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Venezuela’s Unprecedented Collapse

CAMBRIDGE – In a hastily organized plebiscite on July 16, held under the auspices of the opposition-controlled National Assembly to reject President Nicolás Maduro’s call for a National Constituent Assembly, more than 720,000 Venezuelans voted abroad. In the 2013 presidential election, only 62,311 did. Four days before the referendum, 2,117 aspirants took Chile’s medical licensing exam, of which almost 800 were Venezuelans. And on July 22, when the border with Colombia was reopened, 35,000 Venezuelans crossed the narrow bridge between the two countries to buy food and medicines.

Venezuelans clearly want out – and it’s not hard to see why. Media worldwide have been reporting on Venezuela, documenting truly horrible situations, with images of starvation, hopelessness, and rage. The cover of The Economist’s July 29 issue summed it up: “Venezuela in chaos.”

But is this just another bad run-of-the-mill recession or something more serious?

The most frequently used indicator to compare recessions is GDP. According to the International Monetary Fund, Venezuela’s GDP in 2017 is 35% below 2013 levels, or 40% in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%. It is slightly bigger than the decline in Russia (1990-1994), Cuba (1989-1993), and Albania (1989-1993), but smaller than that experienced by other former Soviet States at the time of transition, such as Georgia, Tajikistan, Azerbaijan, Armenia, and Ukraine, or war-torn countries such as Liberia (1993), Libya (2011), Rwanda (1994), Iran (1981), and, most recently, South Sudan.

Put another way, Venezuela’s economic catastrophe dwarfs any in the history of the US, Western Europe, or the rest of Latin America. And yet these numbers grossly understate the magnitude of the collapse, as ongoing work with Miguel Angel Santos, Ricardo Villasmil, Douglas Barrios, Frank Muci, and Jose Ramón Morales at Harvard’s Center for International Development is revealing.

Clearly, a 40% decline in per capita GDP is a very rare event. But several factors make the situation in Venezuela even bleaker. For starters, while Venezuela’s GDP contraction (in constant prices) from 2013 to 2017 includes a 17% decline in oil production, it excludes the 55% plunge in oil prices during that period. Oil exports fell by $2,200 per capita from 2012 to 2016, of which $1,500 was due to the decline in oil prices.

These are huge numbers, given that Venezuela’s per capita income in 2017 is less than $4,000. In other words, while per capita GDP fell by 40%, national income, inclusive of the price effect, fell by 51%.

Countries typically cushion such negative price shocks by putting aside some money in good times and borrowing or using those savings in bad times, so that imports need not decline by as much as exports. But Venezuela could not do that, because it had used the oil boom to sextuple the foreign debt. Profligacy in good times left few assets to liquidate in bad times, and markets were unwilling to lend to an over-indebted borrower.

They were right: Venezuela is now the world’s most indebted country. No country has a larger public external debt as a share of GDP or of exports, or faces higher debt service as a share of exports.

But, like Romania under Nicolae Ceauşescu in the 1980s, the government decided to cut imports while remaining current on foreign-debt service, repeatedly surprising the market, which was expecting a restructuring. As a consequence, imports of goods and services per capita fell by 75% in real (inflation-adjusted) terms between 2012 and 2016, with a further decline in 2017.

Such a collapse is comparable only to that of Mongolia (1988-1992) and Nigeria (1982-1986) and bigger than all other four-year import collapses worldwide since 1960. In fact, the Venezuelan numbers show no cushioning whatsoever: the decline in imports was almost equal to the decline in exports.

Moreover, because this administratively imposed import decline created shortages of raw material and intermediate inputs, the collapse in agriculture and manufacturing was even larger than that of overall GDP, slashing almost another $1,000 per capita in locally produced consumer goods.

Other statistics corroborate this dire picture. Non-oil tax revenues declined by 70% in real terms between 2012 and 2016. And accelerating inflation caused a 79% real decline in the banking system’s monetary liabilities in the same period. Measured at the black-market exchange rate, the decline was 92%, from $41 billion to just $3.3 billion.

Inevitably, living standards have collapsed as well. The minimum wage – which in Venezuela is also the income of the median worker, owing to the large share of minimum-wage earners – declined by 75% (in constant prices) from May 2012 to May 2017. Measured in dollars at the black-market exchange rate, it declined by 88%, from $295 per month to just $36.

Measured in the cheapest available calorie, the minimum wage declined from 52,854 calories per day to just 7,005 during the same period, a decline of 86.7% and insufficient to feed a family of five, assuming that all the income is spent to buy the cheapest calorie. With their minimum wage, Venezuelans could buy less than a fifth of the food that traditionally poorer Colombians could buy with theirs.

Income poverty increased from 48% in 2014 to 82% in 2016, according to a survey conducted by Venezuela’s three most prestigious universities. The same study found that 74% of Venezuelans involuntarily lost an average of 8.6 kilos (19 pounds) in weight. The Venezuelan Health Observatory reports a ten-fold increase in in-patient mortality and a 100-fold increase in the death of newborns in hospitals in 2016. And yet President Nicolás Maduro’s government has repeatedly turned down offers of humanitarian assistance.

The Maduro government’s all-out attack on liberty and democracy is deservedly attracting greater international attention. The Organization of American States and the European Union have issued scathing reports, and the US recently announced new sanctions.

But Venezuela’s problems are not just political. Addressing the unprecedented economic catastrophe that the government has caused will also require the concerted support of the international community.