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AQ Feature

Venezuela Before Chávez: Anatomy of an Economic Collapse by Ricardo Hausmann and Francisco R. Rodríguez

Photo: Lars Klove

During the 1970s, Venezuela was the richest country in Latin America. With the region’s highest growth rates and the lowest levels of inequality, it was also one of the most stable democracies in the Americas. But starting in the early 1980s, things fell apart. The nation endured three coup attempts and one presidential impeachment. Per capita growth plunged, and mass protests became the norm. What happened?

Venezuela Before Chávez: Anatomy of an Economic Collapse, edited by Ricardo Hausmann and Francisco  R. Rodríguez, offers some intriguing answers. Pointedly departing from much of the current research (and political discussion) on Venezuela, which focuses on the 14-year presidency (1999–2013) of late President Hugo Chávez, the editors have assembled a distinguished group of experts with the aim not only of exploring, as they put it, the “enigma” of Venezuela’s pre-Chávez collapse, but to explain why some countries go through such turbulence. The unexpected outcomes in Venezuela are used by the authors to challenge hypotheses that rely on big data analysis to explain economic collapse.

While the explanation behind Chávez’ rise to power may draw attention, as Venezuela continues to be rocked by internal conflict following his death, it is the book’s second aim that makes it stand out as an important work of scholarship.

The political and economic elements at play in the pre-Chávez Venezuelan economy are covered in individual chapters by some of the region’s most distinguished analysts. Omar Bello, an economic affairs officer at the UN Economic Commission for Latin America and the Caribbean (eclac) and Adriana Bermúdez, a credit risk specialist in the Venezuelan private sector, look at the role of market reforms; Francisco Monaldi of Harvard’s Kennedy School of Government and Michael Penfold of Venezuela’s Instituto de Estudios Superiores de Administración (IESA), discuss the rise and decline of democratic governance; and Dan Levy of Harvard’s Kennedy School and Dean Yang of the University of Michigan analyze the impact of immigration.

While the contributors do not find much support for “resource curse” theories, the authors find that Venezuela’s rising oil wealth did play a key role in distorting the national economy. For example, Osmel Manzano, a senior economist at the Inter-American Development Bank (idb), shows how the shift in policy orientation led to a marked decline in oil production per capita. Thus, while increased oil prices and greater state taxation increased state revenues since 1958, the flattening of production per capita and erratic investment were major contributors to the collapse of the 1980s and 1990s when global oil prices dropped.

The larger lessons, however, are drawn by the editors. In both their introduction and conclusion, they deploy two now-standard approaches to economic analysis: growth studies that use large amounts of aggregate national data to generate testable, cross-national hypotheses; and country-specific analysis of growth. Both approaches are used in individual chapters as well, as the analysis of Venezuelan data is sized up and contrasted with expectations generated by predictions from other cross-national studies. This allows for the specificity of the cases within the Venezuelan context to speak to and challenge the lessons drawn from larger, more comparative data.

Underlining the critical role of oil (which today, according to the book, accounts for 80 percent of exports and 40 percent of government revenue), the editors and authors conclude that Venezuela’s dependence on petroleum exports eventually crowded out other factors necessary for a healthy economy. Economics professors María Antonia Moreno of the Universidad Central de Venezuela and Cameron Shelton of Claremont McKenna College show that mini-booms in oil prices consistently reverse growth in the non-oil sector, which sees an average 3.3 percent growth in pre-boom years turn into -2.8 percent in post-boom years.

One of the more surprising findings is related to the role of human capital. The chapter written by Corporación Andina de Fomento (Andean Development Corporation—CAF) economist Daniel Ortega and Harvard Kennedy School professor Lant Pritchett notes that Venezuela not only had a relatively well-educated population in the 1980s, but that education increased throughout the period in which growth decreased. As they point out, “If the wage-returns relationship had been stable over time, then the additional levels of education of workers should have raised wages by 58 percent.” Instead, wages declined by 70 percent in the 1980s and 1990s. The notion that education—a key component of human capital—has either no relationship or a negative relationship to real wages is counterintuitive.

But in their own analysis, editors Hausmann and Rodríguez suggest the significance of this finding may be overstated. Deploying both statistical regressions and cross-country analysis, they conclude that the lack of human capital was responsible for just 12.7 percent of Venezuela’s growth collapse. Indeed, the editors’ own analysis leads them to conclude—in contrast to the arguments advanced by some of the contributors—that the lack of financial depth and export flexibility are more important drivers of economic collapse than weak government institutions.

The chapter authors see it differently. Amherst College professor Javier Corrales argues that the political system that preceded Chávez was far more inclusive of sectors who have been assumed to be political outsiders. Monaldi and Penfold demonstrate how political innovations (particularly decentralization) actually contributed to problems of governability. Lastly, University of London political economy lecturer Jonathan Di John shows that political fragmentation undermined economic policies that required political consensus to succeed.

Unfortunately, the book ends without resolving this puzzle. Why does cross-country regression produce results that are so different from the ones that are more country-specific?

For most readers, the question of explaining growth collapses will be secondary to explaining Venezuela before and after Chávez. The book challenges the notion advanced by Chávez and his supporters that neoliberal policies directly led to the implosion of the national economy. In fact, pre-Chávez policymakers were not unambiguously neoliberal, and they were able to restore some growth prior to Chávez’ election. What all readers—both supporters and critics of the former president—will be able to agree on is the primary takeaway of this volume: deep structural problems hidden in the wealth boom of the 1970s, including a shift toward capital-intensive labor, set Venezuela up for economic catastrophe.

Readers may also wonder why the book’s analysis ends before growth was restored after 2003. Given the ambiguity of the conclusions, it is worth speculating whether (and how) the resumption of growth in the Chávez era might alter the economic lessons drawn by this volume. While that was not part of the authors’ mandate, Venezuela Before Chávez establishes a solid foundation for that discussion.

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Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Venezuelan, Hugo Chavez