Overview of Odd Lots — Ricardo Hausmann Explains How the Venezuelan Economy Collapsed
This episode of Bloomberg’s Odd Lots features Ricardo Hausmann (Harvard Kennedy School, director of the Growth Lab), who served in Venezuelan economic policymaking in the 1990s. Hausmann gives a historical, institutional, and practical explanation for Venezuela’s extraordinary economic collapse — arguing the crisis was driven far more by domestic institutional failure (expropriations, loss of rights, destruction of human capital, poor macro management) than by external measures like sanctions. He also discusses what would realistically be required to stabilize and revive the country’s economy.
Key takeaways
- Venezuela’s collapse is primarily institutional: nationalizations, episodic expropriations, political repression and destruction of human capital produced a collapse larger than most wartime economies.
- Oil wealth was mismanaged: volatile oil revenue was spent and borrowed against instead of being stabilized via buffers/stabilization funds (Hausmann wrote such a law that was later killed).
- Human capital destruction is central: mass firing of oil engineers and managers (notably after the 2003 strike) caused a permanent hit to oil production capacity.
- Sanctions mattered later but did not cause the collapse: the worst economic implosion began before sanctions (imports fell ~85% in 2016); sanctions were imposed from ~2017 onward as a response to political repression.
- Recovery requires political legitimacy first: Hausmann argues stabilization policies and foreign investment will not work unless rights, rule of law, and a legitimate government capable of changing laws (like hydrocarbon rules) are in place.
Historical timeline and economic phases (concise)
- 1917–1965: Venezuela becomes a mature oil exporter and experienced long-run prosperity; strong institutions and low inflation through much of this period.
- 1970s–1980s: Oil booms lead to expansion and debt; 1983 debt/default crisis ("AAA to default quickly").
- 1990s: Structural adjustment, opening, difficult recovery; volatile oil prices.
- 1998 onward: Hugo Chávez elected; initially moderate but consolidated power, changed constitution, then nationalized industries and instituted exchange/price controls as oil revenues rose.
- 2003: Oil-company strike and mass firing of PDVSA staff (~20,000 of 32,000), precipitating long-term loss of technical capacity.
- 2004–2014: Oil-price boom funds expansive spending and borrowing, followed by overreach (2012 spending as if oil were $200/bbl).
- 2013–2016: Oil price collapse (prices fell into the $30s), imports and production crash; 2016 saw extreme import compression before broad sanctions.
- 2017 onward: Targeted sanctions imposed; economy already in deep decline.
Causes of the collapse — institutional vs external
- Institutional failures (Hausmann’s emphasis)
- Nationalizations and expropriations (notably 2007, 2009) that disrupted private investment and managerial continuity.
- Erosion of property, press, and political rights; concentration of power in the presidency.
- Looting of exchange rate differentials and massive rent-seeking via multiple exchange regimes and controls.
- Destruction/expulsion of expert human capital (especially PDVSA engineers).
- Macroeconomic mismanagement: spending and borrowing far beyond realistic oil expectations.
- External factors
- Oil price volatility and global shocks were triggers but not primary cause.
- Sanctions (since ~2017) aggravated the situation but followed — they did not initiate — the collapse. The worst declines in imports and output predate broad sanctions.
Human capital and oil industry specifics
- Oil infrastructure and human capital are not plug-and-play: technical know-how lost in PDVSA was a primary driver of production decline.
- Example: Venezuelan oil engineers increased output dramatically at Colombia’s Rubiales field (from ~30k to ~250k bpd), illustrating the power of human capital.
- Refining capacity fell from ~1.3 million bpd to under 100,000 bpd; Venezuela imports gasoline.
- PDVSA is insolvent and embroiled in legal judgments — complicating any re-entry by foreign oil majors (laws require PDVSA majority stake in projects).
Sanctions, legal constraints, and investment realities
- Sanctions timeline: broad measures came around 2017; but the economic implosion was already severe.
- Legal obstacles to foreign investment
- Current hydrocarbons law effectively requires PDVSA majority (51%), but PDVSA is bankrupt and subject to creditor claims and U.S. court judgments that could freeze assets.
- Exchange-rate volatility and multiple rates (official vs parallel/black-market; black market previously reached very high multiples) make project economics unpredictable.
- Hausmann’s assessment: under current legal and political conditions, Venezuela is “uninvestable” for serious multinational oil companies, even if sanctions were eased.
Political dynamics and prospects for recovery
- Political base and repression
- Chávez had a broad constituency; Maduro relied increasingly on repression, security services, and foreign security (Cuban personnel).
- Secret police and military repression are pervasive (civilian security agency Sebin; military secret police — DGCIM — use harsh methods).
- Electoral politics
- According to Hausmann, there exists a broad domestic and diaspora majority favoring change; he claims opposition strength in recent elections (winning in all states in the July 2024 election narrative).
- Hausmann’s recommended sequencing for U.S./international policy:
- Prioritize political legitimacy: clear timetable for free elections, international supervision, reopening of registration (diaspora and young voters), release of political prisoners, protection of civil liberties and press.
- Offer safety for military and bureaucracy: guarantees for pay and pensions to avoid violent backlash and enable a peaceful transition.
- Follow with recovery measures and investment once a legitimate government is in place that can credibly change laws and provide rights.
- Hausmann’s warning: doing economic stabilization first (without political legitimacy) will likely fail because investors and diaspora won’t return until rights and legal certainty are restored.
Notable quotes and claims (condensed)
- “The biggest economic collapse that ever happened in human history outside of wars.” (on Venezuela’s decline)
- “They were spending as if the price of oil was $200 a barrel when it was $100.” (on fiscal imprudence)
- “It is not sanctions that destroyed the Venezuelan oil industry. It was the expropriations … and the firing of all the oil workers in 2003.”
- “Venezuela is uninvestable” (due to legal and political barriers).
- Policy narrative suggested for the U.S.: “We came to liberate, not to conquer.”
Practical action items / recommendations (for different actors)
- For international policymakers (U.S., regional partners, multilateral institutions)
- Prioritize political transition: set credible conditions and timelines for free, internationally supervised elections.
- Combine guarantees for security/stability with pressure (sanctions relief contingent on political steps).
- Prepare an IMF-driven debt restructuring and stabilization framework that can be activated once legitimate government and transparency are in place.
- Clarify legal pathways for hydrocarbons reform and creditor resolution to enable private investment.
- For investors
- Wait for political legitimacy, legal reform, and clear rules for foreign participation before committing major capital.
- Monitor reforms to hydrocarbons law, PDVSA debt resolution, and currency convertibility protections.
- Consider staged/contingent entry strategies tied to demonstrable institutional changes.
- For Venezuelan stakeholders and diaspora
- Push for electoral inclusion (diaspora voting) and international monitoring to establish credible political transitions.
- Support institutional reconstruction: rule of law, judicial independence, and protections for property and press.
Conclusion
Ricardo Hausmann frames Venezuela’s crisis as primarily self-inflicted via the destruction of institutions, legal certainty, and human capital — not only as the result of external shocks or sanctions. The country’s path to recovery, he argues, must begin with political legitimacy and restoration of rights; only then can macro stabilization, investment, and the return of human capital realistically follow. Absent that sequencing, lifting sanctions or offering money alone is unlikely to bring sustainable recovery.