Thursday, September 20, 2018

Causes of Venezuela's Oil Implosion

Economist Francisco Rodríguez writes about the causes of Venezuela's economic implosion at WOLA's blog, centering on the decline of oil production. That in turn was caused by mismanagement and exacerbated by U.S. sanctions. In particular, the latter "toxified" transactions with Venezuela, thus raising the costs of doing business with the government.

This is not an exercise in blaming the U.S. but rather recognition that a lot of factors are working simultaneously. I had written for a while that Trump's policies seemed quite similar to Obama's in terms of targeted sanctions, but the more general sanctions against transactions are a step much further. Those now can also be accompanied by protests at the offices of financial institutions that loan money.

As we warned previously, these observations should not be taken as decisive proof that sanctions caused the output collapse. There are many other factors at play in the Venezuelan economy which can also be put forward as explanations. Maduro’s decision to appoint a general with no previous industry experience and the broad-ranging corruption investigation that led to the jailing of 95 industry executives, including two former PDVSA presidents, appear to have caused a paralysis in many of the sector’s professional cadres. The loss of the industry’s specialized human capital, part of the brain drain that accompanies large scale migration exoduses, also contributed to the deterioration of its operational capacity. 
The data, however, strongly suggests the need for much more in-depth research on the reasons for Venezuela’s oil output collapse and for the discontinuous behavior in the series. The fact that the acceleration of the decline coincides with the onset of the country’s toxification to international investors suggests that we need to closely explore this channel as a potential driver of Venezuela’s output collapse.
What we should also note is that these policies have increased China's influence significantly. Maduro just returned from a triumphant trip getting more investment promises. This is another example of Trump administration policies unintentionally boosting China's presence in Latin America.


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