Venezuela Before Chávez: Anatomy of an Economic Collapse

482 Pages·2014·4.76 MB·English

by  Ricardo Hausmann

hausmann
At the beginning of the twentieth century,
and
Ricardo Hausmann is Professor of the rodríguez Venezuela had one of the poorest
Practice of Economic Development and edited by ricardo hausmann and francisco r. rodríguez economies in Latin America, but by 1970
Director of the Center for International it had become the richest country in
Development at Harvard University’s the region and one of the twenty richest
Kennedy School of Government. He countries in the world, ahead of countries
served as Venezuela’s Minister of Plan- such as Greece, Israel, and Spain. Between
ning in 1992–93. 1978 and 2001, however, Venezuela’s
a economy went sharply in reverse, with
n
Francisco R. Rodríguez is Chief Andean non-oil GDP declining by almost 19
a
Economist at Bank of America Merrill t percent and oil GDP by an astonishing 65
o
Lynch. From 2000 to 2004 he served m percent. What accounts for this drastic
as Chief Economist of the Venezuelan “This objective and expert evaluation of the y turnabout? The editors of Venezuela Before

o
National Assembly. Chávez, who each played a policymaking
f
Venezuelan economy will become an indispensable role in the country’s economy during the
a
n past two decades, have brought together

e a group of economists and political
reference for any future debates on the legacy of the c
o scientists to systematically examine the
n
impact of a wide range of factors affecting
Chávez era.” o
m the economy’s collapse, from the cost
i of labor regulation and the development
c
—Moisés Naím, author of The End of Power
of financial markets to the weakening of
c
o democratic governance and the politics of
l
l decisions about industrial policy.
a
p
s
e anatomy of an economic collapse Aside from the editors, the contributors
are Omar Bello, Adriana Bermúdez,
Matías Braun, Javier Corrales, Jonathan
Di John, Rafael Di Tella, Javier Donna,
Samuel Freije, Dan Levy, Robert
MacCulloch, Osmel Manzano, Francisco
The Pennsylvania State University Press
Monaldi, María Antonia Moreno, Daniel
University Park, Pennsylvania isbn 978-0-271-05631-9 Ortega, Michael Penfold, José Pineda,
ISBN 978-0-271-05631-9
Lant Pritchett, Cameron A. Shelton, and
www.psupress.org
penn
Dean Yang.
state
press
Venezuela Before Chávez
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Venezuela Before Chávez
Anatomy of an Economic Collapse
Edited by
ricardo hausmann
and francisco rodríguez
The Pennsylvania State University Press
University Park, Pennsylvania
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library of congress cataloging-in-publication data
Venezuela before Chavez : anatomy of an economic collapse /
edited by Ricardo Hausmann and Francisco Rodríguez.
p. cm
Summary: “A collection of essays that explore the collapse of
economic growth in Venezuela since the 1970s. Essays discuss
the relevance of public investment, labor markets, fiscal policy,
institutions, politics, and values”—Provided by publisher.
Includes bibliographical references and index.
ISBN 978-0-271-05631-9 (cloth : alk. paper)
1. Venezuela—Economic conditions—1958– .
2. Venezuela—Economic policy.
3. Financial crises—Venezuela.
I. Hausmann, Ricardo, editor of compilation.
II. Rodríguez, Francisco, 1970– , editor of compilation.
HC237.V4653 2013
330.987’0633—dc23
2013020926
Copyright © 2014 The Pennsylvania State University
All rights reserved
Printed in the United States of America
Published by The Pennsylvania State University Press,
University Park, PA 16802-1003
The Pennsylvania State University Press is a member
of the Association of American University Presses.
It is the policy of The Pennsylvania State University
Press to use acid-free paper. Publications on uncoated
stock satisfy the minimum requirements of American
National Standard for Information Sciences—
Permanence of Paper for Printed Library Material,
ansi z39.48–1992.
This book is printed on paper that contains
30% post-consumer waste.
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Contents
preface and acknowledgments | vii
Introduction | 1
Ricardo Hausmann and Francisco Rodríguez
1 Why Did Venezuelan Growth Collapse? | 15
Ricardo Hausmann and Francisco Rodríguez
2 Venezuela After a Century of Oil Exploitation | 51
Osmel Manzano
3 Public Investment and Productivity Growth in the Venezuelan
Manufacturing Industry | 91
José Pineda and Francisco Rodríguez
4 The Incidence of Labor Market Reforms on Employment in the
Venezuelan Manufacturing Sector, 1995–2001 | 115
Omar Bello and Adriana Bermúdez
5 Understanding Economic Growth in Venezuela, 1970–2005:
The Real Effects of a Financial Collapse | 157
Matías Braun
6 Much Higher Schooling, Much Lower Wages: Human Capital
and Economic Collapse in Venezuela | 187
Daniel Ortega and Lant Pritchett
7 Income Distribution and Redistribution in Venezuela | 207
Samuel Freije
8 Competing for Jobs or Creating Jobs? The Impact of Immigration
on Native-Born Unemployment in Venezuela, 1980–2003 | 239
Dan Levy and Dean Yang
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vi contents
9 Sleeping in the Bed One Makes: The Venezuelan Fiscal Policy Response
to the Oil Boom | 259
María Antonia Moreno and Cameron A. Shelton
10 Institutional Collapse: The Rise and Decline of Democratic Governance
in Venezuela | 285
Francisco Monaldi and Michael Penfold
11 The Political Economy of Industrial Policy in Venezuela | 321
Jonathan Di John
12 Explaining Chavismo: The Unexpected Alliance of Radical Leftists
and the Military in Venezuela under Hugo Chávez | 371
Javier Corrales
13 Oil, Macro Volatility, and Crime in the Determination of Beliefs
in Venezuela | 407
Rafael Di Tella, Javier Donna, and Robert MacCulloch
14 Understanding the Collapse: Venezuela’s Experience in Cross-National
Perspective | 425
Ricardo Hausmann and Francisco Rodríguez
contributors | 443
index | 445
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Preface and Acknowledgments
On March 5, 2013, Venezuela’s president Hugo Chávez died after a two-year strug-
gle with cancer, putting an end to fourteen years in the presidency. Several books
have already been published over the past few years trying to assess Chávez’s
legacy, and many more will certainly come.1 This is not one of them. Rather, this
book is about Venezuela before Chávez came to power. It tries to understand
how one of the continent’s most prosperous nations, which boasted a vibrant
democracy at a time when much of the region was mired in authoritarianism, saw
a prolonged collapse of its economic and political institutions over the last two
decades of the twentieth century. While this book is not about Chávez, it is about
how Chávez became possible.
Hugo Chávez did not come to power in a political vacuum. His radical
authoritarian message was capable of striking a deep chord among Venezuelans
only after they became convinced that their institutions were incapable of bring-
ing them prosperity or stability. Chávez was only possible after two decades in
which living standards fell by more than one-fourth and the country’s political
system imploded. In a context of continued economic deterioration and weak-
ened political institutions, there was a clear opening for a political movement that
called for radical change. This was the opportunity that Hugo Chávez saw, and
took full advantage of, in 1998.
After 1998, the story of chavismo could have been simpler—and shorter.
Hugo Chávez’s policies would have wreaked economic havoc in just about any
economy, except an economy that saw its terms of trade grow more than seven-
fold. In real terms, Venezuelan oil prices had reached their lowest level in nearly
three decades—$7.66 a barrel—in the second week of December 1998, the week
during which Chávez was first elected to the presidency.2 Between 1998 and
2011, Venezuela’s terms of trade grew 6.7 times more rapidly than the regional
average and 3.1 times more rapidly than Bolivia’s, which had the second-highest
terms-of-trade growth in the region. Even after a decline in physical production
and exports of oil caused by the systematic overtaxation of the oil industry and
the virtual disappearance of non-oil exports, Venezuela’s exports in 2011 were
3.6 times as large as in 1998.
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viii preface and acknowledgments
Despite this stroke of luck, Chávez almost lost power three years into his
administration. In early 2002, the nation faced a balance of payments crisis and
was forced to enact a major macroeconomic adjustment—a crisis that occurred
despite the fact that oil prices had nearly doubled since Chávez had reached o ffice.
It is worth emphasizing that this economic adjustment occurred before the onset
of that year’s political crisis: GDP contracted by 4.4 percent and the currency slid
by 21 percent in the first quarter of 2002, while the first attempt to drive Chávez
from office took place in April 2002.
However, the ensuing political crisis—which included not only the coup
but also a two-month-long general strike between December 2002 and January
2003—gave Chávez the extraordinary opportunity to shift the blame for poor
economic performance onto the country’s political opposition while he consoli-
dated political control over key institutions. In all likelihood, these moves would
have only briefly prolonged the hold on power of what was then a deeply unpopu-
lar government (Chávez’s disapproval ratings stood at 67 percent in June 2002,
according to the Venezuelan survey firm Datanalisis). But oil saved the day again,
rising from $26 in 2003 to $91.4 in 2008 and $103 by 2012.
The resulting windfall dwarfed anything ever experienced in Venezuelan
history, including the increase seen in the oil booms of the 1970s and ’80s.3
This windfall allowed the government to generate a massive increase in its size,
which expanded nearly threefold in real terms during Chávez’s tenure in office,
growing from 28.8 percent to 41.1 percent of GDP. This enormous expansion in
the activities of the state brought about an improvement in many indicators of
Venezuelans’ quality of life, such as per capita incomes, poverty rates, and health
indicators—though it also coincided with skyrocketing homicide rates. Contrary
to popular belief, it was not associated with a change in the priorities of govern-
ment spending; the fraction of spending devoted to social programs, even after
one takes account of off-budget funds, was remarkably stable during Chávez’s
administration and not very different from that of previous governments.4
It would have been very hard, in fact, for such a huge oil boom to not have
brought about an improvement in Venezuelans’ quality of life, as it in fact did.
But the results were lackluster. Venezuela’s drop in poverty rates over this period
was actually similar to those of Colombia, Brazil, and Peru, while its growth
performance (2.6 percent annual growth since 1998) was the lowest among Latin
America’s ten largest economies.5
Still, the fact that living standards started improving after Chávez came to
office—and that they had declined steadily during the previous two decades—
seemed to lend support to the idea that there was something wrong in Venezuela
before Chávez came to power, and that chavismo had fixed it. Chávez’s basic
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preface and acknowledgments ix
storyline for explaining what had happened to Venezuela was that it was a wealthy
country whose wealth was being siphoned off by its elites, and that this state of
affairs could only be reversed by firm action by the state in order to redistribute
that wealth to Venezuela’s poor majority. Even the turn toward authoritarianism
seemed easy to justify, as some degree of firm-handedness was surely necessary to
wrest away resources from the previously all-powerful oligarchy.
So while Venezuelans’ living standards were improving largely because an
exogenous shock had led to an increase in the resources available to the nation,
Venezuelans became increasingly focused on how to redistribute the pie instead
of making it bigger. They bought into the story that living standards were im-
proving due to Chávez’s management of the economy and his willingness to
redistribute wealth. What emerged was a political economy that was premised on
a distributive interpretation of reality—even as that reality was being affected by
factors that had little to do with internal distributive dynamics.
Today, that interpretation is coming up against the harsh realities of economic
constraints. Despite historically high oil prices, Venezuela has continued to
overspend and erode its productive base. In 2012, the consolidated public sector
reached a staggering deficit in excess of 14 percent of GDP, following a massive
expansion of public spending whose main purpose was to guarantee the ailing
leader’s reelection. The country once again has one of the highest country risks
in the world. It has adopted, for the fourth time in Venezuelan history, a multiple
exchange rate regime with a huge differential between the official and the paral-
lel rate. It has again adopted extensive price and import controls that have been
pitifully unable to suppress inflation, which averaged 42 percent per year in the
first four months of 2013 and have caused massive shortages across many prod-
uct categories, including essential food items. It has created distortionary incen-
tives throughout the economy that impede the efficient allocation of resources
and incentives. It has created fundamental insecurity in the property rights of all
Venezuelan and foreign investors, from the largest global corporations to farmers
and families who rent out their homes.
There are differences and similarities between what Venezuela is under-
going at this moment and the crises that the country underwent in the past
decades, which we describe in the following pages. The macro picture does
look remarkably similar in some respects to those of 1983, 1989, and 1996, after
long bouts of overspending and overvaluation leading to highly contradictory
fiscal-cum- exchange rate adjustments. They also often happen in an economy
with multiple exchange rates and extensive price and import controls. But those
adjustments tended to take place in the context of low or declining oil prices,
whereas this one is occurring with oil still near its historical highs.
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