners looking for jobs but we don’t even look at them, especially if they have worked at PDVSA as they are useless entitled maladros. Put me down as a ‘burned’ gringo who over his dead body will ever employ a Venezuelan again.

    • Put me down as a ‘burned’ gringo who over his dead body will ever employ a Venezuelan again.
      Even those ex-PDVSA personnel whom Chavez fired for having taken part in the 2002-2003 strike?

      • The PDV strike people have been out of the country working for more then 10 years. They have adapted to the ‘real world’ and survived. The mariners in Venezuela who have been corrupted by PDV, they are the untouchables.

  14. Everything I read here ignores a fundamental fact for Venezuela is drug trade – you can’t control it without US and Europe stopping “our” problem. Like “Breaking Bad” in little bit ricin goes a long way (and all natural for the “all organic cheap to prepare.

  15. Wow! Most all great comments, as was the post. I think that Venezuela will probably never regain even pre-Chavez GDP/capita. Reasons: all commented above; plus: difficulty/impossibility of eliminating Chavismo from any new/transition Government; impossibility of eliminating the influence/corruption of the useless/leftist-infiltrated/corrupt/blood-sucking Venezuelan military; and, difficulty of educating/changing typical Venezuelan worker psychology from entitlement/resentment/live-for-the-moment/stealing to sacrifice/efficiency/plan-for-the-future/honesty.


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