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Oil and Politics: The Venezuelan Experience- Francisco Monaldi

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Oil and Politics: The Venezuelan Experience- Francisco Monaldi

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Francisco Monaldi, Baker Institute and Harvard University

ERF and AFESD conference on: Monetary and Fiscal Institutions in Resource-Rich Arab Economies
Kuwait, November 4-5, 2015

For more info, please visit www.erf.org.eg

Session on: Oil, Rents and Politics:

Forty-five years after Hossein Mahdavy developed the modern concept of a “rentier state,” hundreds of studies have been conducted on the ways that oil wealth seems to influence governance. This session will give an overview of some key insights about state-building, development policies, accountability and conflict, particularly those that cast light on the oil-rich Arab states during a period of low prices. Venezuela, under chavismo, offers a good political economy illustration of how a country can economically underperform during commodity booms, largely thanks to spending bonanzas related to electoral cycles.

Francisco Monaldi, Baker Institute and Harvard University

ERF and AFESD conference on: Monetary and Fiscal Institutions in Resource-Rich Arab Economies
Kuwait, November 4-5, 2015

For more info, please visit www.erf.org.eg

Session on: Oil, Rents and Politics:

Forty-five years after Hossein Mahdavy developed the modern concept of a “rentier state,” hundreds of studies have been conducted on the ways that oil wealth seems to influence governance. This session will give an overview of some key insights about state-building, development policies, accountability and conflict, particularly those that cast light on the oil-rich Arab states during a period of low prices. Venezuela, under chavismo, offers a good political economy illustration of how a country can economically underperform during commodity booms, largely thanks to spending bonanzas related to electoral cycles.

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Oil and Politics: The Venezuelan Experience- Francisco Monaldi

  1. 1. Francisco J. Monaldi Baker Institute Fellow and Adjunct Professor, Rice University Belfer Center Associate, Kennedy School of Government, Harvard University Founding Director, Center on Energy and the Environment, IESA, Venezuela francisco_monaldi@hks.harvard.edu @fmonaldi Kuwait, November 2015 Venezuela: After the Party, the Collapse
  2. 2. The best regional performance in 1938-1978 The worst regional performance in 1978-2003 1.57 1.95 2.37 1.90 1.54 2.27 0.00 0.50 1.00 1.50 2.00 2.50 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Index(1950=1) In 2003 GDP per capita bellow the 1962 level. In 2010 close to peak level of 1978. GDP per capita Source: Venezuelan Central Bank.
  3. 3. Source: Own calculations based on ONAPRE (several years). -100% -50% 0% 50% 100% 150% 200% 250% Percentagevariation Oil fiscal income and spending growth Public Spending Oil Fiscal Revenue Venezuela has never implemented an effective stabilization policy
  4. 4. Poor overall economic performance even during peak oil prices… …but a large consumption boom
  5. 5. IMF Study: Unprecedented Resource Windfall (comparable only to Middle East oil exporters) Emerging Latin America and Selected Regions: Income Windfall during Terms-of-trade Booms, 1970-2012 1/ (Share of annual GDP) 1975 PER ECU 2000 NOR AUS CAN EM Latin America 2000 RUS UKR BEL 2000 IDN 0.0 0.1 0.2 0.3 0.4 2000 SAU KUW 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 1970 2000 VEN BOL CHL ARGPER PAR COL ECU BRA PAR Sources: IMF, International Financial Statistics; and Chapter 5. ¹ Cumulative percentage change in terms of trade (of goods and services) from start to peak of each identified episode (that meet the criteria of at least 15 percent cumulative and 3 percent average increase). Episodes are grouped in 5-year window s according to the date of their first year. Dotted lines indicate group averages. EM Europe AE MENA Oil exportersEM Asia Bars: cumulative income windfall Dots: Annual average (right scale)
  6. 6. Second worse growth performance, behind Libya, among major oil producers and second worse inflation rate behind Angola.
  7. 7. Collapsing exports, booming imports Real Imports Real Exports 50100150200250 1985 1990 1995 2000 2005 year Venezuela Chile
  8. 8. Higher oil dependence, with declining net oil exports 10
  9. 9. - 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Poverty Evolution in Venezuela (1997-2012) Poverty Extreme Poverty Numberofpeople Poverty and the Boom: 2004-2008 Source: INE and Miguel A. Santos >5 million out of poverty
  10. 10. 0.35 0.4 0.45 0.5 0.550.60 0.80 1.00 1.20 1.40 1.60 1.80 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 GDP and Consumption per Capita (1998=100) and Gini Coefficient (1980-2012) GDP PC 1998=100 CON PC 1998=100 Gini Growth and Inequality or Consumption and Inequality? 14.3% CAGR: 0.8% 60.0% CAGR: 3.2% Source: INE and Miguel A. Santos
  11. 11. IMF: Latin America’s Golden Decade: Strong Social Gains 40 44 48 52 56 2000 2004 2008 2012 12 16 20 24 28 32 Poverty (%, rhs)² Inequality (Gini coefficient) Poverty, Inequality and the Middle Class since 2000¹ Sources: PovcalNet; SEDLAC; World Bank, World Development Indicators; and authors' calculations. ¹ Simple average of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Honduras, Mexico, Panama, Paraguay, Peru, Uruguay, and Venezuela. ² Poverty line of US$2.5 per day. ³ Middle class is defined as people with per capita income between $10-$50 per day (2005 PPP), as defined by Milanovic, Branko and Yitzhaki, Shlomo (2002), “Decomposing World Income Distribution: Does the World Have a Middle Class?”, Review of Income and Wealth, International, Vol. 48(2). -20 0 20 40 60 URY CHL CRI MEX ARG BRA VEN PER GUA PRY ECU DOM PAN COL NIC ESV BOL HON 2000 Change 2010 Middle Class³ (Percent of population)
  12. 12. Boom in public expenditure and imports exceeded the oil bonanza 28.705 28.455 29.067 26.104 25.942 27.702 28.853 28.138 30.534 26.598 38.681 50.909 67.449 85.304 98.011 105.779 106.048 0 20.000 40.000 60.000 80.000 100.000 120.000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-II Deuda Pública Externa (USD Millones) Fuente: BCV Foreign Public Debt (US$ Million)
  13. 13. Venezuela: The highest level of public expenditures (% GDP) in the region Gasto Público Consolidado (% del PIB) 18.2 19.1 22.1 23.3 28.7 32.5 34.6 38.8 40.0 41.9 47.2 50.6 26.2 0.0 10.0 20.0 30.0 40.0 50.0 60.0 Argentina Bolivia Brazil C hile C olom bia C osta R ica Ecuador M exico Paraguay Peru U ruguayVenezuela 2011venezuela 2012 51.3 Fuente: Ministerio de Finanzas, CEPAL, Miguel A. Santos
  14. 14. Unsustainable path even before the oil price collapse 16
  15. 15. GDP Growth 2015: OPEC members -10% -6% -1% 0.03% 1% 1% 3% 3% 3% 3% 4% 5% Venezuela Libia Ecuador Irak Iran Kuwait Emiratos Árabes Unidos Argelia Arabia Saudita Angola Nigeria Catar GDP Growth Forecast 2015 Source: IMF
  16. 16. Inflation 2015: OPEC members 190% 14% 14% 12% 11% 4% 3% 3% 3% 2% 2% 2% Venezuela Iran Angola Libia Nigeria Ecuador Emiratos Árabes Unidos Kuwait Irak Arabia Saudita Argelia Catar Forecasted Rate of Inflation 2015 Source: IMF
  17. 17. The Politics: electoral cycles on steroids
  18. 18. World Governance Indicators 0 10 20 30 40 50 60 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 PercentileRank(0-100) Venezuela 1996 - 2010 Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption 26.1 11.3 18.6 3.8 2.8 8.1 51.4 35.9 44.4 47.6 33.8 43.5 0 10 20 30 40 50 60 Index 2009 Venezuela Latin American Average Institutional Collapse
  19. 19. An electoral budget cycle on steroids... ElectionsElections
  20. 20. The public sector deficit in the year to the election at historical high of close to 19% of GDP, with total public expenditures also at a historical high of around 51% of GDP. This when the price of oil is also at a historical peak. Source: BCV and Barclays Elections Elections
  21. 21. Ven Ven Ven
  22. 22. Consumption and Popularity -25 -20 -15 -10 -5 0 5 10 15 20 25 25 35 45 55 65 75 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Chavez popularity (lhs) Maduro (lhs) Real consumption growth (rhs) Source: BCV and Datanalisis
  23. 23. Source: Keller y Asociados
  24. 24. Source: Datanalisis, July 2015 Public Opinion: How is the country doing? 28
  25. 25. Source: Datanalisis, July 2015 Public Opinion: Maduro’s Approval 29
  26. 26. The Oil Industry: another wasted opportunity
  27. 27. 31 Venezuela will continue to produce oil… until the world demands it Venezuela’s official proved oil reserves are 298 billion barrels (using a 20% recovery rate on the Orinoco Belt, for 257 billion barrels). The USGS estimates that 510 billion barrels would be ultimately recoverable in the Orinoco Belt (using a 45% recovery rate). Even using a 10% recovery rate Venezuela would have the second largest reserves after Saudi Arabia, at around 190 billion barrels (close to Canada’s). 0 50 100 150 200 250 300 US Venezuela Russian Federation Iran Kuwait Saudi Arabia United Arab Emirates Nigeria OPEC Non.OPEC Years of production Reserves/production (years) Source: BP Statistical Review of World Energy (2013) Canada including oil sands 110 years Venezuela low estimate 190 years
  28. 28. The Rise and Fall… and Rise again and Fall again… of the Venezuelan Oil Industry 32
  29. 29. • Significant contributions to FONDEN & social programs, compared to investment. • Financial Debt has increased to more than US$ 45 bn. Debt with suppliers and partners above $15 bn. Debt with Central Bank above Bs. 800 bn. Arbitrations $7-8 bn. (estimate) Cash Flow availability – PDVSA
  30. 30. Venezuela Domestic Oil Consumption Gasoline price: $0.07 per gallon or $0.002 at black market exchange rate. 1 cent per barrel versus $21 in Saudi Arabia Domestic subsidies: $24 billion in 2013. $13 bn. in 2015 34
  31. 31. • Texas 5 • Qatar 33 • United Arab Emirates 39 • Colombia 48 • Alberta 51 • Trinidad and Tobago 58 • Brazil 66 • Alaska 83 • Angola 118 • Nigeria 124 • Algeria 126 • Russia 127 • Libya 128 • Iraq 129 • Kazakhstan 131 • Iran 132 • Bolivia 133 • Ecuador 134 • Venezuela 135 Fraser Institute Global Petroleum Survey 2011: Jurisdictional rankings according to the extent of investment barriers (based on All-Inclusive Composite Index values) 135 jurisdictions ranked The Reputational Legacy Ranking sobre barreras a la inversión Fraser Institute 2009 2010 2011 2012 2013 2014 Ranking Venezuela 141 132 135 146 157 156 Jurisdicciones Consideradas 141 133 135 147 157 156 35
  32. 32. The Future? • Macro-adjustment? – Devaluation? Gasoline price hike? • Hyperinflation? • Price of oil? • Legislative elections the end of 2015? – The opposition today has a 30 point lead, but margin would be probably smaller. Gerrymandering and malapportionment help the PSUV. • Recall Referendum in 2016 or 2017? • Presidential elections in 2018 or 2019? • Non-electoral outcomes? Social upheaval?
  33. 33. Thanks for your attention francisco_monaldi@hks.harvard.edu Twitter: @fmonaldi 37

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