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The Financial Times has an excellent interview with economist Ricardo Hausmann on the Chavez and Maduro-created tragedy that is Venezuela. HT2 Timothy Taylor, aka, the Conversable Economist.
The whole thing is worth reading. With help from a good interviewer, Cardiff Garcia, Hausmann, an economics professor at Harvard's Kennedy School, gives a good narrative about the changes in economic policy that took Venezuela from being one of the economic jewels of South America to being arguably, if the numbers are adjusted for reality, one of the poorest countries in South America. Short summary of economic policy: price controls, profligate government spending, and expropriations with the attendant disrespect for property rights. Short summary of political strategy: Chavez overthrows Venezuela's constraints on presidential power and he and his successor jail political opponents and critics.
Now some highlights.
The trouble started way before Chavez
So it was a magnet. It was wealthy, prosperous. It used massively its resources to invest in infrastructure. When democracy came along it prioritised education, health, public housing. And it was a fairly prosperous place. University education was free. Not only primary and secondary but university education was free. There was very cheap access to electricity, water and so on. So it was a fairly prosperous place. When in 1973, 74 the price of oil went up, then the country had these grandiose plans. Very much State centric at the time. State owned enterprises in steel, aluminium, ship-building and all sorts of other things that ended up in very bad failures, and the 1980s was a very, very difficult period in Venezuela.
Chavez's consolidation of power
Well, in the first couple of years he was focused on changing the constitution in order to create a much more powerful Presidency, with a much longer period and with a possibility of re-election, with a single chamber in the legislative branch instead of two, so as to make it more pliant. And with the ability to scrap all the judicial system and start from scratch.
Government spending on "social" programs and their intellectual origin
And there he [Chavez] started to use oil money to massively expand social programmes. These social programmes were mostly designed by Cuba, in Cuba, with significant Cuban advice. And he started to spend a lot of the increasing oil money in that.
Price controls, exchange controls, and import controls--and Chavez's motive
So they used exchange controls, price controls, import controls as a way of keeping control on the private sector -- as a way of making the private sector pliant and dependent on bureaucratic decisions of the State. And there I think Sebastian Edwards' model of saying: Okay, what we are going to do now is we are going to expand spending, this is not going to generate inflation because we're going to have price controls, and this is not going to generate a balance of payments crisis because we have import controls... But that, mixed with the fact that they could borrow internationally, and they borrowed internationally in massive amounts. In incredibly massive amounts.
The collapse of the oil industry that reads like a precis of a chapter in Atlas Shrugged
Let me just give you a sense of the magnitude of the mismanagement of the oil industry. In 1998, the year before Chávez got elected, or the year in which in December of that year Chávez got elected and he took power in February 1999. In 1998, Venezuela produced 3.7 million barrels of oil [per day]. Today it's producing about two. If Venezuela had maintained its market share in the world oil industry -- which it could have because it had infinite reserves, it had the largest reserves in the world -- it would be producing two million barrels more than it is currently producing. With the same market share. So the collapse is immense relative to history, and it's immense relative to this opportunity cost of where it should have gone had it just kept its market share the way it was.
Chavez's wave of nationalizations
Exchange controls and price controls were put in 2004. Chávez won re-election in 2006. And in early 2007 he announced that he was now going to move towards socialism, and he started with a spree of nationalisations. In those days the price of oil was very high, so he could afford to just buy everything that moved or that he fancied.
Another chapter out of Atlas Shrugged
So he took over significant chunks of the Venezuelan economy, and the typical thing is that the moment they took over a company, they ran it to the ground. Production collapsed. They nationalised the steel company. The steel company at the time of nationalisation was producing 4.5 million tons of steel with 5,000 workers. It now has 22,000 workers but it's producing something like 200,000 tons of steel. So they ran those companies to the ground. Aluminium is almost not done any more, when Venezuela was producing about a million tons of aluminium back when...
The effect of the Venezuelan government's interventions on living standards
So as a consequence, incomes per capita have collapsed to a degree that it is hard to transmit and understand, and that collapse in private incomes is accompanied by a collapse in public services like healthcare for example. They are just beyond belief. People have been writing pieces that I'm sure are going to win a Pulitzer Prize, because it's just astonishing how life expectancy rates, how the prevalence of diseases that had been eradicated... Venezuela was the first country to eradicate malaria back in 1961. Even before the US did. And malaria is back big time. Measles is back big time. There are no drugs for HIV. There are no drugs for hypertension. There are no machines to do dialysis. There are no cancer drugs.
The awful role of lenders, including Goldman Sachs
So you think of capital markets as being angels for good in the world. But when capital markets have to deal with a government that is willing to compromise future cash flows for any cash up front, and it's not using the resources to create any good things for the future, then you're giving money to an authoritarian regime to mismanage in the short run and you are condemning the future of the country with obligations that they will not be able to afford to pay. So that's why I call them hunger bonds.
Trump's sanctions, surprise, surprise, haven't made things better
Cardiff Garcia: Any potential restructuring now is further complicated by the US sanctions enacted since that initial interview was taped. The sanctions which have made it very hard, maybe impossible, for US investors to enter into any new exchange of bonds that would happen as part of a restructuring.
The government's attacks on Hausmann and a close relative
Then obviously the government has attacked me for writing op-eds, or they accuse me of these fancy conspiracy theories of all kinds. But the truth is they haven't been able to grab me but they have been able to put my brother-in-law in jail for being a journalist. So that in itself was also a very traumatic experience for the whole family. So I would say this repression, this oppression, this destruction of dreams has been a very disrupting element of my life these last few years.
My one little criticism is that it would have been nice for Cardiff to draw Hausmann out on something that virtually every economist knows, but some readers do not: there is no mystery in why shelves in supermarkets are empty: price controls cause shortages and extreme price controls cause extreme shortages.
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CATEGORIES: Growth: Causal Factors