by Peter Schiff, Schiff Gold:

Venezuela’s economy is in chaos. It’s gotten so bad that a year ago, video game money was worth seven times more than the Venezuelan bolivar. Meanwhile, the Venezuelan people have suffered horrible food shortages. Many people in Venezuela have turned to barter just to survive.

Not so long ago, left-leaning publications in the US were touting Venezuela as a socialist success story. Today, any attempt to point to Venezuela as socialist disaster will be met with the refrain, “That’s not real socialism!”

Apologists for socialism also blame the collapse of the Venezuelan economy on US sanctions. But as Jon Aldekoa explained in an article published on the Mises Wire and UFM Market Trends, actual data reveals it was indeed real socialism that wrecked Venezuela.

In April 2019, the Center for Economic and Policy Research (CEPR) published a report called Economic Sanctions as Collective Punishment (Weisbrot and Sachs 2019). The report tries to evaluate the consequences of the economic sanctions the United States imposed on Venezuela in August 2017. In it, the authors conclude that said sanctions decreased the population’s daily calorie intake, increased the mortality rate, and displaced millions of Venezuelans as a consequence of the worsening economic depression and hyperinflation.

However, in May 2019, a report was published by Brookings that refutes these claims. This new report, Impact of the 2017 Sanctions on Venezuela: Revisiting the Evidence (Bahar, Bustos, Morales, and Santos 2019), finds that the methodology Weisbrot and Sachs utilized did not allow them to estimate the causal effect of the sanctions and that accordingly their conclusions are incorrect for two reasons. First, in the absence of an adequate counterfactual, the effects of the sanctions cannot be separated from the negative economic trends in Venezuela that preceded them. Second, the deterioration observed by Weisbrot and Sachs could also be explained by other, more important factors beyond the 2017 sanctions that have not been taken into account.

If we stick to the data, regardless of which socioeconomic indicator we choose, it seems clear that the sharp economic downturn began long before 2017.

Access to International Financial Markets

Prior to August 2017, international markets had already stopped the flow of credit to Venezuela. The spread of Venezuela’s sovereign debt — the premium that holders of sovereign bonds demand that the country pay above the “risk-free” rate — was on average 2,884 basis points in the 30 days before the sanctions were announced. This is 7.8 times more than the margin paid by the rest of Latin America and 9.5 times more than what was paid by emerging markets during the same period. As can be observed in the following graph, the imposition of sanctions did not have an impact on the Venezuelan spread.

On the contrary, the spread only increased — by 1,013 basis points — when Nicolás Maduro announced the creation of a commission for refinancing and restructuring Venezuela’s foreign debt. The data indicate that by August 25, 2017, the Venezuelan government’s capacity to issue debt was either severely limited or nonexistent and investors had already discounted possible sanctions and their potential impact.

Oil Production

Weisbrot and Sachs argue in their report that Venezuela’s problems worsened as a consequence of the sanctions. They use Colombian oil production as the counterfactual to determine the sanctions’ impact on Venezuela. For Colombia’s oil production to be considered a suitable comparison, both trends should be similar prior to the sanctions imposed on Venezuela.

However, although the trends seem similar for the period selected by Weisbrot and Sasch, they differ significantly if we go back further back in time.

Therefore, it would not be reasonable to expect parallel trends after the sanctions. In fact, the evolution of Colombia’s oil production is due to very different underlying factors, which would explain the different trends. Some analysts agree that the fall in Venezuela’s oil production is nothing more than a continuation of a decline that began with the dismissal of more than eighteen thousand workers from PDVSA (the state-owned oil and natural gas company) after the national strike during Hugo Chávez’s presidency. This dismissal resulted in an important loss in administrative and technical capacity (Forero 2003). Even during the golden age of oil, 2004–14, Venezuela’s oil production fell by 24 percent between 2005 and 2016.

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