The road to ruin

Venezuela has, of course, been much in the news in the last few days.   Fascinating as the politics and geopolitics seems, there is also an economic story – about one of the greatest economic catastrophes of modern times, perhaps of almost any time.  And all the more sad for being entirely manmade.

Go back 100 years and Venezuela didn’t stand out from the countries around it.  Angus Maddison’s collection of historical GDP estimates suggests that in 1913 real GDP per capita in Venezuela was just a bit higher than that in Brazil and just a bit lower than that in Colombia.   The southern cone countries of Latin America –  Chile, Uruguay, and Argentina-  were much more prosperous.

The presence of oil in Venezuela had been known for centuries.  According to one paper I found

The presence of oil was known in Venezuela even before the Discovery of the Americas in 1492; back then, Indians were aware of the existence of hydrocarbons that appear on the surface of their lands. They used them for medicinal and illumination purposes. Also, they collected oil from small creeks near seepages by impregnating blankets and then wringing them out. They also found asphalt, and they used it for caulking their canoes and impregnating the sails of their boats.

In 1499 Spanish conquerors were impressed with the natural occurrences of hydrocarbons in Venezuela. They learned from Indians to use them for medicinal purposes. They also used it for caulking their ships, illumination and lubricating their weapons.

But the modern history of the Venezuelan oil industry appears to date to the granting of a concession in 1913 to Shell, and after 1919 oil exports became a major element in the economy.     And here is a picture, using Maddison’s data showing GDP per capita for the period 1900 to 1960 for Venezuela and for New Zealand, the United States, and Uruguay (as a representative Latin American country, that happens to fascinate me) and Australia (another resource-rich country).

venezuela 1

You can see how relatively poor Venezuela was early on, and then the really rapid growth in the 1920s –  catching Uruguay – and in the 1940s.    By the end of World War Two, on this measure real GDP per capita in Venezuela was matching that in Australia and New Zealand.  Another decade on and it was heading towards matching the United States.  It was –  according to a fascinating article in Foreign Affairs – about the time democracy and economic liberalisation came to Venezuela (so the authors claim, a very rare example of a resoure-rich autocracy, in which the state owns the resources, making a transition to democracy).

The period from the early 1950s onwards wasn’t particularly good for New Zealand.  None of the traditional advanced countries has done worse than us over that full period.  But consider Venezuela.

venezuela 2

This chart is from the Conference Board’s Total Economy Database, which only goes back to 1950, for the same group of countries.  The earlier chart was expressed in 1990 prices (and relative prices), while this chart uses 2017 international dollars.  Levels comparisons at any point in time are affected by which set of prices is used to convert data from national currency measures.   The period around 1957 still shows up as being Venezuela’s best relative performance, but on this set of relative prices Venezuela then was even more prosperous than the United States.  The key point is that in the late 1950s, Venezuela was right up there, in or around the very top tier of countries on a GDP per capita basis.

But whereas since 1957 even New Zealand’s real GDP per capita has more than doubled (and Australia and the US have done better again), in Venezuela there were only a couple of years when GDP per capita even matched 1957 levels.  At the most recent peaks a decade or so ago, the average Venezuelan was barely richer than their parents/grandparents had been 50 years earlier.   And all that was before things began to fall apart almost completely over the last decade.  No one can have much confidence in the most recent estimates, but if today’s Venezuela isn’t Somalia, it is no Uruguay either.

If one knew nothing more someone might suggest that perhaps Venezuela had had limited natural resources that had now been depleted and its former prosperity was never sustainable.   In fact, Venezuela today has more proven oil reserves than Saudi Arabia and substantial natural gas reserves as well.   This is a manmade catastrophe.   The optimistic take, of course, would be that when the manmade destruction ends, Venezuela can have a bright economic future ahead of it.  Perhaps –  and no doubt the decline of the last decade could be relatively easily reversed – but the allure of those state-controlled oil and gas resources will still be there, and the risks and temptations that took Venezuela down the self-destructive path of the last 50 years.

On a final note, here is the chart showing population growth in each of the five countries.

venezuela 3

From 1950 to about 1990, Australia’s population roughly doubled, but Venezuela’s population quadrupled.    Rapid population growth certainly isn’t a major element in the story of Venezuela’s relative economic decline, but when your economy rests almost wholly on fixed natural resources, exceeedingly rapid population growth tends to constrain the rate of growth in income per head (in ways not paralleled in economies –  such as most of western Europe –  little reliant on natural resources).   Things get rapidly worse when the population keeps on growing fairly rapidly, even as the production and sale of the natural resource goes sideways or backwards.   Despite all those reserves, Venezuela produces less oil now than it did in 1980, despite supporting more than twice as many people (those who haven’t fled across the borders to other Latin American countries).

 

22 thoughts on “The road to ruin

  1. “but that wasn’t real socialism” the Marxists cry. An unbroken record of failure, misery, poverty and death and there are still fools, some in our government, that believe this stuff.
    Here’s Dr Peterson with former Aussie deputy PM John Anderson.

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    • It is probably not worth putting governments into categories and complaining about the category. When I was a UK uni student socialism and marxism were quite antagonistic to one another. The UK socialists such as the Labour party had roots in various Christian movements. Student marxists were noisy and split into factions. When I was in the USA it was clear that they used the word socialist differently; mainly as an insult rather similar to the word nazi in England. An insult that avoids discussing difficult issues.

      Compare the success of Norway with the failure of Venezuela but both can be considered ‘socialist’.

      Checking the dictionary; Socialism: a political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.
      That leaves plenty to interpretation. If you emphasize the regulation then it sounds positive and if ownership meant pension funds then that doesn’t sound too bad either. We are content to have a legal system and a democracy that applies to the ‘community as a whole’ so why not a little planning for distribution of welfare and development of infrastructure for everyone to use?

      Venezuela is a lesson on how a country can go wrong but I just can’t see Jacinda, Kelvin, Grant, Phil, Megan etc suppressing the NZ population with military force. I’m more worried about people and organisations that exert influence in NZ without having ties to our ‘community as a whole’; foreign owned buinesses, international businesses avoid taxes, international agencies telling us what to do, etc.

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      • A huge stretch to describe Norway, or any of the Scandinavian countries as socialist. They have all have free market economies with social welfare systems and some level of government ownership of some industries. Very much the same as ours. As the history of the 20th century shows; the more socialist the bigger the train wreck.

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      • I heard the expression “NZ is slowly but surely being weaponized” for the first time this morning on RNZ. Semi automatic and perhaps automatic weapons are now easily available in NZ imported in separate component parts that by pass our border security and is now somewhat become the legal right of Kiwis to bear arms. What if Kiwis do not want to give up those semi automatics that they now possess?

        It is actually quite easy to see how Comrade Jacinda Ardern with her communist/Marxist cronies, Kelvin, Grant Robertson, Phil and Megan would act quite readily to suppress the NZ population with militant type force. They have forced a militant ban on the Oil and gas industry destroying the industry and forcing poverty onto communities. Now they want a militant Capital Gains Tax on property owners and businesses. Just yesterday another militant ban on salesman commissions in the Insurance and banking industry was being easily touted. The militant Auckland Regional Fuel Tax was forced onto Aucklanders which in Paris would have had the yellow shirts out protesting. These are all NZ population militant suppression policies.

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      • Don’t forget the militant Ring Fencing of property tax losses being forced onto young First Time property investors and ordinary mum and dad investors (the older veteran investors don’t have tax losses to ring fence) by Comrade Grant Robertson and Comrade Stuart Nash.

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  2. Over 1m Venezuelans have fled across the border to Colombia
    This has put additional strain on the post FARC recovery
    So the real cost of mismagament extends well beyond the borders.
    But worth emphasising that over the last decade misguided unsustainable policies aimed at redistributing income have wrecked the economy
    But your interesting piece indicates the rot had set in much earlier
    Why was that?

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    • The extraordinary population increase (quadruple in forty years!) must have had a massive effect on GDP per capita as Michael has pointed out.
      They no longer have a “problem” with population increase. The doctors are no longer allowed to enter starvation as a cause of death; the starvation problem has been overcome comrade.

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    • The rot started when oil prices hit a peak of $150 a barrel which prompted alternatives to Oil. The US started Fracking on a massive scale and actually at one stage became one of the largest producer of oil and gas, together with the chinese and Europeans who invested tens of billions in solar power alternatives set up a perfect storm for Oil prices to drop below $40 a barrel.

      Unfortunately Venezuela did not build up alternative investments to weather this massive drop in Oil prices. Even though Oil prices have now recovered somewhat, the heyday of Oil has come to pass and we have now reached Peak Oil and cars are increasingly hybrid or full electric.

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    • The link to the Foreign Affairs article is really worthwhile reading – although it leaves no concrete plan for a solution… only a ‘hope’ that the proud history of protest by the people will somehow change things. That’s no solution. I’m of the opinion you can’t turn around a failed state without debt forgiveness as a first measure, as only that will serve to dramatically revalue the currency. On top of forgiving that debt, then the world also has to announce a means to pour money back into rebuilding the services that were underfunded during the period of austerity that preceded social collapse. In Venezuela’s case, the international community could use payment for ecosystem services as a basis for those payments, and hence recovery.

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      • I’m less optimistic that is a path forward, altho would certainly favour any new democratic govt repudiating the PRC debt.

        Venezuela isn’t Somalia: it has incredible natural resources and the capacity to be a moderately high income country, and there is no obvious reason why that future wealth shouldn’t be the main financial support for the rebuild. But the bigger problem is institutions/cultural. How can Venezuelans build robust institutions that don’t just mean that any assistance now is just lost in some future electoral competitive splurge. I’d put more emphasis on allowing private sector investment in the oil and gas sector, with secure property rights – but property rights can’t just be wished into existence either, and altho the private sector would do the investment the incentives to corruption would be large. That might not stop Venezuela getting richer, but might still just sow the seeds for another revolution or chaotic unwind 20 or 30 years hence.

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  3. I think, Micheal that everything you suggest in terms of resurrecting failed states has already been tried. And the continued exploitation of what you value as their “natural wealth” simply leads to further destruction and degradation of the natural environment. That is certainly no solution. Surely someone as learned as you realises that only truly transformational thinking and real paradigm change will save the globe from the debt, humanitarian and natural crisis we presently find ourselves in. Or are you saying the world is not in crisis and can come back from here using the tolls of the current status quo? It is people with intelligence, like yourself, who are well read and innovative that need to lead that transformational shift in thinking. We must begin valuing biodiversity;

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    • My comments should be read as very sceptical that the genie could be put back in the bottle sustainably in Venezuela: huge mineral wealth, democracy, reasonable fairness, and stability doesn’t seem like a very likely combination. I’m not even sure that reversion to a “strongman” with his heart more or less in the right place is a viable option either: no general (or equivalent) is going to have the popular legitimacy that the Saudi, Kuwaiti, or Brunei royal family seem to have had (for all the ills wrought by the former family in particular).

      It is a variant on the idea of the “natural resource curse”.

      (I’m not entirely sure where biodiversity comes into this. Re oil and gas, I guess I just run with the industry view that peak oil may yet be a couple of decades away, and if there is a market for the product – after whatever carbon taxes or equivalent countries put on – Venezuela should be able to get its “share”)

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      • My first question for an economist would be, what needs to be done to stabilize their currency – that is, to reverse out the hyperinflation that plagues them presently? I saw a teacher interviewed (one fleeing over the boarder) who said she could only afford to buy a dozen eggs with her monthly salary.

        I think a new “cure” for hyperinflation” is an important question for a little economy like New Zealand – our currency must be relatively fragile to the whims of big players.

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      • As a technical matter, stopping hyperinflation is the easiest thing in the world (arguably easier than getting inflation from 15% to 1% as we did): just stop printing money. But hyperinflation is always a political matter – a symptom of a serious breakdown in society (conflicting interests etc), and there aren’t easy technical fixes to those.

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      • Like anything, value is determined by a willing buyer and a willing seller. Therefore it is the currency markets that determine the value of our NZD currency. In order to provide substance behind the value traded by the market you need to establish a perception of value for your goods and services.

        Our GDP is around $270 billion.
        Exports is around $60 billion of which Tourism and International students is a substantial $17 billion annual demand by foreigners because of its daily and regular demand for NZD
        Our household land and buildings is around $1 trillion
        Other Crown land, commercial land and buildings plus Maori land and buildings probably another $1 trillion
        Investment in Businesses listed/unlisted worth around $500 billion
        Savings $180 billion

        The NZD is a very highly traded currency around $1 billion a day which equates to $365 billion a year.
        If we view NZD trading volume in the context of NZ GDP and trading assets, then the NZD value is sustainable because if a currency trader wanted to exit NZD someone needs to buy that NZD which runs to the trillions of dollars of tradeable assets

        My concern is that $1 trillion of NZ household housing assets now have a Foreign Buyers ban. This in effect removes a $1 trillion highly sought after NZD asset that provides tradeable substance if a foreign buyer of NZD wants to exit. The risks of hyper inflation increases as the Labour government stupidly creates a Foreign Buyers ban and as a consequence removes NZ assets from providing substance for its trading volume.

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      • One of the key components to resolving the Hyperinflation issue in Venezuela is first and foremost would have to be peace and security. The threat of civil unrest and war frightens foreign investors and currency traders. No one buys when there is no clear profitable exit policy.

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    • Thanks for the link Katherine, it does seem unreasonable to lay the blame for species extinction and environmental degradation entirely at the feet of our current social and economic systems. Pre European New Zealand illustrates the problem with the premise. Loss of dozens of species, the near complete destruction of the country’s dry land forest and the extinction of accessible seal colonies for example with the human population reduced to impoverishment, widespread slavery, internecine warfare and cannibalism as a consequence. This with neolithic technology!
      The countries doing the best at preserving species and enhancing the environment are, generally speaking, the ones that can afford to. The full realisation of human impact is relatively recent so I don’t think we should be too hard on ourselves for what was, primarily, an issue of ignorance.
      The problems of Venezuela are manifold and that extraordinary population increase must be a significant factor as well as chronic corruption (as you have pointed out) and the corrosive effects of the loss of personnel and property rights.
      It’s unclear what you envision as a result of “transformational thinking” or how to achieve it in our massively complex and co dependant society without it causing catastrophic collapse. We have never been more just, free, safe and prosperous with millions being lifted out of poverty worldwide yet the clamour for broad social and economic change is strong. It fills me with dread, is it a case of “if it ain’t broke fix it till it is”?
      Working towards reasonable solutions and a generally conservative approach must be the preferred option given the position we are in.

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    • To a large extent the US is facing off China and Russia in Venezuela. Unfortunately peace and security is playing second fiddle to the giant warring fractions, who are funding and arming this conflict in their own interests. We have seen the same cold war games being played in Syria with complete devastation to the Syrians.

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