How To Destroy An Economy

FT Alphaville has up a transcript of a fascinating interview with Venezuelan economist Ricardo Hausmann. If you don’t keep up to date on the latest happenings in Venezuela, the below video of a gang of bikers attacking a cargo truck with Molotov cocktails illustrates the post-apocalyptic state of the Venezuelan economy.

And if you have ever wondered how best to blow apart an economy, the interview pretty much walks you through the process. Here is an illustrative passage:

Let me just give you a sense of the magnitude of the mismanagement of the oil industry. In 1998, the year before Chávez got elected, or the year in which in December of that year Chávez got elected and he took power in February 1999. In 1998, Venezuela produced 3.7 million barrels of oil [per day]. Today it’s producing about two. If Venezuela had maintained its market share in the world oil industry — which it could have because it had infinite reserves, it had the largest reserves in the world — it would be producing two million barrels more than it is currently producing. With the same market share. So the collapse is immense relative to history, and it’s immense relative to this opportunity cost of where it should have gone had it just kept its market share the way it was.

That collapse of the oil industry happened in two steps. First, all the know-how of that industry, centuries of man-years of experience was lost in the firing of these people. They were not only fired but persecuted, so most of them left the country. Many of them left the country. And they caused, for example, an oil boom in Colombia [where many of them moved to]. Colombia went from producing 200,000 barrels of oil [per day] to a million barrels of oil thanks to the fact that Venezuelans knew how to extract much more oil from the fields that Colombia was already exploiting.

So there was a massive loss of human capital. They also wanted to create a politically conscious oil company, so they started to put an enormous amount of social programmes and other things on the books of PDVSA, the oil company. And as a consequence they starved the company from investment and they ran the company in an amazingly corrupt way, and this is really not just talk about corruption but evidence of corruption in massive ways. There were these foreign oil companies… These foreign oil companies have been complaining to the government that they want to wrest control of the procurement of oil projects because they know that this procurement is being done at multiples of what things should cost. There’s people that have been found in the US owning hundreds of millions of dollars of money that has been laundered out of PDVSA and so on.

So they really destroyed the hen that laid the golden eggs, at the time when their own plans and their own announced plans was to move Venezuela to produce six million barrels of oil. And instead of increased production they have never been able to stop a very rapid decline in production.

The (understandable) gut reaction of many people to what is happening in Venezuela is to kind of chuckle and shake their heads and say, “that’s socialism for you — good luck with that Bernie Sanders.” However, I’m not so sure the late Hugo Chavez even made a proper go at running a socialist economy. When you read Hausmann’s description of asset expropriations under Chavez it all sounds rather whimsical and Qaddafi-esque:

Chávez won re-election in 2006. And in early 2007 he announced that he was now going to move towards socialism, and he started with a spree of nationalisations. In those days the price of oil was very high, so he could afford to just buy everything that moved or that he fancied.

So for example he nationalised the telephone company that was owned by Verizon. He nationalised the three cement companies that were owned by the Mexicans, Cemex, Holcim and Lafarge. He nationalised one of the largest banks, which was owned at the time by Banco Santander. He nationalised the supermarket chain. He nationalised 3.7 million hectares of land.

So he went on an expropriation spree. At the beginning, when he had money, he would pay for things, and then if these were things owned by people he didn’t like, he would just expropriate and not pay for them. So he changed the contracts of the oil companies in a way that essentially extracted part of the expected cash flows out of them, and many of them accepted but a few of them, Exxon, Conoco Phillips and so on sued. And these suits are now being adjudicated by the International Court for the Settlement of Investment Disputes, and these investment disputes in Washington now add up to $16 billion of claims. Of expropriations that he didn’t pay for. And these are only the foreigners.

He expropriated the service companies that provided services to the oil company, because they started to protest that they were not being paid so instead of paying he just expropriated them.

So he took over significant chunks of the Venezuelan economy, and the typical thing is that the moment they took over a company, they ran it to the ground. Production collapsed. They nationalised the steel company. The steel company at the time of nationalisation was producing 4.5 million tons of steel with 5,000 workers. It now has 22,000 workers but it’s producing something like 200,000 tons of steel. So they ran those companies to the ground. Aluminium is almost not done any more, when Venezuela was producing about a million tons of aluminium back when…

So essentially they expropriated the economy and collapsed it on the public sector. And in the private sector they created all these constraints and this enormous uncertainty over property rights because everybody else was being expropriated and you never knew when it would be your turn. Owens-Illinois was a company making bottles. They were expropriated. Why bottles? Another company making detergents was expropriated. Why detergents?

So everybody else would not know when would his turn come up.

To me that reads more like a dictator and his cronies stripping assets. Which isn’t to defend the merits of socialism so much as argue socialism provided a convenient platform for Chavez to justify the systematic looting of the Venezuelan economy. In fact, dictators in general seem fond of socialist posturing as a means of bamboozling the masses. So-called Arab socialism is littered with examples of strongmen spouting vaguely socialist pronouncements while consolidating political and economic power within single party authoritarian states.

In a serendipitous convergence of themes, the Wikipedia entry for Nasserism contains the following reference to Chavez:

Hugo Chávez, late President of Venezuela, and leader of the self-styled ‘Bolivarian Revolution’, cited Nasserism as a direct influence on his own political thinking, stating: “Someone talked to me about his pessimism regarding the future of Arab nationalism. I told him that I was optimistic, because the ideas of Nasser are still alive. Nasser was one of the greatest people of Arab history. To say the least, I am a Nasserist, ever since I was a young soldier.”

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