Home >Opinion >Online-views >Opinion | The ‘how’ and ‘why’ of the Venezuelan crisis

On 23 July, Alejandro Werner of the International Monetary Fund (IMF) announced that the fund was expecting inflation in Venezuela to reach 1,000,000% by year’s end. In April, the IMF announced that Venezuela’s gross domestic product (GDP) was expected to be 45% below its 2013 level by the same time. These are mind-boggling numbers. How and why could such a thing happen?

Science is better at answering “how" questions than “why" questions. Gravity explains how celestial bodies attract each other at a distance, but it does not tell us why. That is a question for metaphysics. Biology can explain that we gain weight when we consume more calories than we burn. But it does not explain why I often do. By understanding the mechanisms driving outcomes, we can devise strategies to stop, prevent, encourage, or overcome them. If I consume fewer calories and exercise more, I should lose weight.

The discovery of the mechanisms by which large economic fluctuations occur had led to an understanding of how to use fiscal and monetary policies, to tame, if not to prevent, crises such as the Great Depression, when the US economy shrank by 28.9% between 1928 and 1933.

Economists have been much criticized for the post-2008 Great Recession, but thanks to prompt fiscal and monetary action based on macroeconomic theory, GDP fell by only 3.1% in the US. In Europe, despite the large external deficits in some of the European Union’s southern and eastern members at the outset of the crisis and the fetters implied by the euro, the fall in GDP was held to less than 10% in hard-hit Ireland, Italy, Portugal and Spain.

How is it, then, that Venezuela can have a GDP contraction that dwarfs that of the Great Depression, the Spanish Civil War, or even the recent Greek crisis? And how could this happen while simultaneously generating hyperinflation of a magnitude seen only in Germany in 1923 or Zimbabwe in 2008-2009?

The answer is surprisingly straightforward and well understood. The government used the oil boom that started in 2004 to disempower society and enhance state control over production and the market, while borrowing massively in international markets. Although state control was detrimental to production, the government could shelter the public from its consequences through subsidized imports, which further damaged domestic production.

By 2013, the government’s excessive borrowing had caused it to lose access to international capital markets, triggering the start of the recession. In 2014, the price of oil fell sharply, making the previous import level unsustainable and triggering a much deeper collapse. It was clear at the time that the government needed to change its ways. Even members of President Nicolas Maduro’s administration pushed for a return to more market-friendly policies and for international financial support. Instead, Maduro’s government doubled down, deepening distortionary controls on the economy.

It was also clear by the end of 2015 that a major collapse was coming—and even that a famine was in the making. Nothing was done to prevent it. Offers of humanitarian assistance were refused. With imports, output, and tax revenues collapsing, the government opted to print the money needed to cover the fiscal deficit, triggering hyperinflation.

But while the “how" of the Venezuelan collapse is clear and was predicted ex ante, the “why" question is harder to answer. Why, with clearly formulated alternatives on the table, did the government choose a predictably disastrous course of action, at such high human cost?

There are three possibilities: ignorance, intention, and strategic interaction. Let’s start with the last one. In a 1991 paper, Allan Drazen and Alberto Alesina suggested that economic stabilization might be delayed because two contending groups are trapped in a war of attrition; all understand that adjustment is necessary but expect the other group to bear the brunt of the cost. By delaying, they provide information to the other group about their willingness to withstand the pain. The process continues until one group capitulates and bears the cost of adjustment, in order to benefit from the stabilization. But in a totalitarian regime such as Venezuela—and with Cuba calling the reform shots—it is hard to tell who is trapped in a war of attrition with whom.

Ignorance is a weak explanation. True, the government does not have a single cabinet member with an economics degree, and Maduro barely finished high school; but plenty of one-time Chavistas pleaded for a change of policy in a more sensible direction. If the government is ignorant, its ignorance was a deliberate choice.

That leaves intent. The government chose this course of action because it felt that it was better than the alternatives. But it is difficult to imagine courses of action with worse outcomes for millions of people than the current one. What are we missing?

The only way out of the crisis was to re-empower society with the capacity to organize market-based production to meet people’s needs. But that was anathema to the regime. Given the choice between re-empowering and starving its citizens, the regime chose the latter and bought off as many henchmen, through venal means, as it would need. Yes, the catastrophe would weaken the regime; but society would weaken even faster, assuring the regime continued control.

The Oxford English Dictionary defines “evil" as “doing or intending to do harm". Ultimately, there is no other plausible explanation for what has happened in Venezuela. ©2018/Project Syndicate

Ricardo Hausmann is director of the Center for International Development at Harvard University.

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