Comparative Economic Studies, 2015, 57, (539568)

2015 ACES. All rights reserved. 0888-7233/15

www.palgrave-journals.com/ces/

Symposium Article

Venezuela 19992014: Macro-Policy, Oil

Governance and Economic Performance
LEONARDO VERA
Universidad Central de Venezuela, FACES, Escuela de Economa, Caracas, Venezuela.
E-mail: Leoverave@gmail.com
During the administration of President Chavez, Venezuela registered some celebrated
and encouraging socio-economic achievements, however; in the macroeconomic realm
the country underperformed compared with other countries in Latin America of a similar
size. The country, for instance, did not manage to avoid recurrent external crisis, suffered from unprecedented net transfers of nancial resources abroad and, despite the oil
windfall, has not accumulated a strong level of defensive international reserves. Moreover, ination has been rampant and output growth has been very volatile and, on
average, poor. This study provides a descriptive account and analysis of Venezuelas
macroeconomic performance and policy experience during the administration of President Chavez and his handpicked successor, Nicolas Maduro (19992014). It focuses on
the major policy and institutional changes, and on the problems and imbalances of the
economy to nd out and explore the conundrum of Venezuelas economic underachievement. We evaluate Venezuelas exchange rate and monetary policy and the key
commitments of the Central Bank to society. In general the study suggests that macroeconomic mismanagement and a failed institutional structure of governance are essential to understand some key imbalances. It seems to be the case that the root cause of
this macroeconomic mismanagement and poor governance of Venezuela lies in prevailing political and economic incentives.
Comparative Economic Studies (2015) 57, 539568. doi:10.1057/ces.2015.13;
published online 4 June 2015

Keywords: Venezuela, macroeconomic policy, Central Bank, oil governance, real

exchange rate
JEL Classication: E5, E52, E60, N16

INTRODUCTION
The macroeconomic performance and socio-economic progress in Venezuela
in the last 15 years represents an interesting development experience that

L Vera
Venezuela 19992014

540

encompasses periods of remarkable growth and collapse, external crises,

unexpected ination acceleration and deep and controversial economic and
institutional reforms designed to establish an ambitious pro-poor platform
within a short time span. All this happens in an environment in which the
petroleum sector provides the lions share of total export proceeds of the
country while the international oil price jumped from US$16.0 per barrel in
1999 to $88.4 in 2014. Venezuelas exports of oil, at a time of increasing oil
prices, enabled the country to post-systematic trade and current account
surpluses. However, with improved terms of trade, and substantial and
persistent current account surpluses, the country suffered from unprecedented
net transfers of nancial resources abroad, was unable to avoid recurrent
external crisis and, despite the oil windfall, did not accumulate a strong level of
international reserves. Moreover, ination has been rampant and output
growth has been very volatile and, on average, poor.
Though during the administration of President Chavez and his successor
Nicolas Maduro, Venezuela registered some celebrated and encouraging socioeconomic achievements, in the macroeconomic realm the country has underperformed when compared with countries of a similar size and level of
economic development in Latin America without the oil bonus.
This study provides a descriptive account and analysis of Venezuelas
macroeconomic performance and policy experience during the so-called
Bolivarian Revolution, the period since President Hugo Chavez took ofce in
1999. During this time a nationalist revolution, bolstered by the soaring price of oil,
redirected and enhanced the presence of the State in the economy as well as the
role of public policies. In general the study suggests that macroeconomic mismanagement and a failed institutional structure of governance are essential to
understand some key imbalances. It may be the case that the root cause of this
macroeconomic mismanagement and poor governance of Venezuela lies in prevailing political and economic incentives. In particular, we evaluate Venezuelas
monetary and exchange rate policy and the key commitments of the Central Bank
and show that a changing macroeconomic and institutional framework created a
number of specic pressures and constraint on the Central Bank.
The study proceeds as follows. In the section A brief tour of Venezuelas
macroeconomic performance we present an interpretive set of economic
regularities to show that the economic behavior and performance of Venezuela
has differed from its peers in Latin America. We then present an account of the
economic evolution and performance of the economy and review the role that
politics and institutional design played in shaping macro policy. Broadly we
divide the examination into four short periods or phases conditioned on the
behavior of oil prices, the policy choices and some key institutional arrangements. The four periods consist of: (a) a phase of intense political turmoil,
Comparative Economic Studies

L Vera
Venezuela 19992014

541

(b) a period of collapse and relatively long recovery leveraged by increasing oil
prices and the control of the oil rent, (c)the aftermath of the global crisis, and
lastly (d) a short-lived recovery phase followed by severe macroeconomic
instability and troubling governance. The section The challenges for the central
bank: monetary and exchange rate policy looks at the role that macro-policy
mismanagement has played in explaining Venezuelas mediocre macroeconomic performance. We highlight the political and economic constraints and
incentives under which both monetary and exchange rate policies have taken
place. The section The seeds of bad oil resources governance focuses on the
effects that a very the poor structure of oil governance has produced on the
management of oil proceeds and stocks.

A BRIEF TOUR OF VENEZUELAS MACROECONOMIC PERFORMANCE

Any appraisal of Venezuelas economic performance between 1999 and 2013
must start with some critical macroeconomic regularities. Table 1 presents key
external sector indicators for Venezuela as well as average gures for the LatinAmerican region as a whole. Looking at the current account, it seems clear that
while the average current account decit for the region was nearly 1% of GDP,
Venezuela was one notable exception. Having seen oil prices accelerate from
the early 2000s onward, the country had current account surpluses that
averaged 8% of GDP. As a primary exporter, Venezuela could gain from an
improved terms of trade.1
However, unlike other Latin-American countries and despite its recurrent
current account surplus, Venezuela did not manage to accumulate large
international reserves. Table 1 also shows that the increase in Central Bank
foreign assets was only modest despite the sharp persistence in the current
account surplus to GDP ratio and the inexorable rise in the terms of trade. The
Venezuelan experience contrasts sharply with that of the region where
international reserves increased substantially more.
Why Venezuela did not take advantage of its comfortable commercial
position is not at all clear now. A good starting point, however, is to focus the
attention on certain inherent contradictions of the domestic policy mix as
well as on the factors that led to increasing fears of wealth and capital loss. In
addition, a crucial institutional change that would share honors in this regard
1

With the rapid increase of oil prices since year 2000 and up to 2012, Venezuelas international
terms of trade improved by about 300% over the period, while the improvement for Latin America as
a whole was close to 38%. Though the international nancial and economic crisis generated a major
shock and deterioration in the term of trade in 2009, the term of trade recovered rapidly even in the
case of Venezuela.
Comparative Economic Studies

L Vera
Venezuela 19992014

542
Table 1: Venezuela versus Latin America External Accounts
Year

Current Account (% of
GDP)

International Reserves
(millions of US$)

Net Financial Transfers

from Abroad a

Venezuela Latin America Venezuela Latin America 6b Venezuela Latin America

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014c
Average

2.2
10.1
1.6
8.2
14.1
13.8
17.5
14.4
7.5
10.9
1.8
5.0
7.7
2.9
1.6

2.9
2.3
2.5
0.8
0.5
1.0
1.3
1.5
0.3
0.8
0.5
1.2
1.4
1.8
2.3

8.0

0.8

% Increase 19992014
Accumulated
19992014

15,164
15,882
12,295
12,002
20,667
23,497
29,637
36,672
33,477
42,299
35,000
29,500
29,889
29,887
21,481
20,479

126,582
126,729
128,803
134,915
159,482
178,989
202,058
246,467
379,237
413,452
469,970
561,510
670,354
726,257
720,050
752,562

35.05

494.52

2,953
7,792
6,031
14,785
8,679
17,037
22,225
22,603
20,155
24,408
19,968
25,312
35,543
22,060
23,500
26,287

2,778
2,679
335
42,269
41,149
67,453
76,843
89,675
16,499
39,125
31,967
17,735
32,457
19,500
18,288
26,900

299,338

256,867

The net transfer of resources equals net capital inows (including non-autonomous, errors and omissions
minus the balance in the factor income account (net interest and prots). Negative quantities indicate
resources transferred abroad.
b
It refers to the 6 bigest economies of the region excluding Venezuela.
c
For 2014 gures are preliminary.
Source: Economic Comission for Latin American and the Caribbean, ECLAC

was the advent and questionable reform of the Venezuelas Central Bank Law.
The reform altered the balance of power between the monetary authority and
the national oil company (PDVSA) and allowed the government to take excess
international reserves, and deposit them into a special fund, known as the
National Development Fund (FONDEN).
Table 1 shows that during this period, Venezuela could not stop its chronic
condition of an exporter of capital and suffered from unprecedented negative
net nancial resource transfers, which have escalated during last decade.
The timing of the escalation of net capital outows coincides with upswing of
the current account surplus ows, illustrating the so-called revolving door
effect. Negative nancial transfers have been driven by greatly diverging
motives and incentives. Substantial political and economic instability, something that seems to be intrinsic to the political model envisioned by Hugo
Comparative Economic Studies

L Vera
Venezuela 19992014

543
Table 2: Venezuela versus Latin America Seleted Macroeconomic Indicators
Year

Ination Based on CPI (on

annual average)
Venezuela

Latin America Venezuela Latin America Venezuelaa Latin Americaa

6.0
3.7
3.4
8.9
7.8
18.3
10.3
9.9
8.8
5.3
3.2
1.5
4.2
5.6
1.3
3.0

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 b

23.57
16.21
12.53
22.43
31.09
21.75
15.95
13.65
18.70
31.45
28.59
29.06
27.15
21.11
56.20
63.40

9.28
9.47
7.20
8.57
11.09
7.25
6.39
5.34
5.46
8.14
5.60
5.75
6.68
5.75
7.60
9.30

Mean

27.05

7.43

2.53

3.08

14.17
200.69

1.74
3.02

7.36
55.65

2.31
5.44

Standard Deviation
Variance

Povertya

Real GDP Growth

0.6
4.4
0.7
0.5
1.7
5.9
4.5
5.5
5.6
4.1
1.5
5.9
4.4
3.1
2.8
1.1

Multiannual Change
(19992013)

49.4
44.0
44.4
48.6
45.4
37.1
30.2
28.5
27.6
27.1
27.8
29.5
23.9
32.1

43.8
43.9
39.7
36.2
34.0
33.5
32.9
31.1
29.6
28.2
28.1

17.3

15.7

Percentage of Poor People based on data and calculation provided by ECLAC.

Figures for 2014 are preliminary.
Source: ECLAC
b

Chavez, played a part. Moreover, monetary and exchange rate policy did not
provide the needed support. Capital outows were also fueled by the largescale accumulation of resources in FONDEN.
The domestic side of the economy also shows striking contradictions.
Venezuela shares with the region the remarkable recovery in socio-economic
indicators of the standard of living. Poverty rates in Venezuela which were
close to 50% in the late 1990s, registered a sharp drop to 23% in 2012
(Table 2). Contrary to what some observers may think, Venezuelas singular
good performance in terms of socio-economic indicators is not just a case of a
growth dividend. GDP growth has been poor even with a very favorable
movement in the terms of trade. This does not mean that poverty, inequality
and well-being have not been affected by the commodity boom. The massive
resources from oil-production and exports available to the government were
used, as in the past, for important efforts to increase social spending. From
2004, centralized and extra budgetary public expenditure on education, health,
Comparative Economic Studies

L Vera
Venezuela 19992014

544

social security, housing, and social development and participation rose. This
new emphasis entailed the development of large-scale poverty reduction
programs which were not very much under the conventional supervision or
control of the Central Government. Over time, the abstract concept of
socialism became associated with the strategy of redistribution.
Growth was not only far from satisfactory, but it was also very volatile.
Table 2 also shows that Latin America as a whole experienced a smooth
decline in the dispersion of annual growth rates while the Venezuelan
economy passed from periods of moderate growth to periods of severe
recessions and (occasional) intense booms. As a consequence, growth volatility is much larger in Venezuela than in the rest of the region. Measured by the
standard deviation of GDP growth, Venezuela is almost three times as volatile
as the rest of the region, a group of economies typically thought of as volatile.
As pressing and relevant as GDP growth trends and volatility is the
experience of chronic and high ination. Table 2 shows the steady decrease
of the ination rate in the continent, at least if we compare with the level
ination registered at the beginning of the sample. The case of Venezuela, of
course, catches the eye. By many standards, Venezuelan ination has been one
of the most intractable economic issues facing the country.2
This birds eye view of the relative macroeconomic performance of the
Venezuelan economy does not explain why Venezuelas external and domestic
macro performance did not show signs of improvements despite substantial
increase in oil export proceeds. We explore some details by dividing the period
into four successive episodes.
The rise of political turmoil, institutional uncertainty and capital ight
(19992002)
The rst facet of the Venezuelas economic problems involved the bold
experiment in a non-consensual project of radical transformation that led to
problems of conict and governability. Subject to a sharp environment of
domestic conict, the country could not fully reconcile the external balance
with a system of xed exchange rates and free convertibility. Monetary and
exchange rate policy were not in any sense designed to deal with the domestic
political turmoil. Moreover, government authorities and the Central Bank,
obsessed with ination, held the exchange rate stable as a nominal anchor
against ination and this, instead of helping, exacerbated the crisis.
From the beginning in 1999, the agenda of Hugo Chavez embodied a
project of radical transformations inevitably associated with an intensication
2

The time span of ination has been unparalleled: ination has exceeded 10% per annum every
year since 1979 following a very irregular or volatile pattern.
Comparative Economic Studies

L Vera
Venezuela 19992014

545

of the political conict. As soon as he was elected President, Chavez convoked

a constitutional assembly to introduce far-reaching changes to Venezuelas
political system. The resulting new constitution of 1999 was designed with the
aim of deepening social and economic rights but also presidential powers.3 In
November 2000 the government majority in the National Assembly granted
President Chavez year-long decree powers and he forged ahead with his
radical reform agenda. A set of 49 laws that pretended to bring Venezuelas
legal framework up to date with the new constitution and far-reaching
economic and business reforms were presented a year later. The reforms
raised questions about future property rights and contract enforcement and the
outcry against these laws was immediate. Fedecamaras, the countrys largest
chamber of commerce, which unites most of Venezuelas big businesses,
complained that the laws were anti-business, undermined private property
rights, and were passed without consulting them or anyone outside government circles. Venezuelas main union federation, the Confederation of Venezuelan Workers (CTV) quickly joined the fray arguing that the laws were also
harmful to workers. The result of the vehement opposition to the government
by union workers (around CTV) and the business community (around
Fedecamaras) was that the two organizations called for a general strike on
10 December 2001.
But it was not only the package of 49 laws and the resulting general strike
that added re to Venezuelas conict and uncertainty. Another crucial factor
was that the economy suddenly slowed down as the price of oil decreased in
the wake of the September 11 terrorist attack on the United States. The
government was forced to adjust its budget and cut back spending in all areas
by at least 10% (Wilpert, 2007). The impact was almost immediately noticeable, as GDP growth started to fall and unemployment began inching upwards
in the fourth quarter of 2001.
A new conict was whipped up with the new hydrocarbon law approved
in January 2002. Chavezs moves to consolidate power in the oil sector
provoked new opposition among labor and business groups and led them to
unite against his attempts to control the oil sector.4 In April 2002, Venezuelas
largest labor union staged a general strike to support a walkout by oil workers
over PDVSA management changes. The strike sparked a countrywide protest
3

The Constitution of 1999 strengthened the power of the Executive by extending the presidential
term from 5 to 6 years, providing the possibility of re-election for one more period, and strengthening
the power of the president over the Armed Forces. There was increased centralization with less
autonomy for regional and municipal powers, PDVSA and the Central Bank.
4
The new hydrocarbon law included higher scal taxation and royalty rates, reserved all
medium and light crude upstream development for PDVSA, and allowed the oil-state company to own
at least 51% of all present and future concessions.
Comparative Economic Studies

L Vera
Venezuela 19992014

546

and galvanized support from anti-Chvez factions in the military. On April 11,
the President was forced temporarily to relinquish power though he was
reinstated by the military two days later.
In this environment of political instability, the existing exchange rate
regime (a currency-band) was put to the test as the domestic currency (the
bolivar) came under pressure. Still working in a context of full convertibility
with a xed exchange rate, monetary authorities had to deal with capital ight
and currency overvaluation both driven by an environment of political and
economic instability and by the exchange rate policy.5 Thus, during 2001 and
2002, when the country suffered a serious governability crisis and strong
capital ight, Central Bank authorities decided to defend the currency peg but
without major success.6
Though in year 2002 the Central Bank (in conjunction with the government) decided to adopt an auction system for foreign exchange with exchange
rate exibility and promote an increase in interest rates, the oat collapsed in
December 2002 when the 2-month oil strike crippled the countrys export
sector. By January 2003, it was impossible to regulate auctions and they were
suspended. On 5 February 2003, the external crisis was recognized and
President Hugo Chvez and the Central Bank authorities enacted exchange
controls pegging the bolivar to a high parity with the dollar once again.
Collapse and immediate recovery with rising oil prices and increasing oil
rent control (20042008)
The strike called between late 2002 and early 2003 triggered sharp decreases in
oil production and exports. Moreover, with the introduction of exchange
controls in February 2003, non-oil activities were severely affected; the shortage of foreign exchange had a serious dampening effect on private-sector
domestic production. GDP plunged by 27.6% in the rst quarter of 2003 and
Venezuelas scal position rapidly deteriorated as a consequence of the strong
reduction in oil revenues and the fall in non-oil activities.
As a part of an effort to contain the effects of the crisis, President Chavez
replaced his right-hand man and minister of planning Jorge Giordani with an
economist, Felipe Perez Mart, and named another qualied economist, Tobias
Nobrega, as nance minister. Facing a severe economic downturn the new
5

It is important to point out that the system of frequent small devaluations attached to the
prevailing crawling-band regime was seen by the Chavezs administration, and especially by the
minister Jorge Giordani, as excessively inationary. Indeed, nominal exchange rate stability was seen
as a fundamental nominal anchor against ination.
6
Frenkel (2004) has correctly pointed out, that Latin American countries that in the last 30 years
have focused their exchange rate policy primarily on controlling ination, have created unsustainable
current account and external debt trends that have led to crisis followed by maxi-devaluations.
Comparative Economic Studies

L Vera
Venezuela 19992014

547

economic team decided to avoid the characteristic procyclical bias in public

nance and introduced a sizeable increase in public spending. Financing the
scal expansion was not a major problem since the exchange controls provided
the needed domestic liquidity funds to issue and place further public debt, and
to nance the growing scal gap.7 Further contributions came from revenues
obtained by the Central Bank that were transferred to the public accounts.
But the scal expansion was not sufcient to offset the output effects caused
by the import compression associated with the foreign exchange control. Even
though, the recovery in oil production and exports, together with these
exchange controls, boosted the countrys international reserves from $14 billion
to $21 billion between the beginning and end of 2003. Import compression
operating largely through adverse effects on the supply side was a critical factor
underlying the slide into deep recession. As a result, the government found itself
in a new dilemma. On one hand, it wanted to increase public expenditure in
order to ght the economic downturn and on the other hand, it attempted to
engineer a higher trade balance surplus by restricting the supply of imported
inputs. Given the supply side difculties associated with import restrictions to
redress the external sector problems, it is natural to ask whether other policies
would have offered more favorable macroeconomic tradeoffs.
After 4 years in power which included endemic political confrontations
with opposition groups, a thwarted coup dtat, a series of strikes, a severe
external sector collapse and an economic downturn, Chvez faced a decline in
his popularity that posed a threat to his stay in power. In May 2003, the major
opposition groups agreed to pursue their goal of removing Chavez through a
recall referendum. However, when the referendum took place in August 2004,
President Chvezs supporters defeated his recall with a 59% vote. Thus,
though the presidents approval ratings were low in July 2003, popularity
steadily increased from 31 % to 56 % in 1 year (McCoy, 2006).
Three major factors explain Chavezs recovery to win the recall referendum in 2004: the sudden recovery of world oil prices, Chavezs control over
the oil rent, and the emergence and crucial political impact of his new and
personally controlled distributive programs.8
Control of the oil industry along with the windfall because of price
increases, gave Chavezs administration more leverage over funds as well as
additional resources to introduce new social policy innovations. The innovations were a wide set of publicly funded social development programs the
7

In addition, given the impossibility of investing in the foreign exchange market and the
sluggishness of credit operations, banking institutions invested quite heavily in government
securities.
8
As a matter of fact, the economy began to recover as the world price of petroleum climbed from
US$29 per barrel in August 2003 to US$41 per barrel in August 2004.
Comparative Economic Studies

L Vera
Venezuela 19992014

548
Table 3: The Great Recovery Main Economic Indicators (20042008)
2004

Average Oil Price (US$ /bl)

GDP Growth (%)
Per capita GDP Growth (%)
Growth of Imports (%)
Aggregate Demand Growth (%)
Central Government Spending
(% of GDP)
Extra-Budgetary Spending
(percentage of GDP)
Total Government Spending
(percentage of GDP)
Poverty Rate (%)
CPI Ination (%)
Current Account Balance
(Millions of US$)
Net Financial Transfers from abroad
Effective Real Exchange Rate
(Index 2000 = 100)

2005

2006

2007

2008

Five-Year
Average

33.1
18.3
16.2
57.7
24.8
25.8

46.0
10.3
8.4
35.2
15.5
25.8

56.5
9.9
9.3
34.8
16.0
29.8

64.6
8.8
6.1
33.0
15.6
25.6

86.8
5.8
3.2
1.4
4.0
25.7

57.4
10.6
8.7
32.4
15.2
26.5

3.9

4.3

9.2

7.9

8.1

6.7

29.7

30.2

39.0

33.5

33.8

33.2

45.4
37.1
30.2
28.5
27.6
19.2
14.4
17.0
22.5
31.9
15,519.0 25,447.0 26,462.0 18,063.0 37,392.0

33.8
21.0
24,576.6

(17,037) (22,225) (22,603) (20,155) (24,408)

139.0
142.2
132.5
118.7
96.8

21,285.6

Source: Venezuelan Central Bank, National Institute of Statistics, Ministry of Finance and ECLAC

Missions that were characterized by a pattern of institutional bypassing and

thus not subject to supervision or control by the central government. The
programs attended to the basic needs of low-income individuals and families in
terms of nutrition, health and education and required extra-budgetary
resources to fund their expansion.
Daguerre (2011) points out that what really represented a break from
previous administrations was the amount of money devoted to social spending
and the new programs. Social spending as a proportion of the GDP increased
from 8.8% in 1990/1991 to 11.7% in 2004/2005 (ECLAC, 2007). For Penfold
(2007), total public spending for the Missions already represented 6% of the
GDP in 2006. As Table 3 suggests most social spending was executed through
extra-budgetary mechanisms. Starting in 2004 extra-budgetary spending (as a
proportion of GDP) went from 3.8% to 9.2% of total GDP in 2006. While
historically the executive has always had a fair amount of leeway in determining the use of oil rent, the sheer magnitude of resources that did not pass (and
currently do not pass) through any budgetary process was unprecedented.
This was achieved by (i) redirecting part of the oil taxes to the off budget
development fund, FONDEN, created in 2005 and directly controlled by the
president, and (ii) bypassing the traditional budgetary mechanisms and using
PDVSA as an extra-budgetary fund to manage several of the governments
social programs and other expenses.
Comparative Economic Studies

L Vera
Venezuela 19992014

549

The success of the redistributive programs and the recovery years of the
Chvez administration were very much supported by the spectacular rise in oil
prices. Macroeconomic performance was thus inuenced by the increase in
government oil revenues, which served to nance increased government
spending. As also shown in Table 3, oil prices (and exports revenues) almost
triple in 5 years and from 2004 on the economy began to make steady progress.
Venezuela real per capita GDP growth, that between 1999 and 2003 was far
from satisfactory and volatile, jumped in the period 20042008 to an average
rate of about 8% a year, characterizing one of the best growth performances in
the world at the time and also in the countrys modern economic history. As
the economy began to grow rapidly and social programs started to have a full
impact, poverty was sharply reduced.
The commodity boom and the increasing State control of the oil rent
became no doubt the cornerstone of the Chvez regime after his victory in the
recall referendum. In January 2005, Chavez announced a new phase of
the Bolivarian revolution, a call to build 21st century socialism.9 Further, he
decisively won a second 6-year term on 3 December 2006. Though the idea of
21st century socialism remains undened as yet, Venezuela has in recent years
been applying a model that accentuates the role of the State in the economy.
The model moves beyond market mechanisms for regulating production and
distribution of many goods and services, breaks away from the old institutions
of governance of Venezuelas oil ows and replaces them with a wide range of
discretionary powers. In terms of the new role that the State was supposed to
play, a strategy for changing the ownership and control over the means of
production was rapidly developed. It was based on the expropriation of
strategic industries (such as iron, steel, energy, transport, communications,
agribusiness industries, insurance, banking, supermarkets, shopping malls,
and even hotels) and also idle factories in the private sector.10
With Jorge Giordani back as a minister of planning, the oil boom and the
progressive restoration of the huge current account surpluses, well-known
incentives to peg the currency exchange above its fundamental value
returned.11 Real exchange rate appreciation along with the substantial expansion of aggregated demand resulted in steep increase of imports. Thus, while
9

Chavez made this announcement at the January 2005 World Social Forum in Porto Alegre.
The most prominent examples of expropriations include the 2007 takeover of telecom
company CANTV and electricity company EDC.
11
Del Bufalo (2005) points out that in an oil-led development model since oil exports are not
sensitive to the variations in the exchange rate, a xed parity covering a moderate real appreciation
was thought to be benecial for the import of capital goods and an efcient way to protect personal
real income. Moreover, Garcia Larralde (2001) has advanced the thesis that currency overvaluation in
Venezuela is very often sustained by oil booms.
10

Comparative Economic Studies

L Vera
Venezuela 19992014

550
2000.00

120.00

1800.00
100.00

Basis Points

1600.00
1400.00

80.00

1200.00
1000.00

60.00

800.00
40.00

600.00

EMBI Spred + Venezuela

400.00

Sep-14

Mar-14

Mar-13

Sep-13

Mar-12

Sep-12

Mar-11

Sep-10

Mar-10

Sep-09

Mar-09

Sep-08

Mar-08

Sep-07

Mar-07

Sep-06

Mar-06

Mar-05

Sep-05

Mar-04

Sep-04

0.00

Sep-11

Price of the Venezuelan Oil

Basket

200.00

20.00
0.00

Figure 1: Oil Crude Prices and Country Risk, January 2014 to December 2014 (quarterly data).
Source: Ministry of Energy and Bloomberg

the rate of growth of aggregate demand was substantially above real GDP
growth, the rate of growth imports was systematically above the rate of growth
aggregate demand, at least during the 20042007 period. This divergent
pattern of growth between aggregate demand and imports could have
continued as long as the price oil continued to increase. By the end of 2008,
commodities, and particularly crude oil and derivatives, accounted for more than
92% of Venezuelas exports (Rodriguez et al., 2012).12 Unfortunately, oil prices
suffered a big slide during the second part of 2008 and all policy efforts turned
toward dealing with the thread of an external and scal crisis.
The aftermath of the global crisis (20092010): The anti-Keynesian procyclical adjustment
In the second half of 2008 as the world oil market began to be seriously affected
by the aftermath of the global economic crisis, the price of crude oil began to
fall. In just 6 months the price of crude oil fell 68%. In a period of risk aversion,
international investors began to liquidate Venezuelan nancial assets on a
massive scale. In December, just when the price of oil reached its lowest level,
spreads were at 7 year highs (as shown in Figure 1).
Oil prices gradually started to recover in 2009. However, the average price
of oil in 2009 was $56.93 which was well-below the average in 2008 ($86.81).
With a drop in oil revenues of almost 40% in 2009, the surplus in the current
account disappeared. Unfortunately, the decline in oil exports proceeds could
12

Corrales and Penfold (2011) argue that a state that depends so heavily on one sector faces
diminished incentives to stimulate the growth of other sectors when the main sector is booming.
Comparative Economic Studies

L Vera
Venezuela 19992014

551
250
200
150
100
50

III09

I09

III08

I08

III07

I07

III06

I06

III05

I05

Figure 2: Daily Average of government allocations of foreign exchange for imports and payments
(millions of US$) January 2005 to December 2009.
Source: CADIVI and Own Calculations

not be offset by higher non-oil revenues. The value of non-oil exports fell as a
result of the marked currency overvaluation, Venezuelas exit from the Andean
Community of Nations, and the fall in other mineral and commodity prices.
Venezuela had accumulated a comfortable level of reserves that reached
an historical peak of $ 42.299 billion at the end of 2008. Venezuela also had a
low level of public debt (and, most importantly, low foreign public debt) when
oil prices began to fall, and could have borrowed and spent as much as
necessary in order to keep the economy growing. Moreover, the combination
of a high level of international reserves and exchange controls seemed to be
deterrent enough to prevent an orthodox adjustment.
However, instead of using exchange rate exibility as a shock absorber,
Venezuelas authorities maintained the xed parity and reduced the allocation
of foreign exchange for imports and payments (see Figure 2). This clearly
promoted a further appreciation of the real exchange rate. In 2009, overall
imports (including the public sector) were reduced about 22% from the level
recorded in 2008. As nearly 77% of goods imports in Venezuela are intermediate inputs and capital goods, the discretionary reduction in the allocation
of foreign exchange introduced a supply-side constraint that had a negative
impact on production.
Beyond this initial reaction to the crisis, on 22 March 2009, almost
9 months after starting the collapse of oil prices, the Executive announced a
set of scal measures. The budget assumed that the price of oil for 2009 would
be $40 per barrel13 and the government also announced a 6.7% cut in nominal
13

The National Budget approved only 5 months before estimated an average oil price of US$/bl.

60.
Comparative Economic Studies

L Vera
Venezuela 19992014

552

government expenditure for 2009 and an increase of 3 points in the rate of the
Value Added Tax to bring it to 12%. To cover the scal gap the government
authorized an increase in domestic debt from Bs. 12 billion to Bs. 37 billion.
The measures looked like an effort focused on balancing the public
accounts. This observation is important because it denotes the absence of a
clear determination to act counter-cyclically. This could be because of either
the absence of scal space (a lack of nancing or other resources to stabilize
the cycle) or to a lack of understanding. A well-known propensity to engage in
pro-cyclical scal policy is explained in the case of Venezuela by its extremely
high dependence on oil (Baldani, 2005).
Even during the positive oil shock period the Venezuelan economy did not
fully escape the external constraint since capital outows were prominent in
spite of the exchange controls. Moreover, when oil prices declined in 2009
Venezuela lost 25% of its international reserves. The decision to make an
exchange rate adjustment came late. Forced by the circumstances, in January
2010 the government decided to adjust the exchange rate and established a
two-tier exchange rate system comprising a rate of Bs.F 2.6 (BsF) per dollar for
selected items, chiey food, medicine, educational materials, machinery, and
equipment, and a rate of Bs.F 4.3 per dollar for other imports.
For two consecutive years (2009 and 2010) output fell precipitously and
Venezuela said good-by to the golden year of high growth.
Riding the economic roller coaster (once again)
Venezuelas economy plagued with severe ups and downs, with GDP uctuating wildly between periods of impressive growth and dismal slumps, recovered
some ammunition in 2011 and 2012 as oil prices returned in the rst quarter of
2011 to their pre-crisis level. The recovery in the value of oil exports, coupled
with government measures to increase its share of oil revenue, supported public
spending. But, despite oil averaging $ 100 per barrel in 2011, growth did not
return to precrisis levels. For 2011 and 2012 the economy grew 3.9% and 5.7%
respectively. The economy was boosted above all by the construction, commerce and nancial sectors. Other key sectors such as oil and manufacturing
recorded low growth in 2012 (1.4% and 2.1%, respectively).
An examination of this recovery phase reveals the key role played by the
political cycle. Hugo Chavez was running for an unprecedented third term in
ofce and his political success depended on his ability to maintain the support
of his core base at all costs, a consideration that pointed to generous and heavy
public spending.
With an eye in the presidential elections, very early in 2011 the government began to develop a strategy aimed at accumulating funds. In January
2011, as it tried to boost revenue and narrowed the budget decit, the
Comparative Economic Studies

L Vera
Venezuela 19992014

553
Extra budgetary spending

Ordinary spending

29.8%

28.4%
25.6% 25.7% 26.5%

25.8% 25.8%

26.4%
22.9%

9.2%
3.9%

2004

10.2%
7.9%

8.1%

7.4%

9.4%

7.2%

4.3%

2005

2006

2007

2008

2009

2010

2011

2012

Figure 3: Total Public Spending as a % of GDP.

Source: Data from the Central Bank, PDVSA and the Ministry of Finance

government harmonized the exchange rate at BsF 4.3 per dollar, abolishing the
BsF 2.6 per dollar rate. For operations not eligible for the BsF 4.3 per dollar rate
authorized by Foreign Exchange Administration Board (CADIVI), there was an
alternative swap market mechanism (the so-called SITME) created in 2010.14
The move attempted to ease the scal gap by giving the government more
money in local currency terms for every dollar it earns in oil exports. Exchange
rate policy remained however tied to an adjustable peg system that could not
avoid a continuous overvaluation of the real exchange rate. Moreover, in
October 2011, the 2012 budget was prepared based on a very conservative
assumption regarding oil prices (US$ 50 per barrel). The idea was, once again,
to allow the executive the use of extraordinary resources for discretionary
spending.
To increase the States share of the rent generated by increasing
oil exports, in April 2011 the government established a special levy on windfall
prices in the international hydrocarbons market, specically on exports of oil
and derivatives. Under the decree-law, when oil prices exceeded the price set
in the Budget Act a tax would be levied on the difference between the two
prices. The revenue from this tax would be then channeled into FONDEN. In
essence, the implication was that a spending ow subject to political oversight
within the framework of the budgetary system was changed to one that was
subject to the discretionary power of the executive.
In addition to these policy measures, the Central Bank transferred US$ 3.5
billion in international reserves to FONDEN in 2011; and US$ 10.4 billion more
14

Since 2003, this government agency has been in charge of allocating FX to the private sector
for imports, debt service, remittances, and purchases abroad at the xed ofcial exchange rate.
Comparative Economic Studies

L Vera
Venezuela 19992014

554

in 2012. By the end of the third quarter of 2012, just days before the
presidential election, international reserves reached their lowest in many years
and stood at US$ 25.8 billion.
Thus, the growth needed to consolidate Chavezs revolutionary project
and his election to a third term in ofce was founded on a massive scal
expansion which emphasized housing infrastructure and the social development programs.15 A look at Figure 3 indicates that there was a large shift in
total public spending (budgetary and extra budgetary) during 2011 and 2012.
Monetary policy basically accommodated the scal stance.
After the government ramped up spending in 2012 ahead of Octobers
presidential election, the economy was left with worrisome imbalances and a
severe external constraint. Ofcial data reporting current account surpluses
appeared inconsistent with independent estimates of the value of oil exports,
the dramatic decline in international reserves and the sudden and drastic
rationing of foreign exchange allocations to the private sector that started in
the second part of 2012. The dollar shortage became the dominant feature of
Venezuelas economy which would generate a contraction in output and
higher ination.16
President Chvez passed away in March 2013 and several weeks later,
after a brief but nasty presidential campaign, the new elected President,
Nicolas Maduro, had to face the crisis in the countrys main external accounts.
The most debilitating problem for the non-oil sector of the economy was an
inadequate supply of foreign exchange. The countrys which was last in
recession from 20092010, reported a new output contraction in the rst
quarter of 2014 even before the most recent and catastrophic decline in oil
prices. The lack of foreign exchange resulted also in chronic domestic
shortages that, along with monetary disorder and expectations of exchange
rate realignments, have been a major contributor to the countrys current high
and accelerating ination rate. The Venezuelan economy, which showed a
year-on-year ination of 21% in December 2012, has seen uninterrupted
increases in the ination rate, reaching 68.5% in December 2014.
On the domestic side of the spectrum, Maduros policies drove the
economy with one foot on the gas, and the other on the brakes since the
15

In the run-up to the presidential election, President Chavez made low-income and social
housing a priority, launching a plan to build three million homes by 2018. During the rst quarter of
2012, the construction sector expanded by a whopping 29.9% compared with the same three months
of 2011. Chavez stepped up house-building in the run-up to the election.
16
On the question of why government authorities have systematically preferred a quantitative
adjustment of imports to exchange rate devaluation, it would be convenient to point out that
devaluation is perceived as a policy that penalizes everybody, while the rationing system of imports
established certain priorities and preferences.
Comparative Economic Studies

L Vera
Venezuela 19992014

555

government launched all kinds of initiatives to stimulate demand

while braking hard on supply. Moreover, the governments unorthodox antiination policies, such as price controls and the Law on Fair Costs and Prices
would only compound the problem, by encouraging domestic rms and
foreign investors to cut production and investment and promoting further
increases of prices in many sectors of the economy. 17
During 2013 and 2014 as ination accelerated the overvaluation of the
currency got worse. Expectations of a sizeable devaluation started to develop
and further pressures on the parallel exchange rate market signaled more acute
shortages of hard currency and of intermediate and nal goods. Thus, the
external constraint set in motion a cumulative process of price ination and
further foreign exchange shortages.
It does not take much of a leap of faith to infer that the poor state of the
economy was the most pressing of the problems facing President Nicolas
Maduro. The Maduro governments inability to ght price and exchange rate
distortions and to halt the ongoing increase in corruption, smuggling and
speculation as well as the rapid increase the open-market parallel exchange
rate has generated severe criticism from all sides of the political spectrum.
More worrisome, and indicative of growing difculties is the fact that a nearly
50% drop in the price of crude since mid-June 2014 has made the foreign
exchange constraint worse and has left Venezuelas nances in shambles.

THE CHALLENGES FOR THE CENTRAL BANK: MONETARY AND EXCHANGE

RATE POLICY
The involvement of the Central Bank in the managing the macroeconomic
and institutional challenges facing Venezuela calls for serious assessment.
Venezuelas Central Bank is a relatively young institution. It was established in
the 1930s as were most central banks in Latin America. Like other central
banks in the region its legislation was extensively amended in the 1990s to
make it more independent from the executive branch. This reform provided
strengthened the institution in several ways: a clear mandate was dened
placing priority on maintaining the value of the legal currency; the institution
was given certain political independence to design monetary policy; the
members of the Board of Directors were appointed and conrmed by the
17

The Decree with status of Law on Fair Costs and Prices was published in July 2011 and went
into effect 90 business days later. Though wide prices controls had existed since 2003, the objective of
this Law was to establish a National Superintendence that would establish the standards for the
National Registry of Prices of Goods and Services, and would have overall responsibility to regulate,
supervise, control, and monitor prices.
Comparative Economic Studies

L Vera
Venezuela 19992014

556

executive branch but also by the legislative branch; and the institution was
granted operational autonomy to execute monetary policy. But provisions
contained in the central bank legislation and the relevant parts of national
constitution have never measured the central banks effective independence in
Venezuela. One thing is to grant de jure independence and another different
thing is to perform de facto independence. The difference between de jure and
de facto independence is relevant, particularly in countries where institutions
are weak and changing, as the recent case of Venezuela seems to suggest.
Between 1999 and the early 2003 when full currency convertibility was
still in place, one of the most important pressures that monetary authorities
had to face was capital ight. While the management of foreign exchange
reserves was at that time still under the full responsibility and control of the
Central Bank of Venezuela, the responsibility of managing the foreign
exchange market resided both at the Central Bank and the executive thorough
a so-called exchange agreement. Therefore, while the executive imposed and
kept a erce attachment to nominal exchange rate stability, the Central Bank
had to deal with pressures on the external accounts by drawing on international reserves and using interest rates. Since 2003 when the exchange control
measures were imposed along with interest rate controls and a currency peg,
the Central bank has responded to balance of payments pressures with similar
quantitative adjustments through import compression and monetary targeting.
So long as ination was persistent (at a double digit level) and the nominal
exchange rate remained xed, Venezuelas currency became increasingly
overvalued no matter whether the system was of free or restricted convertibility. Figure 4 shows the real effective exchange rate appreciation between
1996 and 2001 which was followed in early 2002 with the decision to
devaluate. Evidence collected by Campos et al. (2006), using the rate-of-return
band test developed by Svensson (1991), shows that estimated expectations of
devaluation started to increase and became signicantly different from zero
just at the end of 2001. This seems to suggest, in line with previous empirical
results reported by Cuddington (1986), that the increasing probability of
devaluation may have been a major determinant of capital ight.
As the bolivar came under pressure during the whole year 2001, the
viability of the band began to look fragile. The Central Bank then had to defend
the exchange rate by drawing on international reserves and raising interest
rates as a reaction to the capital ight. As shown in Figure 5, the interest rate in
the market for loans increased about 100% during the last three quarters
before the rst currency crisis of the Chvez administration and the introduction of the free oat. Unfortunately this kind of monetary restriction proved to
be mostly inappropriate for the problem at hand. Concerns about currency and
default risks played a major role in the portfolio decisions of foreign investors
Comparative Economic Studies

L Vera
Venezuela 19992014

557
160.00
140.00
120.00
100.00
80.00
60.00
40.00

January-13

January-12

January-11

January-10

January-09

January-08

January-07

January-06

January-05

January-04

January-03

January-02

January-01

January-00

January-99

January-98

January-97

January-96

0.00

January-95

20.00

Figure 4: Index of the Real Effective Exchange Rate (2005 = 100) (January 1995December 2013).
Source: ECLAC, Cepalstat

60
50
40
30
20

Oct-14

Mar-14

Aug-13

Jan-13

Jun-12

Nov-11

Apr-11

Feb-10

Sep-10

Jul-09

Dec-08

Oct-07

May-08

Mar-07

Jan-06

Aug-06

Jun-05

Nov-04

Apr-04

Feb-03

Sep-03

Jul-02

Dec-01

May-01

Oct-00

Mar-00

Jan-99

Aug-99

10

Figure 5: Lending Rate (annualized %), January 1999December 2014.

Source: Data from the Central Bank

and domestic residents, and in that sense the policies that had the largest
chance of stemming capital ight were those that decrease the risks associated
with holding domestic assets.
Comparative Economic Studies

L Vera
Venezuela 19992014

558

Neither the exchange rate peg nor the monetary tightening (through an
increase in interest rates) was an effective intermediate operating targets to
restrict ination and stop capital ight. In a broad sense these policies were
unsuccessful. The late implementation of a oating system in 2002 did not
work either since the very low level of international reserves, heavy capital
outows and the work stoppage in the oil sector resulted in a shortage of
foreign exchange, which in turn led the Central Bank, in conjunction with the
government authorities, to trigger a new sharp devaluation and to introduce
strict exchange control measures in the early 2003.
The attempt by the central bank to ensure nominal exchange rate stability
and free convertibility, also conditioned the stance of monetary policy. Facing
upswings of oil surplus ows and subsequent net capital outows, monetary
aggregates, from the point of view of the balance of payments, were pretty
clearly set as a residual. The central bank mandate was to monetize positive
inows in the current account and, in turn, to sterilize huge amounts of net
capital outows. As a consequence, monetary authority was unable to manage
its own balance sheet and inuence monetary aggregates with sufcient
precision. Between 1999 and 2001, following the destabilizing impulse of oil
prices, the little exchange rate exibility built into the system exacerbated the
domestic variation of monetary aggregates. With the upswing in oil prices the
central bank tried to maintain the exchange rate. As a result, it has poor control
over monetary aggregates and ination persistence; monetary policy used
capital ight as the alternative to depreciation. Somehow and ironically, capital
ights became then the mechanism to sterilize excess money and to maintain
ination under control.
Since January 2003, an exchange control regime has restricted the sale and
purchase of foreign currency; it has remained in place for more than a decade
with several modications. Though the central bank participates in the design of
the currency exchange, the administration of currency control has always been
under an exchange control authority (CADIVI or CENCOEX). Thus, in order to
honor payments in foreign currency, every entity in Venezuela must gain the
previous approval of this government authority. The exchange rate for all
operations is at an ofcial pegged nominal rate, but eventually the government
makes a modest concession to economic reality and devalues the currency when
the real appreciation induced by chronic ination is no longer sustainable. The
resulting pattern of prolonged exchange rate appreciations and sudden realignments can be observed in Figure 4. Noteworthy, the oil boom encouraged
macroeconomic policy and specically an adjustable peg system that made the
country more vulnerable to a turn in the international oil market.
As very often happens with currency exchange controls, the system coexists with an illegal or quasi-illegal parallel market and there are times when
Comparative Economic Studies

L Vera
Venezuela 19992014

559

this parallel market becomes very signicant and dominant. This is precisely
what happens in the extreme and more recent case of Mr Maduros administration, when stronger rationing of currency exchange and the expansive
monetary policy followed by an already captured Central Bank resulted in an
increased in the black market premium.
The Venezuelan experience with prolonged currency exchange controls
suggests that the imposition of these restrictions along with a pegged nominal
rate did not succeed in putting an end to capital outows, nor did they succeed
in halting the deteriorating situation in the countrys degree of international
competitiveness.
As a complement to the regime of currency controls, since 2003 a system of
controlled prices for basic consumption goods and nancial services has
been in place since 2003. With regard to the nancial industry, the
government explicitly stated its preference for the Central Bank to set
maximum rates for lending and minimum rates for deposits. Policies and
regulations also included directed lending to specic sector of the economy,
explicit or implicit caps and oors on interest rates, regulation of crossborder capital movements, tighter connection between government and
banks either explicitly through public ownership or through heavy moral
suasion, high reserve requirements, nancial transaction taxes, and the
placement of signicant amounts of government debt.18 Zarra-Nezhad et al.
(2012) measure nancial repression in a selected group of oil exporting
countries for the period from 1990 to 2009 and nd that nancial repression
in Venezuela was the highest among the selected countries.
To understand the complication to monetary policy in Venezuela as the
introduction of this regime of heavy regulation and control, it is crucially
important to understand how monetary policy operates under conditions of
nancial repression, and, specically, in an environment of domestic interest
rate controls and growing insulation from international nancial markets.
In theory, restrictions on currency convertibility allow governments not
only to peg the nominal exchange rate (as Venezuela effectively did for a time)
but also to use monetary policy for meeting domestic objectives. Thus, in
contrast with the period of free convertibility, monetary aggregates targeting
may become the focus for day-to-day policy operations.
During the oil boom that started in 2004, with so much money pouring into
the country, the Central Bank of Venezuela was forced to monetize amounts
equal to a substantial share of its existing money base. To avoid massive market
pressures and other domestic distortions normally central banks try to sterilize
18

For many years, the government has used foreign exchange restrictions for the purpose of
increasing bank liquidity and closing the nancing gap of the public sector.
Comparative Economic Studies

L Vera
Venezuela 19992014

560

such money creation, and the Central Bank of Venezuela did try to mop it up.
But most measures of money nonetheless continued to increase rapidly, and
there was a real question about the effectiveness of sterilization with highly
liquid instruments that were already a close substitute for money.19 Moreover,
money supply targeting that relies on two essential requirements, a stable
demand for the monetary aggregate, and a supply process readily controllable by
the authorities, did not work well and was called into question (see Vera, 2009).
With respect to the predictability of money demand, the problem was that
exchange rate expectations and institutional uncertainty have chronically
generated signicant amounts of both speculative inows and capital ight
which undermine the ability of the central bank to predict money demand.
This signicant activity in the capital account in Venezuela during a period of
exchange controls is partly explained, as widely believed, by the evasion of
capital controls, by the over- and under-invoicing of exports and imports, and
by a great deal of local corruption. What is more, although much of the traderelated capital inow and outow is still controlled by the central bank, an
increasing share of capital ows occurs outside the central bank.
On the controllability of the money supply, it is important to note the
decisive inuence that scal policy has on the behavior of the monetary base
as well as the degree of endogeneity of monetary base to the erratic behavior
of external oil shocks and capital outows.20 As the discussion in the
previous section suggests during the last 5 years (including the presidency of
Mr Maduro) the behavior of the monetary base has been subordinated to scal
nancing requirements.
To uncover the inuence of the scal stance on monetary policy it may be
convenient to explore the details. In an environment of chronic and accelerating ination as in Venezuela, the Central Government and, in general, public
agencies used to protect themselves against ination through ination
adjusted nominal spending. However, an important portion of ordinary scal
revenues in domestic currency are tied to oil revenues in foreign currency. As
long as international oil prices (and revenues) have remained stable and the
nominal exchange rate has been pegged, this component of scal revenues in
domestic currency has not grown.21 Hence, in the scal realm a situation has
19

The tools used to sterilize inows, mainly short term bills issued by the central bank and
transaction in the repo market, are themselves forms of money, and the more extensively they are
employed, the more liquid they become and hence more money-like.
20
The rst case corresponds to what is known as a scal dominant regime. The endogeneity of
monetary aggregates to the behavior of external shocks ts with what Ocampo (2013) calls a situation
of balance of payments dominance.
21
Of course some form of indexation will appear in other government revenues, but it turns out
to be impossible to make the entire tax collection fully ination proof.
Comparative Economic Studies

L Vera
Venezuela 19992014

561
12

80,000
70,000

10
60,000

PDVSA's Stock of Debt with the

Central Bank

50,000
Money to International Reserves
Ratio

40,000
30,000

20,000

Millions of US$

10,000
2
0

10-Jan
10-Mar
10-May
10-Jul
10-Sep
10-Nov
11-Jan
11-Mar
11-May
11-Jul
11-Sep
11-Nov
12-Jan
12-Mar
12-May
12-Jul
12-Sep
12-Nov
13-Jan
13-Mar
13-May
13-Jul
13-Sep
13-Nov
14-Jan
14-Mar

0
-10,000

Figure 6: PDVSAs Money Financing and Broad Money to Foreign Reserves Ratio (January 2010March
2014).
Source: Data from the Central Bank

developed in which government spending increases with ination while

government revenues stagnate. This inconsistency between Venezuelas scal
and exchange rate policies during Maduros administration has weakened
monetary policy.
Now, while the central government lls this gap with higher non-oil taxes
and/or higher government debt, in the case of PDVSA these options are not
available. However, PDVSA was beneted by a new amendment to the law
governing the Central Bank passed by the National Assembly in 2009 that
allowed the Central Bank to purchase bonds issued by PDVSA, thus bridging
PDVSAs decit in domestic currency.
The continuous nancing of PDVSA has been one of the main causes of
the expansion in the monetary base in recent years and has led to a
considerable increase in the amount of money in circulation (liquidity) in the
economy. Moreover, this accumulated stock of liquid resources (whose
counterpart comes as short term debt instruments) is highly correlated with
the ratio of M2 to international reserves. Figure 6 shows, using monthly data,
the recent pattern followed by both the accumulated stock of PDVSAs money
nancing from the Central Bank and the index of broad money to international
reserves. Since 2010, both variables have followed a rapid increase and nearly
parallel courses, which might indicate that PDVSAs money nancing has been
inuencing the capabilities of the Central Bank to back the liabilities of the
banking system. Of course, more liquidity chasing the same restricted volume
Comparative Economic Studies

L Vera
Venezuela 19992014

562

of output, and chasing the same amount of dollars, has an impact on both
ination and exchange rate depreciation dynamics.

THE SEEDS OF BAD OIL RESOURCES GOVERNANCE

Together with the expanded network of State-run companies, controls,
and regulations, the oil windfall facilitated and precipitated several long-lasting
and critical reforms in oil governance structures, particularly around the rules
and institutions that shape the exercise of power and interactions between
intra-government institutions and between citizens and decision makers. Most
of these changes were not an ideal for good oil governance, were sown in good
times, and would promote several devastating effects later on, eliminating any
hope of immediate stabilization that could push the economy on to a more
balanced growth path.
PDVSAs new administrative governance and changes in the government
budget making process
After the recovery of PDVSAs full control in 2003 President Chavez adopted a
centralized model of administrative governance in order to better control the
management of hydrocarbon activities. In this model there was no division
between Chavezs political representation, the regulatory state bureaucracy,
and the operational business activity of PDVSA. Chavezs primary focus was
on achieving the rent from the offshore sector to maintain and strengthen his
political project and the extent of the social development programs.
But much of the enthusiasm generated around the recovery of PDVSAs
control gradually declined as the government/state-owned company alliance
established itself as an impenetrable monolithic power. PDVSA was soon to
generate so much income and accumulate so much power that it could act as a
Ministry of Finance for the whole country. PDVSA became a development
agency and the company was used to nance social development programs,
food imports, infrastructural programs and presumably electoral campaigns,
including two presidential campaigns. Between 2006 and 2013 contributions to
FONDEN from PDVSA averaged $7.5 billion per year which represented about
10% of the total oil bill.22
The budget making process was not exempted from this overall institutional deterioration. The National Assembly, controlled by a government
22

The company was also used to underwrite the governments foreign policy initiatives and
under the aegis of its Petrocaribe program, Venezuela sells or barters oil to Caribbean, Central and
South American countries offering subsidized nance.
Comparative Economic Studies

L Vera
Venezuela 19992014

563

alliance, for years has passed the executives proposed budget without any
major changes to the agrantly biased assumptions regarding oil prices,
production, and expected income. Thus, during the oil boom, systematic
underestimation of the crude oil price has allowed the executive to retain
and use extraordinary resources for discretionary and extrabudgetary
spending, leaving only a small share of the oil rents subject to political
oversight within the framework of the budgetary system. This centralized and
authoritarian order of control has facilitated the direction of neo-patrimonial
practices toward pro-poor outcomes, but it has come at a price. Obscure
networks based on clientelism developed along with a system that devours
resources and wants to extend its jurisdiction without minimum public nance
controls.
The new structures of oil governance knock on the door of the central bank
The period between 2003 and 2008 saw also a number of signicant reforms that
involved the Central Bank. In July 2005 Venezuelas National Assembly passed a
reform of the countrys Central Bank charter. Basic questions concerning the
explicit contract between the Central Bank and PDVSA on the surrender of
foreign exchange proceeds, and concerning the adequate amount of international
reserves were particularly pressing.
The reform changed the balance of power between these two public
institutions (the Central Bank and PDVSA). Indeed, the old rule or obligation
imposed on PDVSA and the oil industry to surrender and sell their foreign
exchange proceeds to the Central Bank was lifted. Of course, this gave PDVSA
more exibility in meeting legitimate external payments and in transferring
foreign exchange resources to government funds and other public requirements. But this regulatory change severely affected and undermined the
capabilities of the central bank to response to exchange market pressures and
to effectively manage its holdings of international reserves. It seems convenient to remark that a major drawback for central banks in oil dependent
economies is that their main source of foreign exchange comes from the
surrender requirement on oil exports. As illustrated in Figure 7, the foreign
exchange inows reported by the Central Bank as a percentage of the oil bill (in
quarterly terms) fell to 49.9% for the period after the charter reform (it was
close 70% before the reform).
The Reform Act of the countrys Central Bank passed by the National
Assembly in 2005 also introduced the concept of optimal level of reserves and
served to create FONDEN. Thus, under a specic provision the Central Bank was
obliged to divert excess reserves into this new investment fund. In 2005, the
Central Bank delivered $6 billion to this special fund ahead of elections in
December when Hugo Chvez was expected to be re-elected. Between 2005 and
Comparative Economic Studies

L Vera
Venezuela 19992014

564
1.2
1
0.8
0.6
0.4

III

2013 I

III

III

2012 I

III

2011 I

III

2010 I

III

2009 I

III

2008 I

III

2007 I

III

2006 I

III

2005 I

2004 I

III

III

2003 I

III

2002 I

III

2001 I

III

2000 I

1999 I

0.2

Figure 7: Foreign Exchange Inows reported by the Central Bank as a percentage of the Oil Bill,
January 1999October 2013.
Source: Data from the Central Bank of Venezuela and own calculations del BCV

20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0

2005

2006

2007

2008
BCV

2009

2010

2011

2012

2013

PDVSA

Figure 8: Central Banks and PDVSA transfers to FONDEN, 20052013 (millions of US$).
Source: PDVSA Financial reports, and data from the Central Bank

2013, the Central Bank handed over part of its international reserves beyond a
pre-determined optimum level and transferred $53.5 billion to FONDEN.
Figure 8 displays the Central Banks and PDVSA transfers to the fund over
a period of 9 year between 2005 and 2013. The transfers amounted $115
billion. This money funneled through FONDEN has been ultimately spent by
government agencies, but it doesnt require congressional approval. Instead,
FONDEN outlays often begin with the Presidents approval and are viewed by
a board of directors made up of his closest allies. In practice, the political
Comparative Economic Studies

L Vera
Venezuela 19992014

565
35000
30000

Millions of US$

25000
20000
15000
10000

Aug-14

Oct-13

Mar-14

Dec-12

May-13

Jul-12

Feb-12

Apr-11

Sep-11

Nov-10

Jun-10

Jan-10

Mar-09

Aug-09

Oct-08

May-08

Jul-07

Dec-07

Feb-07

Apr-06

Sep-06

Jun-05

Nov-05

Jan-05

5000

Figure 9: Operational Level of International Reserves (January 2005November 2014).

Source: Venezuelas Central Bank

process introduced short-run pressures on FONDEN to nancially support a

wide array of bad structured and inefcient projects and even engaged in
activities that violate its own internal rules about which investments it does
and doesnt make.
In shifting the ow of foreign exchange oil proceeds from the Central Bank
to a development fund and slicing the stock of international reserves, the
country was signaling a severe weakening of reserve management practices
including the capacity to intervene in support of the domestic currency. The
systematic and direct transfers of international reserves to FONDEN severely
affected Venezuelas external exposure. Though over time the Central Bank
tried to partly cover these losses with gold revaluations, by the end of the
third quarter of 2012 Venezuela had only $2.4 billion in liquid reserves (see
Figure 9). The risk of a severe external crisis partly generated by these reforms
was not perceived or in any case was dismissed.
As we already pointed out, well-before oil prices started to plunge in mid2014, worrisome trends in external ows and the extremely low level of
international reserves led the government to a sudden and drastic rationing of
foreign exchange allocations. External factors cant be blamed for this sudden
weakening in the countrys external position and the dollar shortage. Policy
mismanagement and institutional weakening are of critical importance. An
appreciating real effective exchange rate (that kept non-oil exports at their
lowest levels and promoted cheap imports in a massive scale) played a part.
External debt servicing over the period 20112013 exerted additional pressure
Comparative Economic Studies

L Vera
Venezuela 19992014

566

on available foreign currency. A rapid growth of governments foreign

purchases (to limit shortages of basic goods) also put further pressures in the
foreign exchange market. But the new rules and institutional design are critical
to explain the disastrous management of Venezuelas oil cash ows and
international reserves.

CONCLUSIONS
The descriptive account and analysis of Venezuelas macroeconomic performance and policy experience during the administration of President Chavez
(19992012) provide a number of interesting lessons. It seems to be clear that a
political project that seeks consolidate long-lasting, non-neutral and radical
reforms cannot fully reconcile a system of free convertibility and a xed
exchange rate with external balance. Beyond the thwarted coup dtat and the
series of strikes that occurred in Venezuela during Chavezs rst years in
government, these political and economic inconsistencies, in essence, explain
the rst collapse of the Venezuelas economy between 2002 and 2003. The
following phase that runs with the commodity boom (between 2004 and 2008),
faced a different exchange rate arrangement (because of the implementation of
the exchange controls system) and in this period there was successful introduction of a brand new system of social development programs. However, the
policy initiatives were plagued by perverse incentives the led the economy to a
very fragile situation. On the hand, the progressive restoration of huge current
account surpluses, generated incentives to peg the currency and to promote a
substantial appreciation of the effective real exchange rate. On the other hand,
the need to buy political legitimacy and the scenario of higher oil revenues were
a catalyst for the expansion of the State, centralized decision making and a new
structure of governance that led to an overall institutional deterioration.
Monetary policy and the Central Bank basic commitments to society were not
immune to these changes. The pro-cyclical nature of scal and monetary policy,
though always present in the macro-policy design of the revolutionary government, was very prominent during the global crisis in 2009 and 2010. Moreover,
currency exchange rationing instead of exchange rate adjustment, was key to
understanding the adjustment to the fall in oil prices. Thus, government
authorities, by cutting scal spending and tightening exchange controls induced
a profound and prolonged recession. The country had a short-lived recovery
during the biennium 20112012 that unraveled very quickly since it was built on
fragile foundations. The foregone oil revenues caused by the severe institutional
weakening and policy mismanagement of oil production and exports had the
equivalent impact of an adverse oil price shock. An impressive currency
Comparative Economic Studies

L Vera
Venezuela 19992014

567

overvaluation and a massive increase in government spending and imports

combined with a rapid suppression of foreign assets led to a severe shortage of
foreign exchange and to several interlinked perverse macroeconomic circles.
The Venezuelan economy is obviously under considerable strain at this
time (February 2015). With ination bordering 70%, the monetary base
growing above 70%, the scarcity of goods, as well as the economy almost
surely slipping into recession this year, it is not difcult to understand that this
mess is nothing more than the result of the accumulation of poor governance,
misguided policies, and induced distortions that have, over the years, led to the
erosion of macroeconomic stability.
Nicols Maduro, strongman Hugo Chavezs handpicked successor, after
more than 2 years into his term, is facing this very complex and challenging
situation and so far has sent few indications that his government is ready to
take the meaningful actions needed to recover Venezuelas macroeconomic
stability and improve its long-term outlook.

Acknowledgements
The author would like to thank Ricardo Ffrench-Davis, Roberto Frenkel, Mario
Damill, Jos Antonio Ocampo, and participants in the workshop on Central
Banking at CEDES in Buenos Aires for comments on an earlier draft. Eduardo
Ortiz Felipe, Marcos Morales and two anonymous referees provided helpful
comments.
REFERENCES
Baldini, A. 2005: Business cycles and scal policy in an oil-dependent economy: The case of Venezuela.
IMF Working Paper no. 05/237, Washington DC.
Campos, M, Torres, J and Villegas, E. 2006: The credibility of the Venezuela crawling-band system.
Revista de Economa del Rosario 9(2): 111123.
Corrales, J and Penfold, M. 2011: Dragons in the tropics: Hugo Chavez and the political economy of
revolution in Venezuela. Brookings Institution Press: Washington DC.
Cuddington, JT. 1986: Capital ight: Issues, estimates and explanations. Princeton Studies in
International Finance (58): 139.
Daguerre, A. 2011: Antipoverty programmes in Venezuela. Journal of Social Policy 40(4): 835852.
Del Bufalo, E. 2005: Venezuela: From stability to turmoil. In: Solimano, A. (ed). Political Crises, Social
Conict and Economic Development. Edward Elgar: Cheltenham, UK.
ECLAC. 2007: Social panorama for Latin America. United Nations publication: Santiago de Chile.
Frenkel, R. 2004: Real exchange rate and employment in Argentina, Brazil, Chile and Mexico. Paper
prepared for the G24, CEDES, Buenos Aires.
Garcia Larralde, H. 2001: Desarrollo Industrial y Tipo de Cambio Real: El caso venezolano. Revista
Venezolana de Economa y Ciencias Sociales 7(3): 1350.
McCoy, J. 2006: The 2004 Venezuelan recall referendum. Taiwan Journal of Democracy 2(1): 6180.
Ocampo, JA. 2013: Balance of payments dominance: Its implications for macroeconomic policy.
Initiative for Policy Dialogue Working Paper Series, Columbia University, New York.
Comparative Economic Studies

L Vera
Venezuela 19992014

568
Penfold, M. 2007: Clientelism and social funds: Evidence from Chvez Misiones. Latin American
Politics & Society 49(4): 6384.
Rodriguez, PL, Morales, JR and Monaldi, F. 2012: Direct distribution of oil revenues in Venezuela:
A viable alternative? Center for Global Development, Working Paper 306, Washington DC.
Svensson, L. 1991: The simple test of target zone credibility. IMF Staff Papers 38(3): 655665.
Vera, L. 2009: El Control de los Agregados Monetarios: Lecciones y experiencias del caso venezolano
reciente. Economia e Sociedade 18(1): 141181.
Wilpert, G. 2007: Chavezs Venezuela and 21st century socialism. Research in Political Economy 24:
342.
Zarra-Nezhad, M, Parsaeian, S and Anvari, E. 2012: Measuring nancial repression in selected oil
exporting countries. Quarterly Journal of Quantitative Economics 8(4): 119133.

Comparative Economic Studies