Just How Unprecedented Is Venezuela’s Economic Collapse?
By Ricardo Hausmann
In a hastily organized plebiscite on July 16, held under the auspices of the opposition-controlled National Assembly to reject President Nicolas 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.
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 per cent below 2013 levels, or 40 per cent in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the U.S., when GDP is estimated to have fallen 28 per cent. 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 U.S., Western Europe or the rest of Latin America. And yet these numbers grossly understate the magnitude of the collapse, as ongoing work at Harvard’s Center for International Development is revealing.
Clearly, a 40-per-cent 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-per-cent decline in oil production, it excludes the 55-per-cent plunge in oil prices during that period. Oil exports fell by $2,200 (U.S.) per capita from 2012 to 2016, of which $1,500 was a result of 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 per cent, national income, inclusive of the price effect, fell by 51 per cent.
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 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 per cent 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.
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 per cent (in constant prices) from May, 2012, to May, 2017. Measured in dollars at the black-market exchange rate, it declined by 88 per cent, to just $36 from $295 per month. Measured in the cheapest available calorie, the minimum wage declined to just 7,005 calories per day from 52,854 calories during the same period, a decline of 86.7 per cent and insufficient to feed a family of five, assuming that all the income is spent to buy the cheapest calorie.
- Read More: Venezuela’s Bolivar Plummets to New Lows amid Hyperinflation Fears
- Read More: Hyperinflation? Venezuelan Bolivar Loses 29 Percent of Value in 9 Days
Income poverty increased from 48 per cent in 2014 to 82 per cent in 2016, according to a survey conducted by Venezuela’s three most prestigious universities. The same study found that 74 per cent of Venezuelans involuntarily lost an average of 8.6 kilos in weight.
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 U.S. 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.
Ricardo Hausmann, former minister of planning of Venezuela, is Director of the Center for International Development at Harvard University. This piece originally appeared in The Globe and Mail. You can read the original here.