Francisco Rodriguez
Subject: Venezuela After Maduro
Bio: Senior Research Fellow at the Center for Economic and Policy Research, and author of The Collapse of Venezuela: Scorched Earth Politics and Economic Decline, 2012-2020
Transcript:
Larry Bernstein:
Welcome to What Happens Next. My name is Larry Bernstein. What Happens Next is a podcast which covers economics, politics, and history. Today’s topic is Venezuela After Maduro.
Our speaker is Francisco Rodriguez who is a Senior Research Fellow at the Center for Economic and Policy Research and the author of the recent book The Collapse of Venezuela: Scorched Earth Politics and Economic Decline, 2012-2020.
I want to learn from Francisco about the importance of sanctions to explain the catastrophic performance of Venezuela’s economy for the past 20 years. I also want to hear about whether the US should encourage a negotiated settlement between members of the regime and its opposition to create a functioning civil society.
Francisco, please begin with six minutes of opening remarks.
Francisco Rodriguez:
Venezuela suffered between 2012 and 2020 the largest growth collapse ever documented outside of wartime. GDP per capita dropped by 71%. That’s the equivalent of three consecutive great depressions. Poverty rates shot up to greater than 90%. Malnutrition, which was virtually non-existent in Venezuela, grew to more than a quarter of the population. Another quarter of the population left the country.
What happened? To a certain extent, disasters of this magnitude are a challenge to our theories of development and economic growth. Some people think that they know the Venezuelan story. It was failed policies, corruption, mismanagement. Some say it is the failure of socialism.
It is not that simple, because if you look at the policies that were implemented in Venezuela over this period, you find nationalizations, price controls, exchange controls, excessive regulation, corruption, mismanagement, and you find all of those in several Latin American experiences. Rudiger Dornbusch and Sebastian Edwards many years ago described this cycle as the macroeconomics of populism. Countries would go through expansions that were fueled by irresponsible policies, overspending, overvalued exchange rates, and these countries would invariably end in crisis. And those crises sometimes took 10% of GDP, sometimes 20, sometimes as much as 30, never 70%.
What happened in Venezuela? That is what I tried to answer in my book. The first thing to understand is that in Venezuela, it is two crises going on. The first one is the Dornbush and Edwards style crisis, which starts at around 2013, as the economy was adjusting to a previously unsustainable peak. President Chavez had overspent on his last reelection, the economy was overextended, and you start getting import cuts, a devaluation, and a classic macroeconomic adjustment. But then something different happened when oil prices started recovering in 2017, the economy did not recover along with it, and the reason it did not recover was that oil production was collapsing.
Since the 1920s, oil has been the driver of the country’s economy, and between 2012 and 2020, oil revenues declined by 93%. The economy’s engine of growth disappeared over this period. So, what drove this collapse in oil production? After 2017 the increase in oil prices, which would have typically stabilized the Venezuelan economy was unable to do what it had done in the past.
It was the breakdown of the institutions that had managed conflict between political elites. At a certain moment, the country’s competing political elites decided that it made sense for them to weaponize the economy in their fight for power. To adopt what I call scorched earth strategies that directly target the economy. Politicians choose because they believe that it works to their advantage; Maduro to his advantage of staying in power; the opposition to their advantage in terms of driving him from power. When both sides to a political battle adopt this type of strategies, you get economically destructive political conflict.
The economy becomes a political battlefield. You saw that from the moment that Maduro started imposing price controls, monetizing deficits and in 2013, Maduro went on national TV to direct the looting of the country’s largest electronics retailer whom he accused of price gouging. The opposition doing the same when it decided to lobby for economic sanctions, which severely harmed the Venezuelan economy and a great part of the decline in oil production.
The question becomes, is there a way to step back from this? Is there a way in which you can rebuild the country’s institutions so that it does not affect the majority of Venezuelans? I believe that there is, although it’s complicated because the two sides that are trapped in a winner take all battle to the death.
Larry Bernstein:
Let’s start with the collapse in oil production driving down the economy. We had your friend Ricardo Hausmann on the program a few weeks ago. Ricardo is an economist at Harvard, and he spoke at my DC conference about the role of know-how. He said that if you have know-how, you can do things and if you lack know-how you can’t, and if you add more workers who don’t know what they’re doing, it can’t change or improve the productive nature of the capital. Venezuela is a country sitting on the most oil reserves of any country in the world, and yet that oil predominantly stays in the ground.
Venezuela had a functioning oil sector for a long time. It was run and managed by a combination of Western oil companies and Western trained oil workers. But first, the western oil companies were kicked out as PDVSA was nationalized, and then many of the workers left the country with that specialized knowledge leaving the country with a lack of know-how to continue production. Tell us about the role of know-how and the collapse in oil production in Venezuela.
Francisco Rodriguez:
It’s important to distinguish two questions: Why is this country that’s sitting on the world’s largest oil reserves not producing more oil? And why Venezuela between 2012 and 2020 suffered this huge decline in living standards. Why did it suffer a decline of more than 80% in oil production? You point to the nationalizations that happened in 1976. In the period between 1991 and 1993 when Chavez fired 20,000 employees of the state-owned oil industry because they had participated in a national strike to paralyze the oil sector. But production only starts falling in 2017.
The puzzle was that when oil prices started recovering that production did not recover. With some of these state-run oil industries and some of these so-called petrostates, they can be inefficient exploiting their oil wealth, and that means that they will not have the incentives to have optimal levels of extraction of these resources.
But petrostates do not kill the goose that lays the golden egg either. Petrostates have a basic instinct to self-preservation. You can see this in places like Iran, Iraq, Saudi Arabia, Nigeria, Venezuela, and they maintain a level of oil production that is necessary to fund its state and fund the governing elite.
What happened in Venezuela after 2017 was completely out of the ordinary. The problem with Venezuela after 2017, and particularly after from 2019 on it could not import bents (bentonite) because the firm was sanctioned.
This country could have been exporting 10 million barrels. It has more reserves in Saudi Arabia. It was not doing that in 1999. It was not doing that in 2012, even with oil prices at a hundred dollars a barrel. And that has a lot to do with the inefficiency of the Chavez government. Chavez overtaxed this industry because he wanted to have that money for other projects. Chavez was about the short run. He wanted to have the money to spend right now, so he did not want to wait 10 years for that investment if that meant a sacrifice to current spending for that investment to turn into a higher production capacity. But what happened from 2017 is that this is an industry that simply could not do the basic things that it needed to do. And that has a lot to do with sanctions.
Larry Bernstein:
The United States has implemented substantial sanctions against Iran and Russia, and yet their oil production has not collapsed.
Francisco Rodriguez:
If you look at the collapse of oil production in Iran in 1979, it is similar to the one that Venezuela has had had in 2017. Iran, between 1979 and 2026 has adapted to sanctions, which you see happening in Venezuela because after the imposition of sanctions production declines significantly to 400,000 barrels a day in 2020, and then it recovered under sanctions to its current level around 900,000 barrels a day.
In the case of Russia in 2022 when they invaded Ukraine, oil prices went up largely because of that invasion. Russia was selling its oil at a greater discount because of sanctions, but because oil prices had gone up, the revenues didn’t go down.
There’s a vast literature on the effects of sanctions. I published a survey of 31 quantitative econometric studies. 30 of them found significant adverse effects of sanctions on living standards. Sanctions lead to a decline of GDP per capita for around 28%. That is the equivalent of the great depression. According to a study by Gutman, they lead to declines in life expectancy of around one and a half years. That’s the equivalent of the life expectancy effect of the COVID pandemic. I published last year in the Lancet Global Health a study quantifying the mortality effects of sanctions. And we found that sanctions are associated with approximately 500,000 deaths a year.
Larry Bernstein:
Endogeneity between factors. Sanctions result in a downfall of the economy. And then oil field workers with specific skills emigrate, and you do not invest in maintenance capital expenditures in your existing oil fields, then they start to have lower production. You do not build new fields because you want to use the available money to help your voting constituents. You do not invest to take advantage of new fields. And then it is a disaster with collapsing production.
Francisco Rodriguez:
I am not arguing that sanctions are the sole clause that the collapse. Table 10.2. says that sanctions explain 52% of the collapse. All the other stuff that you are talking about is in the other 48%. I’m not denying that these factors have an effect.
Larry Bernstein:
The U.S. and European governments love to use sanctions to promote policy objectives and regime change. The United States put sanctions against Russia, Iran, Venezuela, Cuba, and it’s had mixed results as it relates to promoting regime change. Sanctions are particularly good at reducing GDP in these countries and harming individuals that live in those countries. One alternative has been the use of military force to do the regime change, but some Americans and many Europeans prefer the use of sanctions in lieu of military force as being a more benign way of altering the behavior of these regimes they dislike. Why do you think that sanctions are a poor way of achieving these foreign policy objectives?
Francisco Rodriguez:
When you impose economic sanctions on a country, you are hurting everybody in the country. And the evidence that we have is that typically those effects tend to fall on the population on the most disadvantaged sectors. Leaders insulate themselves from the effect of sanctions, but most of the population does not. There is a deep ethical question is it right to target the population because you want to change the behavior of their leaders?
And then there’s the question of effectiveness. What do we know about the effectiveness of these tools? Because it’s one thing to say we dropped the nuclear bombs on Hiroshima and Nagasaki and got the Japanese to surrender. But imagine if you had dropped those nuclear bombs and it still hadn’t caused it to surrender.
What we know is that sanctions do not have high success rates. Maduro was taken out because of a military operation not because of sanctions. We also know that the success rate of sanctions tends to be much lower when you try to generate regime change and particularly when that is not within the framework of a negotiated transition.
The stakes of power are the way in which the benefits of power are distributed. There are the benefits of being in power and the cost of being out of power. The Venezuelan system that was built through the 1999 Constitution, which Chavez promoted. It is one that accumulated all power in the executive branch. The president can force the dissolution of the Supreme Court, of the electoral authorities of Congress, of all other branches of government. You do not really have a democracy. I would call it the constitution of an electoral autocracy.
There are elections, but people vote for somebody who has dictatorial powers. This has a lot to do with the crisis that we saw in Venezuela over the past couple of years where the opposition was campaigning for an election, Maduro was highly unpopular, and the opposition won, and the government stole the election.
If the opposition had assumed power, it would have been very difficult for the opposition not to use the constitutional power to dissolve the Supreme Court, to dissolve the electoral branch, and to dissolve all other branches of government. In fact, there were many people planning to do this on the opposition side, and there were many people that would have said that anything less than completely getting rid of Chavismo would have been not living up to its promises.
Democracy is not just elections. Separation of powers have restraints on the use of power by the executive to protect political minorities, to guarantee the rights to compete. You don’t have that in Venezuela, and that feeds into a certain type of political confrontation that makes it very attractive for governments and oppositions to appeal to scorched earth strategies.
The opposition says that the only way we can stop this authoritarian government is to get our international allies to block their access to resources. That is when sanctions start playing an important role in driving the collapse of oil production and driving the economies collapse. There was a moment which the economy became a political battlefield and both sides were depriving the other of control of the country’s oil resources.
Democracies are institutions born out of negotiation between powerful actors. That is precisely what we should have in Venezuela constitutional and institutional reform before we have elections. The elections come at the end of that process once the guarantees are in place.
Larry Bernstein:
At the end of the US constitutional convention in 1787, a reporter asked Benjamin Franklin what happened? And he said, we got a republic if you can keep it. If you notice, Franklin did not say it is a democracy if we can keep it, because the separation of power’s doctrine is that we don’t have a winner take all. The leader in power cannot do what he wants. The Democrats have desired to terminate the filibuster in the Senate and pack the Supreme Court.
In Mexico, they changed the composition of the Supreme Court to being in the party’s favor pushing Mexico towards a complete winner take all environment. And you would say that is bad. And you would say embrace the filibuster, embrace the long-term nature of the Supreme Court, and adopt legislation and make it bipartisan.
Francisco Rodriguez:
It is extremely tempting to get rid of restrictions. That is what Chavez said in 1999. He convinced Venezuelan voters to go along with it. He said to Venezuelans, the country is in shambles. And it’s true. Venezuela had one of the worst performing economies in Latin America in the quarter century before Chavez came to power. People were disillusioned with the way that it was run by political elites. he said, you need to give me power. I cannot govern with a Congress and a supreme court that is stacked by the old elites. He took that case to voters to change the Constitution. That moment the change in the Constitution completely altered the structure of political competition in Venezuela and is at the root of the crisis that we are living today.
Larry Bernstein:
What do you make of Trump’s decision to extract Maduro to a Brooklyn courtroom?
Francisco Rodriguez:
It violates international law. A lot of people are incredibly happy that he is gone. And I do not think that we should live in a world in which the U.S. can just say, I will go into a country and kidnap its head of state. The U.S. made a choice that it was going to carry out a surgical operation instead of doing a full-fledged invasion and occupation of the country. The U.S. was very mindful of the risks that came along with its Middle Eastern experiences, particularly in Iraq and in Afghanistan, of having to govern these countries directly and having these interventions cause a deeper collapse in societal arrangements, which effectively fueled the violence in both of those countries and led the U.S. to end up losing the country to the Taliban again.
And here is where the U.S. also takes this decision, which surprised a lot of people of saying, we are not going to install Maria Corina Machado. I think that has a to do with who Maria Corina Machado is in terms of her political message. She is not a moderate politician. She is not somebody who’s talked about reconciliation, about healing old wounds. Her whole message has been one of a fight between good and evil. Her project is driving Chavismo totally from power. The Trump administration decided that it was going to be a disaster if they tried to get her to work together with the current structure so that if you need a power sharing agreement, she was probably not the most ideal person for it.
If you want to have peaceful change in Venezuela, it must be through negotiation redesigning the country’s institutions so that they allow for coexistence between the country’s dueling political factions. The problem is that you can get revolutions.
Larry Bernstein:
What is interesting about you is you are applying political science and economics together. Fundamental to the book is your opposition to sanctions because it hurts the little guy and destroys the economy.
This is the 90th anniversary of the Spanish Civil War. Hundreds of thousands of people died. I do not want that either.
What do you want? A productive country that has opposition coming up with reasonable solutions to run your own country. You just complained about the extraction in Maduro, but it only hurt Maduro. It did not result in hundreds of thousands of deaths.
We can bomb it to the Stone Age, which we did in the Japan example you gave. We can sanction it so that we drive people to migrate and exit or deprive them of nutrition and a productive society or we just take out the bad guy.
What is fascinating about Trump’s decision to not install Machado into power. The Trump administration seems to want Maduro’s regime to coexist with the opposition. They are trying to figure out with the benefit of time how to do that. Maybe we end up with a constitutional result that can allow for power sharing to require the country’s two parties to coexist. The world right now is scratching their heads as to what the Trump administration is up to.
Francisco Rodriguez:
I do not know what the Trump administration wants. Trump does not talk about democracy or institution building. He talks about oil, crime and drugs. I agree with you when you have a regime like the Maduro one, there are no good solutions. Taking out the bad guy through a military operation with extremely limited effects in terms of lives does not seem like a bad option among all the bad options that we have even if it does break international law.
Sanctions are being lifted. Venezuela can sell oil to Western markets. I can assure you that we’re going to see a rapid recovery of Venezuelan oil production in coming months and years, and that’s going to be good for Venezuelans. It’s also important that the U.S. now has leverage, which is something that it has not had in the past in Venezuela. Maybe this does allow it to shape the outcomes. What do I think that they should use this leverage to sit the opposition and government together in negotiations to reshape the country’s institutions so that you can have coexistence between the country’s political factions so that you can ultimately go to an election in which when somebody wins that election, it doesn’t mean that the loser of that election is going to go to jai Francisco l. That is fundamental. Maybe you had to take out Maduro.
Transitions are built between moderates to form a coalition for change. The radicals must be sidelined. This happened with Maduro and with Machado. She is being very politely sidelined. Maybe this is enough for there to be incentives for her to become more moderate. If Machado became more moderate, it would be fabulous because she has the credibility to tell her followers, I’m doing this not because it’s necessary for us to get change.
To get the conditions for oil firms to go into the country, you need to jumpstart the economy so that this country becomes a livable place. When you have the economy on a sound footing, elections make sense.
You need to focus on human rights. You need to have a new prosecutor general with credibility. The Supreme Court, the Electoral Counsel, and the Controller General need credible people in those institutions with significant opposition participation so that you have power sharing, which restrain the power of the executive branch.
Larry Bernstein:
What are you optimistic about the future of Venezuela?
Francisco Rodriguez:
Venezuela has a long democratic tradition. That is the reason why it has been so difficult to install dictatorship here. If you look at Chavismo, they feel that they need elections. If you look at Cuba, the Cuban regime does not have the pretense of holding elections.
Venezuela is the country that has the longest streak of uninterrupted competitive presidential elections in South America and the second longest in Latin America after Costa Rica. That makes me confident that the country is going to find its way to democracy. Despite the level of political polarization, you have not had in Venezuela political violence nor civil war. That reflects a tradition of peaceful resolution of conflicts.
The Venezuela economy is very vulnerable with its dependence on oil. It also makes it easy to rebuild. Because if you get the oil sector running, you can also get the rest of the economy running. You can get a lot of bang for the buck in the initial moments of reconstruction. You can create positive dynamics where you have political and economic reforms, and coalesce around national unity, and building a prosperous and inclusive democracy. That is very possible in Venezuela.
Larry Bernstein:
Thanks to Francisco for joining us.
If you missed the previous podcast, the topic was Defending Israel.
Our speaker was Amir Avivi who is a retired Israeli Brigadier General and the Chairman of the Israel Defense and Security Forum – ISDF. Amir is the author of a recent book entitled No Retreat: How to Secure Israel for Generations to Come.
Amir discussed how the Palestinians could govern themselves using city states instead of Hamas or the Palestinian Authority. Amir explained why Israel’s previous peace negotiation strategies were flawed and that going forward Israel should focus primarily on seeking borders that can be easily defended.
You can find our previous episodes and transcripts on our website
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