Ricardo Hausmann Explains How the Venezuelan Economy Collapsed

in Venezuela. That was from a grain perspective, and I think one thing that's very obvious is that sure Venezuela may have plenty of natural resources oil obviously, but also other ones, and perhaps that the relationship between the US and the current government maybe better than it was, but there's going to be you know, actually reviving the economy, actually getting in a place of stability at thriving.

them elsewhere. So many people left, and when you think about the security situation on the ground even again, let's say somehow the foreign money wants to come back in this question of talent, yeah, and the question of like where are they and do they want to come back, and what it would take to get them to come back such that you can actually sort of produce natural resources among other things profitably. That's a huge difficult element and there's no switch that you can flip.

and I wanted to take home with me. That's all I remember, but that it didn't them thinking about the economy, But also I find it really interesting because here we have an economy which seems to have cola around one specific resource. Yes, but as we learned from that episode, they do make some other things, yes, And so I'm curious about the trade offs between, you know, encouraging the oil industry versus other types of jobs and businesses. There's a lot to discuss.

of commodities. Anyway, someone that we've had on the podcast before who has talked a lot about these things, some of the preconditions for sustainable growth, We've talked to him about all this multiple times. He happens to be the perfect guest because he was previously part of economic policy making in Venezuela in the nineties. He was a Minister of Planning. He was also more a member of the

board of the Central Bank. Truly the perfect guest. So I'm thrilled to welcome back on the podcast Ricardo Houseman, who is currently professor at the Harvard Kennedy School director of the Harvard Growth Lab. So Ricardo, thank you so much for coming back on odd Lots. Truly the perfect guest and the perfect moment.

five when it was taken over by Saudi Arabia. And in that period going to say nineteen seventy eight nineteen eighty, between say nineteen seventeen and nineteen seventy eight, say it was you know, sixty years, Venezuela is probably the fastest growing country in the world, and it was the country with the lowest inflation rate in the world, and it had a fixed exchange rate with a dollar. It had

a very developed financial market. It was a country a very very large immigration, so that saying the census of nineteen sixty seven percent of Venezuelans were born in Europe, in mostly Spain, Italy, Portugal, but also it was a source of attraction of Colombians, Dominicans, Ecuadorians, etc. So it was a very prosperous country. And then got in the nineteen seventies the oil boom, and the oil boom it

made us think very very big. Then came the second oil shock of the Iran Iraq War, and that brought in even more money. And then suddenly in the nineteen eighties, the price of oil collapsed, revenues collapsed, and the US jacked up interest rates like crazy in the early eighties, and that led to a that crisis by nineteen eighty three, and from nineteen eighty three to around nineteen eighty nine, it's what in Latin America was called the last decade of the eighties. We were all in a big balance

of payments crisis that was very painful. Happened in Venezuela is a country in the world that went from triple A to default more quickly it did, so it was triple A like in nineteen eighty one, and it defaulted in nineteen eighty three, So it was and then the eighties were quite complicated. Then in the early nineties was President Carlos Andres Pedes and his minister Miguel Rodriguez and others Moises Naim and other ministers. I participated on that government.

A very major structuralogy lustment was done, that restructuring, opening the economy, and the nineties were a period of a difficult recovery. Oil was very volatile, going up and down. But by nineteen ninety eight you had the Russian crisis and the price oil collapsed dramatically. Interest rates went through the roof financial markets dried up. And it is in that year nineteen ninety eight that we had elections and the public said, what the hell you told us that

all these reforms are going to pay off. You know, where's the money, et cetera. There was no money because the price of oil had gotten down to something like eight dollars a barrel. But the truth is that they voted for Chavis, massively voted for Chavis, and e. Chavis started, you know, very moderately at the beginning. But as time went on and as the price of oil recovered, and we had a spectacular boom between two thousand and four in twenty fourteen in the price of oil, well Chavis

felt that he was empowered. He had the money. The oil money was coming in. He thought, giving all the oil money that was coming in, he could borrow against it. He put all these policies to restrict the private sector. He nationalized everything that moved. He created these socialist enterprises left and right. They all went broke eventually, but he imposed exchange controls, import controls, price controls. If it moved, you controlled it. And by twenty twelve he was very

sick with cancer, but he ran for the election. He died probably immediately after the election. We don't know exactly the day when he died because he didn't appear publicly after early December, but they announced his death in March of twenty thirteen. The year twenty twelve, the government spent as if the price of oil was at two hundred dollars a barrow, when it was only at one hundred dollars a barrow. So they borrowed as if it was

going out of fashion. And then Suddenly in twenty thirteen twenty fourteen, the price of oil collapsed to something like in the thirties. So it's not that they had to go from one hundred to thirty or it's that they were spending at two hundred and borrowing, and when the price of oil collapsed, nobody wanted to lend to Venezuela. So suddenly they had no dollars, no dollars to import praw materials, spare parts, seeds, fertilizers, whatever, and production came

tumbling down. And it was the biggest economic collapse that ever happened in human history outside of wars, and bigger than the collapse that happened in most wars. So without money coming in, they still had to pay for a huge public sector that they had created, so it just printed money. In Maduro took out five zeros out of the currency, and barely three and a half years later he took six more zeros out of the currency. This

is a hyperinflation never seen before. Maybe I don't know, in Germany in the nineteen twenties and for a brief period in Germany after the Second World War. It's something that has never happened. The financial system went from being like eighty billion dollars in assets to like one billion dollars in assets. So it was a total collapse of the economy. Eight million people left the country. Now you have to ask yourself the question, what the hell this

is not the only oil country in the world. I mean, what happened to Saudi Arabia, what happened to Kuwait, What happened to United Emirates or Kasakhstan or a Zerbadan. You never heard of a collapse of this magnitude just because the price of oil went down. So what really happened is that the price of oil went down in a system that presumed that people had no rights and all the money was in the government. And when now the government doesn't have the money, people are left with no

rights and nothing moves. And that's the underlying reason for the Venezuelan Plus.

hundred and sixty five days a year, it's fantastic. From its hydrological marvel, it's not producing eight megawatts agigoads, so it's they messed that up to we were going to use that to produce aluminium steel. We have enormous agricultural potential, especially with the agricultural revolution that has happened in mostly in Brazil in the last twenty years. It didn't reach Venezuela during Chavismo, so we could be producing over twelve

million hectares and we're producing less than a million. So the potential for diversification is huge. But the story of Venezuela has been the story of this incredible uncertainty over what the future brings because we have not managed the volatility in oil incomes in a way that protects the domestic economy. So more than you know, just the old Dutch disease of being. You know, you're earning so many dollars that you're so appreciated that other things are not competitive.

It's really that since the nineteen eighties, it's been up and down, up and down in oil incomes that have made the economy quite unpredictable. And the only way to deal with that is to protect the economy from oil price volatilities through stabilization funds and those I wrote the law for the stabilization fund. But the moment Chavis got in, that's the first thing he killed.

exchange rate. The market believed the exchange rate was fixed and pegged, and it worked quite well until the nineteen eighty three crisis. And then in the nineteen eighty three crisis, first they tried exchange controls, multiple extra rates, and when I was at the central bank, we decided to unify the exchange rate to float and to adopt something more like inflation targeting. But it was not easy to do because you know, inflation targeting is easier to achieve when

inflation is under control and things are more stable. So we had a pretty bumpy road.

longer needed society, that the private sector needed him. He didn't need a private sector. So he started. He had the money to buy everybody off, but he expropriated, didn't pay for most of it, and created an environment in which people thought that they really had no rights. You had, your property could be taken away, you could not set prices, you could not buy foreign exchange without permission, and to buy to get that permission, you had to behave and

so it created an environment to quite oppressive environment. By the way, we had a free press and now there's no free press whatsoever. So it's it's this erosion of rights, property rights, information rights, voting rights, just political rights. So it was the complete erosion of all rights in the transformation of a long standing democracy into a dictatorship. Was quite horrible to watch.

not a it was a sort of slow boil. So to spect them, the big international companies, they didn't leave right away. They actually they kept trying to make it work for as long as they possibly could.

ten to one, one hundred to one. So the best business was to sell a dollar at the parallel rate and convert that into dollars at the official rate. That would have been a rate of return of ten thousand percent in a day. So it was it was that craziness in that led to the economic collapse that I mentioned before.

They just collapsed imports. I wrote an article in those days testing that Venezuela should go to the IMF and restructure its debt because since it had borrowed so much money and the price of oil had declined so much and it had no savings, it could not keep on servicing the debt and it would need to restructure its dead ideally with some support from the IMF. So I asked the question in the title of that article was should Venezuela default? And that got me banned from the country,

so fortunately I published it abroad. But it gives you an idea of how this was the year twenty sixteen, okay before sanctions, okay, twenty fifteen, twenty sixteen, before sanctions.

So it was the writing was on the wall. The oil production had collapsed because in two thousand and three, Chavez fired the oil company gone on strike because Chaves was messing with their meritocracy, with their hierarchical rules of you know what, you needed to do to reach a certain level in the structure of the company, which was a culture that we inherited from Excellent Mobile and from a shell that were sort of like the two large

producers in Venezuela before they were nationalized in the seventies. So there was a deep culture that in that company. They went on strike. Chaves fired twenty thousand out of thirty two thousand, starting from the top, So he eliminated all the human capital of that company, and immediately productions started to decline. We had the capacity to refine one point three million barrels of oil a day. Today we can't refine one hundred thousand. We import gasoline. So this

destruction way proceed semi sanctions. Now, the sanctions were imposed because Maduro started to get farther and farther away from democratic norms, and it was a way of trying to force him to to move back to democratic norms, and instead he radical He became more radicalized than his in his name. But just to tell you the importance of human capital and all you might say, oil is not that important, you know, human cap It's kind of like a basic industry. When they kicked out of Venezuelan and

oil engineers. They went to Colombia. There was a field in Colombia called Rubialis. It was producing thirty thousand barrels of oil a day. The Venezuelan and oil engineers came in and in no time they it was producing two hundred and fifty thousand barrels a day. So it's it just you need to know what it is that you're doing well. That human capital they kicked out that that's

the real collapse of the Venison oil production. And then obviously he could have negotiated around sanctions, but he would rather be poor and in power then you know, provide some more rights and norms and and and and maybe risk losing an election.

allowed them to stay in power despite these disruptions. Because even the most absolute dictator anywhere, to some extent has to have some credibility with some pocket that's powerful, something that preserves I would I would think, et cetera, talk to us about where was the constituency for this new trajectory of the country that started under Javis.

civil society, but extreme repression on the military. They distrust the military to death. They have a secret police for civilians called Sabine, and then there's a secret police for the military called the Hesim, and the de Hesem has hundreds of officers in jail. They are the worst treated political prisoners in Venezuela. They are starved, they are tortured. They have deeply penetrated all the communications of anybody in

the army the Cubans are deeply into it. They're using Russian technology so that they're trying to prevent the army from organizing against the government. So the army is not really there to defend the country. That's why the attack on January third was such a cakewalk. It's that, you know, the army was there to be kind of controlled so

that they wouldn't break from the government. So it's really that's why in the election of July twenty eighth, twenty twenty four, in spite of the fact that they didn't let eight million Venezuelans a broad vote, in spite of the fact that they did not let three million young Venezuelans register for the first time in the electoral roles, in spite of the fact that they did not let the candidate that the primaries to run, Maria Corina Matchalo.

She appointed somebody who nobody knew. She raised his hand, and he won seventy thirty. He would have won eighty five fifteen if other people had been allowed to vote. Now that's a margins, even seventy to thirty, that's a margin that you haven't seen Trump win. You know, train bound, nobody wins by those margins. So there is a huge political majority in Venezuela for change that has that is behind one clear political leadership. So Venezuela is not Iraq.

Venezuela is not a polarized country. Venezuela is a unified country. In those elections, the opposition won in all twenty four states, they won in ninety percent of the three hundred and thirty five municipalities. That means it's a natural there's a political majority in Venezuela that wants to go in a different direction, but there's a small clique that's trying to

prevent it. And so that is the current situation, and that's my concern that the Trump administration has announced that they want to rule by indirectly, by controlling that trick when there is a big political majority that wants to go in a different direction.

rights that people have? Right now? People in Venezuela are afraid to speak, are afraid to to to do anything because they're still being deeply harassed and put in jail for just you know, tweeting something or for having an opinion or for you know, they have put in jail young girls in order to pressure military officers that have say, broke rank, and they want them to to to turn

themselves in. So it's a very very oppressive regime. And the idea is that, yes, we are going to give this regime orders of what to do, even though at the heart they are the ones that brought the economy to where it is. And the idea is we're now going to eliminate sanctions. But it's not sanctions that destroyed the Venezuela and oil industry. It was the expropriations that were done in two thousand and seven and two thousand and nine. It was the firing of all the oil

workers in two thousand and three. It was the rules that they created for the oil industry. In the oil industry, according to the law, production can only happen through the national oil company or in joint ventures where the national oil company has fifty one percent of its shares. The national oil company is broke, it's in default with all

its creditors. So if it were to receive some dollars in some bank account in the US, you know, there are judgments in US courts that would freeze those assets to pay creditors. So nobody wants that as a partner. So it is in this context that Trump says, oh, I want US companies to go back. Well, the law doesn't allow for those companies to go back. And if you want to change the law, who's going to change

the law? Well, we had stolen elections last year for the National Assembly that the US does not recognize Latin America does not recognize, Europe does not recognize. There is no legitimate power to change the hydrocarbon's law. Right now, you have a dollar at the official rate of three hundred and something, and the black market rate is that four hundred, five hundred, six hundred. It reached one thousand. So if you are going to invest at what exchange

rate do you come in? At what exchange rate do you convert your profits back out? It's what the president of Excellent said that Venezuela is uninvestable. It's just a description of reality. It's it's that the system was not designed for private investment independent of sanctions, and that's that's

what needs to change. But it needs to change through a government that has legitimacy to change things that is perceived as being, you know, the reflection of the will of the people that you know, they are the ones who decided that, you know, what course of action to take. I don't think any serious investor is going to go in into such a messy situation.

removing the Maduro regime. There's not an impulse to put boots on the ground American troops and so forth. That doesn't seem like there's any appetite. So is there some mechanism in which the Trump administration, even if it wanted to take your advice and put political stability before economic revival? Does the tool exist practically to establish that sequence?

never been an election. There had never been political parties in Venezuela was democracy. We have political parties. We ran an election not one hundred years ago, in twenty twenty four. We were able to secure the results of those elections because we had six hundred thousand people across the whole country supervising and protecting the votes for the opposition. You

have a political organization, a majority political organization there. So what you need to do right now is to say is to tell the army, we're not going to fire you the way they fired all the army in Iraq. You tell the bureaucracy, we're not going to fire the way you fired all the bureaucracy in Iraq. Everybody's going to have their salaries, everybody's going to have their pensions, right,

but they are going to be under civilian control. And if you tell them, you know, they have already seen what happened to Maluru, they are very clear that it's much cheaper a treatment alasule money. Right. You don't have to put the special forces on the ground to extract somebody, you know alasule money. You just send some missiles and no boots on the ground. So the pressure you can put to say, listen, guys, Let's define a timetable for elections.

Let's define a credible electoral council to supervise those elections with international supervision. Let's have a date for those elections. Let's open up the role so that young people can register and diaspora can register, and we have an election on a certain date. And by the way, you have to free all the political prisoners. You have to allow the diaspora to go back, and you have to allow a free press, otherwise you get a Soulay money treatment. And I tell you that if you do those things,

what is going to do. They're going to want to participate in those elections, to organize for those elections, to start thinking about the future, and to have the credibility that the future is going to be possible because there will be a democratic government committed to a market economy, not a socialist government under threat of American attack and

with a cash flow control by the American power. So that is a much better situation in which to recover the economy, to achieve social peace, and to have a Venezuela become prosperous again.

that has failed, and has failed catastrophically. There is no other catastrophic failure that you can compare to the collapse of the Venezuelan and economy. People want change. There's a state that is not working. By the way, Venezuela is going to have a free education, free healthcare, free many things. Because it's kind of like in the DNA, don't it's always been The consensus is by US standards, relatively liberal.

But if you tell them, look, recovery is coming in a free place with a government that wants a restitution of rights. Venezuelans has always been a country of immigration, not out migration. It's a country that has been a source of attraction of people everywhere. So that transition. I tell you that transition can be done quickly and without conflict if enough pressure is put on the clique that has sequestered the government. That's why they can't get votes,

that's why they look. Even in the voting centers in military bases. The government lost seventy to thirty in spite of its repression. So let the majority of Venezuela something that did not exist in Iraq, it did not exist elsewhere. It's a society that has undergone a catastrophe and has learned from that catastrophe, it has figured out what doesn't work and what course of action it wants to continue.

shocking turn of events. I think we're all shocked the day that we woke up on January third and you're talking about you know, you say the Soleimani treatment, So that is assassination that you're saying should be would be the threat against the clique. Do you see possibility that you essentially engender a sort of I don't know about a necessarily defense of the existing regime, but a defensive sovereignty that what is this other country doing kidnapping our

head of state? What is this other country doing threatening to assassinate the people who run our government. This is our government, et cetera. Do you not see or is it completely off the mark to talk about risk of backlash there and the impulse to rally around the flag and sovereignty when another country is being this aggressive about controlling our government.

had been taken over by Cubans. You saw that in the attack on January third, cub announced that thirty two of its members were killed. Because that was the security apparatus around Maduro. Maduro didn't rely on Venezuelans for his security. He relied on Cubans for his security because he doesn't trust Venezuela. So the perception was that we were a colony of Cuba. If you want, we were a colony of foreign interests and now we want to get back

to our freedom. So the narrative I would want to us to stick to is we came to liberate, not to conquer. We came to reestablish your freedom. And if freedom gets re established, Venezuelans will naturally be good partners of the US as they had historically been, the fact that Trump is popular in Venezuela and is a condemnation of Chavismo, it's how disastrous these guys have been, how aligned with foreign powers that have nothing to do with us.

You know their language, Cuba. They're aligned with Russia, they're aligned with Iran, they're aligned with Belarus. So it's that kind of government that has taken over with no domestic political base, that is, it's been threatened to be kicked out, and that's why I think it makes the transition so much easier.

the external factors like the sanctions. And it seems to me that that makes it more difficult in the current environment, right because again, US involvement in Venezuela, I don't even know how to describe it nowadays would suggest that maybe dollar shortages aren't going to be as much of a thing as they were in the past, maybe sanctions go away,

stuff like that. But if the major problem is that institutional decay and the acting president is still still from the Maduro regime, that seems a much harder problem to solve. By the way, your last question about whether or not US involvement maybe like Coalesces Venezuelans around sort of nationalist regime. Uh, there's a headline out right now saying that Venezuela's acting president says she's had enough of ES orders. So you know, you get kind of like a glimmer of it.

Cuba for how long they'll work? Like getting the government you want, even if you're much more powerful than the other country, is far from a trivial exercise in almost every example that we can think.

be incentivized. They need to want to come in to Venezuela. Yeah, in order to advocate for like the conditions that would make it possible for them to enter Venezuela.