Why you should care
Economists aren’t optimistic that even an entirely new economic policy could put Venezuela on a swift path to recovery.
Venezuela’s economic collapse now exceeds that of the former Soviet Union, suggesting 21st-century socialism may be going the way of its 20th-century predecessor.
The Latin American state’s gross domestic product has fallen 54 percent from its 2013 peak, according to calculations by the Institute of International Finance, a Washington-based trade body.
This collapse is now far worse than the 37 percent peak-to-trough slide of the median former USSR state in the period after the union’s breakup in 1991, according to IIF data. It has even outstripped the 51 percent slump experienced by Ukraine, the worst-hit ex-Soviet state. In fact …
Venezuela’s meltdown is now the second-most-severe economic crash in modern history.
Its plight is exceeded only by that of Zimbabwe, where GDP plunged 74 percent between 1998 and 2009.
“Venezuela’s economic collapse is almost unprecedented in recent history,” says Sergi Lanau, deputy chief economist at the IIF. “Zimbabwe in the last 20 years and the collapse of the Soviet Union are the only comparable episodes. GDP has collapsed to a point where it’s almost unthinkable in modern times.”
The country, once one of the richest in Latin America and home to the world’s largest proven oil reserves, has been brought to its knees by the socialist Bolivarian Revolution led by former President Hugo Chávez and his anointed successor, Nicolás Maduro, whose ruinous policies, allied to widespread corruption, have ushered in an era of food shortages, hyperinflation, disease and violence.
Venezuela stopped publishing official GDP data in 2016 after reporting a 16.5 percent year-on-year slide, driven in part by a slump in oil prices. It was the third straight year of economic contraction.
Lanau, a former country economist for Venezuela at the International Monetary Fund, has calculated his own output figures since, based on measures such as oil production (down 18 percent last year), car production (which “has fallen to basically zero”) and export data from the likes of Colombia and the U.S.
He estimates that GDP fell a further 15.5 percent in 2017 and 20 percent in 2018 … and is on track to contract a further 10 percent this year. The figures are a little worse than official IMF estimates.
The likelihood of regime change in Venezuela has seemingly risen in recent weeks as Juan Guaidó, head of the National Assembly, has been recognized as the country’s legitimate interim leader by a host of Western and Latin American states.
But based on the history of severe economic collapses elsewhere, Lanau suggests it may take more than a decade for Venezuela to claw its way back to the peak GDP it enjoyed in 2013, even if a new regime were allowed to enact different policies.
“It’s not like the standard V-shaped recession in emerging markets, such as in Indonesia in 1998, where it’s only a year and a half of real economic hardship,” he says.
“It took the median former Soviet state 12 years to achieve pre-crisis real GDP levels, and significantly more in some cases. [This] experience suggests that Venezuela’s recovery … is not assured to be fast. Where there has been significant destruction of economic capacity, recoveries can take a long time.”
Even if annual growth averages 5 percent a year … it would still take just over 15 years to get back to the previous peak.
Others are also downbeat about the long grinding nature of any meaningful recovery.
Fitch, the rating agency, said in a note that “the successor to the [current] government will face massive political and economic challenges in the following years,” as it attempts to rebuild institutions, combat hyperinflation, revive the oil sector and reduce crime.
“We believe it will take several years for most of these challenges to be addressed, and we see significant risk of backsliding on reforms throughout the process,” Fitch added.
Edward Glossop, Latin America economist at Capital Economics, argues that Venezuela could potentially fare better than the former USSR, given that communism had been entrenched in the latter for 70 years.
“In Venezuela’s case you can get good growth quite quickly if you get the oil production back,” Glossop says, with this providing the dollars needed to raise imports from their pitifully low levels. “So that should lead to quite strong growth in both the oil and non-oil sector.”
Yet even if annual growth averages 5 percent a year (comfortably above a trend growth of 1 to 3 percent), it would still take just over 15 years to get back to the previous peak.
Lanau sees post-crisis annual growth of 5 percent as “reasonable,” but is hopeful Venezuela’s vast oil reserves — enough to last it 600 years at current rates of production — could at least attract significant foreign investment to the country.
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2019.