COMMODITY BOOMS, REFORMS AND POPULISM:�INSIGHTS FROM VENEZUELA

Francisco Rodríguez

Josef Korbel School of International Studies

University of Denver

Venezuela as an inverse economic miracle

• Venezuela has one of the worst-performing economies in the world.
• It is also a prime example of three phenomena.
• Economic populism
• Resource booms
• Democratic backsliding
• How are these phenomena connected?

Rise and fall of the Venezuelan economy

1998: Chávez

elected

2002-3: Oil strike

Two views of the state

• The public choice literature tells us why politicians may pursue inefficient policies to pursue political objectives
• Our models to study the state should be no different from those we use to study markets (Buchanan and Tullock, The Calculus of Consent, 1962)
• The democratization literature explains why politicians may accept limits on their power.
• The higher the stakes of power, the more risks that political actors will take in their fight for power (Przeworski, Democracy and the Market, 1991)

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“War can never be separated from political intercourse.” ��Carl von Clausewitz, On War, 1832

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“Until we can repopulate Georgia it is useless to occupy it, but the utter destruction of its roads, houses and people will cripple their military resources.”

General W. T. Sherman, telegram to Ulysses S. Grant, 1864

The Calculus

of

Destruction

How Politics Drives Collapses

• When the stakes of power are high, political actors have less incentives to accept constraints on their conduct.
• Democracy becomes less enforceable
• Politicians are more willing to harm their economy
• Political actors can adopt scorched earth strategies when they choose to generate severe negative economic externalities in their fight for power.
• When power is effectively contested, both sides may opt for scorched earth strategies and the economy falls into economically-destructive political conflict.

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The genesis of populism

• Rents from extractive natural resources can raise the stakes of power.
• These states tend to become less democratic.
• Politicians are much more likely to prioritize results in short term horizons.
• Losing power becomes more costly.
• These societies are also more likely to fall prey to economically-destructive political conflict.

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A (very) short contemporary history of Venezuela

• 1920-1970: Highest growth in LatAm, early democratization
• 1970s: Oil boom leads to power infighting among elites, GDP peaks
• 1980s: Overvaluation leads to capital flight, FX crises
• 1990s: Low oil prices drive growth and banking collapse, reforms stall
• 1999: Chávez wins election
• 1999-2012: Oil prices skyrocket, economy undergoes oil boom.
• 2002: Failed coup attempt, oil strike
• 2013: Chávez dies, Maduro wins snap election by small margin
• 2015: Opposition wins 2/3 majority in National Assembly
• Supreme Court, National Assembly stand off
• Maduro calls Constituent Assembly elections, opposition boycotts.
• 2018: Opposition boycotts presidential vote.
• 2017/20: US imposes sanctions, recognizes Guaidó
• 2021/23: Opposition dissolves interim government, US negotiates with Maduro

Venezuela loses ground to peers in oil boom times

• 2013: Maduro faces first electoral test in municipal elections.
• Trailing in polls, he accuses electronics retailers of price gouging
• Consumers loots stores, Maduro calls in national guard.
• Army organizes sales of electronics products at regulated prices.
• Maduro gets 10-point boost in polls.
• Socialists sweep elections

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The Dakazo

Oil revenue collapse drives Venezuelan decline

Going after purse strings

• 2016: Government cancels recall referendum
• 2017: Opposition decides to call for lending boycott
• January: National Assembly sends letters to banks
• May: Campaign against Goldman for “hunger bonds”
• August: Trump imposes lending sanctions
• 2019: US imposes oil sanctions
• 2020: US imposes secondary sanctions on non-US companies dealing with Venezuela

Sanctions and oil production

• Oil production was stable in the 2008-15 period.
• Begins decline in 2016 as oil prices reach lows.
• Decline accelerates with 2017 financial sanctions, 2019 and 2020 oil sanctions

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Identifying sanctions effects

• Difficult to test causal hypotheses on single time series.
• Quasi-experimental methods allow us to focus on channels of causation
• Consider behavior of firms with and without access to finance prior to sanctions
• Firms with prior financial access suffered more.
• Results support the thesis that access to finance, instead of confounding effects, drove collapse.

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In brief

• Economic collapses can help us understand what drives progress.
• Explanations highlighting poor policies are at best incomplete.
• Growth implosions can be traced back to shifting political incentives.
• We need t0 understand the reasons politicians have to harm the economy.
• Low stakes of power play a key role in sustaining democracy and economic progress.

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