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- [00:01]
Liliana Rojas Suarez
Health, education, climate, the United nations, the.
- [00:04]
Danny Bahar
World bank, private actors, locally rooted institutions, locally rooted experts.
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Liliana Rojas Suarez
What we're really talking about is a very complex ecosystem. How do we find the interlinks to.
- [00:15]
Danny Bahar
Innovate and come up with the best.
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Liliana Rojas Suarez
Solutions to actually rethink what we do as a broader development community?
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David Evans
You're listening to the CGD podcast where.
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Liliana Rojas Suarez
We explore smart policies for a better world. Each episode highlights an important development topic hosted by a CGD researcher and featuring experts from around the globe. Tune in to learn how independent research.
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Danny Bahar
Can bring global prosperity.
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David Evans
Welcome to the center for Global Development Podcast. I'm David Evans, director of the Global Education and Child well Being program in here at cgd. Today we're going to speak about Venezuela and its economic future. Since 2013, Venezuela's income per capita has dropped by at least 70% and even more by some estimates. And it has the highest poverty rate in all of Latin America. At the start of 2026, President Nicolas Maduro was removed from power. The country faces huge uncertainty. But one thing is clear. Venezuela is at a turning point. So everyone is asking, what is next for Venezuela's economic future? I have two experts with me here today to help answer that question. Danny Bahar is The director of CGD's Migration and Displacement Program. Danny grew up in Venezuela, earned his first university degree there and has published widely on Venezuelan refugees. Welcome, Danny.
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Danny Bahar
Thanks for having me, Dave.
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David Evans
Liliana Rojas Suarez is The director of CGD's Latin American Initiative and has published extensively on financial crises, especially in Latin America, and the development impact of global financial flows. Welcome, Liliana.
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Liliana Rojas Suarez
Hi Dave. Thank you for having me here.
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David Evans
Thank you for being here. I cannot think of two people I'd rather be discussing this question with. Danny, you grew up in Venezuela. Tell us a little bit about the changes you've seen in Venezuela over the years.
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Danny Bahar
Venezuela is a very sad story of a country that once was one of the wealthiest nations in Latin America and was a magnet of immigration. Venezuela had a lot of people coming from all parts of the world, from Europe, from Spain, from Italy. My own grandparents were Holocaust survivors who actually fled to Venezuela. It was the only country that let them in. And Latin Americans fleeing from dictatorships all over the place. And I'm saying this because that also shows that it was a country that was growing wealthy, very diverse and rich. I always remember this image of the airport in Caracas that has a bunch of planes, including the Air France Concorde. And it's an oil rich country. During the 70s when the world experienced this boom in oil prices. Venezuela became very wealthy due to the high price of oil. That of course, brings a lot of economic issues to think about how to manage that. But from being a wealthy country and a magnet of immigrants, Venezuela became a very poor country, one of the poorest in the region and the source of the largest refugee crisis in the world as of today. So how does this happen in 20, 30 years? So I was growing up in this country that had kind of a lot of inequality in the 80s, but it was still a rich country, a very strong democracy for four years. In 1999, Hugo Chavez gets elected. He's the same person who a few years before was in the military and he tried to overthrow the government, the democratic government, through a coup and failed. But then he actually ran into in elections and won. And since he was in power, a lot of reforms started happening in which very slowly the country lost its democracy. Essentially, a lot of the institutions started to crumble. More and more power was concentrated in the executive. And at the same time, Chavez got elected numerous times. They changed the constitution, et cetera, et cetera. And the first few years of Chavez, where to some extent people will say they were economically good. And the reason of that is that Chavez enjoyed the longest and largest oil boom in the history of Venezuela. The price of oil was very high for a very long time. So, you know, there were some achievements in terms of lowering poverty and lowering inequality. But when the price of oil collapsed in 2014, something that affected everywhere in the world. But in Venezuela in particular, you started to see everything crumbling from the economic perspective, because you had a country that at that point was heavily dependent on imports, because the private sector had so many regulations in terms of price controls and that they just couldn't produce anything locally. And because the price of oil was so high for so many years, they were able to get a lot of money from the exporting and use all that to buy the most basic necessities through importing. But when the price of oil goes down, suddenly you don't have that amount of money to keep consumption going. And that's what you saw. You saw a big collapse of the economy starting in 2014, when Maduro was already president, after Chavez dies. And that starts one of the biggest crisis that we've seen, which converts into a drop of the GDP by according to some estimates, 70, 80% since, which is. It's a huge drop in GDP in a country that didn't have war. It was all man made by bad policies. And then that also resulted in the largest refugee crisis in the world, as we saw. So it's a really sad story.
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David Evans
It really is. It's a dramatic collapse. So the question that I have is how unique this is when we think about the region, when we think about recent economic history. Liliana, you have a lot of experience analyzing economic and financial crises. Do we have examples of other Latin American countries that have faced crises that are similar but that have made it back to a path of economic stability and growth?
- [06:01]
Liliana Rojas Suarez
Indeed, the economic conditions in Venezuela are extremely difficult and the country currently lacks a path towards macroeconomic stabilization and sustained economic growth. Also, I have to qualify that Venezuela's crisis is the worst crisis ever experienced in the region, both in terms of depth and duration. No other crisis in the region has been as prolonged and structurally deep, and so exact comparison with other crisis episodes would not be exactly right. Having said that, however, there are multiple examples around the world, and especially in Latin America, where economic conditions were just disastrous, but still comprehensive economic programs were able to stabilize the economies and promote growth. Also, there are a number of important mistakes that were made during this economic program that could actually help and serve as examples that can be avoided during a planning of an economic program. In Venezuela, perhaps the best examples of effective crisis resolutions are the experiences of countries that were able to deal with the hyperinflation recession episodes during the 80s this last decade in Latin America that included, among others, countries like Brazil, Bolivia, Chile, Mexico and Peru. To Peru. My native country, Peru experienced hyperinflation and deep recessions in the mid-80s. In Peru, GDP declined by about 25% cumulative and poverty rose above 60% and malnutrition and urban hardship really increase significantly. This is less than Venezuela, but is still extremely large. As Venezuela now Peru also defaulted on its external debt and cut relations with the IMF in the late 80s. So a lot of similarities. Right under those very dire conditions, Peru established a comprehensive stabilization Program in 1990. Exactly. That was able to restore the country's access to the international capital market. And as you know, Peru by now is one of the most stable economies in the region. However, this is not to say, of course, that the Caribbean program was perfect. There were problems with the sequencing of liberalization policies with insufficient support for social protection that I don't have time to discuss now. But the bottom line is yes, even under large economic distortions, stabilization and path to economic growth can be restored.
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David Evans
So this is at least somewhat encouraging news. Even though we don't have crises of quite the same depth and duration, we do have a history of crises in the region. And we have some examples where countries have come out and Peru made a fantastic transformation. So before we think about what a program for Venezuela could look like, my question is what conditions would need to be in place in Venezuela for an economic program to even work? Liliana, as we think about Peru or as we think about other countries in the region that have recovered from crises, what do we learn about what needs to be in place?
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Liliana Rojas Suarez
Okay, any progress program needs fresh investment. That's number one. There is no way that economic activity is going to flourish if investment is lacking. Now, given the significant deficit of the public sector, Large public investments are not in the cards in Venezuela. Venezuela needs investment from the private sector, but at the same time there has been a dilapidation of the local private sector. So the country needs foreign direct investment. But if I've learned something from previous and current experiences, is that foreign direct investment doesn't come unless there is sufficient credibility in the institutions. Now, in my view, funds are not going to flow to Venezuela unless it has assurances of the rule of law. Even if the US were going to give guarantees, the question in investor minds would be something like, ok, for how long are these guarantees going to be extended? Are these guarantees credible? So you need to build some basic local institutions. And I do not mean the construction of perfect institutions that would take a long time, just a solid base to ensure investors that contracts are going to be respected and that they will operate under the general rules of a market economy. So from my perspective, there are four independent institutions that need to be independent in place to ensure the credibility of any economic program. The first two is to ensure credibility in democracy, and those are the electoral council and the legislative power. We need legitimacy of elections and that is sought by investors to be sure that political disturbances are not going to be in the way of the functioning of the labor and product markets that has to be there. The third is the independence of the judicial system. And this is to ensure that property rights and contracts will be respected according to the law. And the last one is the independent central bank, which has been demonstrated multiple times that the central bank is the pillar of economic stability in any country because it allows delinking the fiscal from printing money. For successful countries in Latin America, the status of the central bank actually prohibit that institution from finances the government. So with this in place, even if they are not perfect, I think there's a really good chance that a stabilization slash economic growth program can be successful in Venezuela.
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David Evans
So let's imagine that we see advances in these institutions we see a movement towards elections, the independence of the judiciary, the central bank. So when Venezuela seeks to put an actual economic program in place that will bring it out of poverty and in the direction of prosperity, what would that program look like?
- [12:20]
Liliana Rojas Suarez
Any economic program needs two things. Data to correctly estimate funding gaps and money to fund those gaps in the transition to stability. Right now there is not official data for any program. So the reinsertion of Venezuela to the international community, especially the IMF and the World bank, is essential. An IMF Article 4 toward the fiscal and financial accounts with the authority is the baseline that Venezuela needs right now. Whatever the final numbers look like, it is clear that Venezuela will have to adjust its fiscal account and resolve its large external debt problem. Once the financing gaps are identified, it is likely that those same financing gaps are very large and the authorities are going to need resources to meet those needs. In my view, most likely resources from oil exports are not going to be sufficient. And therefore Venezuela will need to engage in an IMF program not only for the financial resources, but also as a signal to investors, local and foreign. I mean, this is for all type of investors that the reforms to correct for major fiscal monetary financial imbalances are going to be in place. As part of an IMF program, I would like to actually see the jewel of Venezuela's 5 billion SDR Special Drawing Rights to be part of the financing pot to support the program. This is funds that are being allocated to all countries that can be used at any time and converted into US dollars. Countries can do that, but in the case of Venezuela, they have been frozen because the Venezuela government is not recognized as legitimate. But I could expect that if the IMF Board of Directors approves the program, these constraints will be lifted. Though it's too early to talk about the specific of an economic program, some of the key components would have to be fiscal consolidation to bring the public accounts to sustainability. And this includes the restructuring of the public oil company, which is PD Beza. Monetary policy reform to avoid monetization of the fiscal deficit, restructuring of the external debt, unification of the exchange rate system, since right now there are multiple exchange rates in the country, lifting price distortions and controls as the government currently has legal authority to cover prices and establishment of funded social programs to minimize the effects of policies and reforms by the most vulnerable populations. So right now there are more questions than answers, Dave, especially on the timing and sequencing of different reforms. There are questions such as should Venezuela dollarize officially, since this already dollarized de facto right. But a sustainable dollarization requires large Accumulation of international reserves. And Venezuela is very far from that. So this is just the beginning of a conversation.
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David Evans
Clearly that's the case. And this is an impressive list of reforms that you mentioned that could be in place to put Venezuela on the right economic path. Now you mentioned, obviously one of the resources that Venezuela has is oil. That said, the last time oil production was as low as it is today was in the 1940s, nearly a century ago. Danny, how much can Venezuela look forward to oil exports for stabilization purposes?
- [15:56]
Danny Bahar
That's a great question, Dave, because Venezuela has a lot of oil. It actually has the largest proven oil reserves in the world. But here's the thing. Oil below ground costs $0. Nobody wants to buy the oil below ground. People want to buy the oil that has already been out to pump your tanks, et cetera. So how do you get that oil out? Well, Venezuela actually was very successful doing that for decades. We mentioned before Perevesa, which is the state owned oil company which has a monopoly of the Venezuelan oil because the Venezuelan oil was nationalized in the 70s. And you know, it was a very strong world renowned company with amazing engineers for many years with R and D centers. Actually my uncle was a PhD physicist who went back to Venezuela to spend his career doing R and D in the oil industry. And then Venezuela, even during Chavez year, this momentum of this very strong company was there. Venezuela was actually producing at some point in its peak, about 3.5 million barrels of oil per day. And that was also part of what explains the wealth that was generated during the Chavez era. But then actually Venezuela today is producing perhaps a third of that. At its lowest point, it actually produced about 300,000, 400,000 barrels per day, which is minimal amount. And over the past few years it has gone up again to 1 million bars per year. You might ask, how does that happen? How do you lose your production capabilities? Well, a bunch of things including lack of maintenance, some mismanagement of the company, the fact that the company, because it's a state owned company, was actually used as a vehicle for corruption. And I think the number of employees of the company exploded during the Chavez era. And it was used for social programs or things of that sort of. And you also have a big exodus of some of the experts and the talent. So the company lost a lot of its abilities. So what does that mean? It means that yeah, Venezuela has a lot of oil under the ground and the big question is like, how do you actually bring it back? I think some of the infrastructure, even though it's not super well maintained, is still there. Sometimes economies, when we think about going up, going up sometimes is faster when it's recovery than when you are kind of quote unquote in the frontier. So if you are so low at 1 million barrels per day compared to where you were 10 years ago, 3 million, maybe with some low hanging fruit, some modest investment, you could go up to maybe one, five, something like that. But to go back to three or three, five or more, that's going to be much more difficult endeavor, which will require, as Lena was saying, a lot of foreign investment. And for that a prerequisite is to have a transition to democracy and to have rule of law and to for investors to know that their long term investments are actually they're going to be able to propy the returns. And that cannot happen under a dictatorship of the sort that we're still seeing. Even though Maduro is not there, the regime, the apparatus is still there. So I think investors want to have the sense to make the big investments that could bring their oil revenues back up significantly. They need to have the certainty that their investments are going to be protected. Without that, there could be a modest increase maybe, but it's definitely, as I agree with Liliana, not nearly enough to be able to repay or to restructure the debt that Venezuela has in a credible way put it back into fiscal sustainability.
- [19:11]
David Evans
Absolutely. And this takes us back to those essential conditions that will need to be in place for any sort of economic program of recovery, that rule of law and trust in institutions. Now something Liliana highlighted earlier is Venezuela's debt and the need to restructure this. Danny, what are your best estimates on Venezuela's sovereign debt right now that's definitely.
- [19:35]
Danny Bahar
A central part of the story is that big elephant in the room. I want to start by mentioning that these are all estimates precisely because Venezuela as a country, the official state institutions, we don't have enough data to understand where things are. And a lot of this debt, it's sovereign debt that was issued by the Republic, some of this debt was issued by the state owned company. So it's kind of like sovereign debt. Some of these debt, it could have happened behind the door with the Chinese government for instance. So we don't really know. But I think the estimate is that Venezuela probably has a debt of north of $150 billion to repay. Now putting that in context, the GDP of Venezuela today, again not something we know exactly, but it's about let's say $50 billion, $40 billion. Also we were talking about the fact that not only the Price of oil went down, but the. The number of oil production also collapsed. Out of that 1 million barrels per day that is being produced, a bunch of it stays in the country for domestic consumption. Some of it gets exported. But doesn't matter how you run the numbers and the scenarios, even with the oil revenues, it's such a big extraordinary debt that that's definitely a binding constraint for future recoveries. Let me, Dave, if I may say just one word or one sentence about how we got there, because the question is, like, you know, how people didn't know this was so catastrophic. And in the case of Venezuela, I always love to teach my students that, that the reason we got to this point is because the government at the time, Chavez and El Maduro, did exactly the opposite of what the Macroeconomics 101 textbook will tell you to do. I'm not a very religious guy, but the Bible has this part in which the pharaoh in Egypt asked Joseph, hey, I had this dream, this weird dream. I saw seven fat cows and then I saw seven thin cows. What does it mean? And Joseph, which was the first macroeconomist in the history of the world, tells me, well, this means that you're going to have seven good years and then you're going to have seven bad years. So why don't you. In the seven good years, you should accumulate some of the extra grain that you have so that in the seven bad years, you can eat some of that grain and then you don't get hungry. Well, that's what economists call countercyclical policies. When you are doing well, you save some of that money. This is a very important thing because a lot of developing countries actually struggle with this. When you're doing well, when you have good years, particularly in countries that export oil, what you should do is to save some of that money, because the price of oil eventually will go down. And then you have some of that money in the bank so that you can continue to consume, continue to do everything you do without causing a shock to the economy. Causing, like the type of shock we saw in Venezuela, which was even hunger, lack of medicines, lack of food. The Venezuelan government at the time, Chavez and El Maduro, they did exactly the opposite. When the price of oil was high, they used all of this money for consumption, not for investment. If that wasn't enough, they actually started borrowing money all over the place at the time that the price of oil was high. And of course, in that circumstances, if you are getting a lot of money, I'll lend you the money. Who cares? You're going to pay me back someday. And when that wasn't enough, they said, let's print money, let's print more money to pay for this. And then that's why you got to inflation. So all these dead things didn't come from the sky. It's a manufactured crisis that now, of course, now the Venezuelan people, hopefully with the transition to democracy, will have to deal with. It's a very serious problem to deal with, but it's also a very big lesson for developing countries, but for all countries in general.
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David Evans
I feel like this is an extreme example of a challenge that a lot of resource rich countries face, which is this temptation to when prices are high on the resource that you're exporting, to just spend it all. So that's wise counsel. Liliana, how does Venezuela get out of this debt disaster?
- [23:19]
Liliana Rojas Suarez
Yeah, debt problem is actually one of the most common problems in deep crisis economies and restructuring. The Venezuela debt is actually the economic variable that has to be handled at the very beginning of any economic program. It's very important to note that Venezuela has a solvency problem. It's not a liquidity problem, it's a solvency problem. Venezuela cannot repay this debt and that warrants large principal haircuts in the negotiation with its creditors. Without those haircuts, it would be extremely hard to regain debt sustainability and growth will not restart.
- [24:00]
David Evans
Liliana, just for those who are unfamiliar, when you say a haircut, I know you don't mean going to the barber. What are you talking about?
- [24:08]
Liliana Rojas Suarez
Yeah, no, what I mean is that creditors need to agree that a significant amount of the principal payment of the debt will be forgotten. They will be cut. That is basically if the debt is 100 and there's a haircut of 50, that means that the debt that has to be serviced now is 50, not 100. Now Venezuela's restructuring is widely described as one of the most complex examples because it involves many areas. First is the defaulted sovereign and pedrezas, the oil company bonds. But there's also bilateral claims, especially with China. Then there is the arbitration awards. Venezuela has been losing in international courts, a number of trials and need to make repayments for that. And there is a number of major sanctions and legal constraints that have to deal with and coordinating creditors for a debt restructuring is is a problem that usually leads to protracted negotiations and huge delays in resolving. This is awful and cannot happen in Venezuela right now. China, for example, may have an incentive to delay negotiations since Chinese benefit from an oral for loan agreement. There is an oral for loan agreement in place. And this doesn't bode well for a successful program because. Because Venezuela's oil needs to be used for many purposes and not just for servicing China's debt. So there's a number of economists now that have started to think about how to deal with this issue, which is very good actually. I recently read an article by Martin Mullisem which is an ex IMF official that have recently argued, and I agree, that the IMF can play the leading role and be a key part of the solution by relying on its lending into official arrears. This means that even though there are not payments being made to bilateral creditors, the IMF can actually extend loans. Before this policy, the IMF was constrained into making these loans if there were disappears in place. So this would allow the IMF to provide fresh resources to Venezuela even if some official bilateral creditors lose. Like China. Do not commit to restructuring. But to lend into areas the IMF requires that preferential treatment to hold out creditors, meaning creditors that do not commit to restructuring is not allowed. That means that China could no longer benefit from the oil for loans deal and that would increase in incentive to participate in the restructuring. I know that this starts getting really complex, but there is a way out and people and economies and institutions are already starting to think about it. So the road ahead is not free of obstacles. But promptly resolving the Venezuela den problem provides an opportunity also for the IMF to improve its credibility with emerging markets and developing countries. Right now there are many issues of the IMF credibility with this group of countries of prompt solving the Venezuela there to benefit not only Venezuela, but the imf.
- [27:22]
David Evans
Thank you so much, Liliana. And again, as we talked about the economic recovery plan, there is at least some room for optimism here. So I have a last question for both of you. If you could wave a magic wand and you could see Venezuela put one policy in place to help along this path out of poverty and toward prosperity, what would that policy be, Danny?
- [27:51]
Danny Bahar
Free unfair elections? That would be my only answer. We are now in a situation which the economics will have to wait for the political solution. The regime that was in charge of the collapse of the country through mismanagement is still in charge, even though as we speak right now things are evolving very fast. Right now they are cooperating with the US in making some of the steps to revert course. But I think the one step that we're less talking about, but it's the most important one, is that this regime will either respect the elections result of July 2024 in which the opposition candidate won by a landslide. But they did not recognize or call for new and really free and fair elections in which they will allow any Venezuelan who wants to run for office to run for office differently than what they've done before of banning people in which they will, most importantly, make sure to respect the will of the people, because that's the best technology we have, democracy to make sure that people's preferences are reflected in their institutions. And the people's preference today is that they want a Venezuela that is prosperous. The model that this current regime brought is not a model that worked for Venezuela. And they want a recovery. And for that, as we were saying, we need rule of law, we need institutional reform to bring investment, to bring prosperity. But first we need a government that represents the will of the people. And for that we need free and fair elections.
- [29:16]
David Evans
Thank you, Danny.
- [29:18]
Liliana Rojas Suarez
Liliana, I definitely, totally agree with Danny, but I would like to add the reincorporation of Venezuela to the imf. The country needs the resources and advice of the institution to put in place the policies and reform that has been needed for a very long time. I've already talked about what the IMF can do, so that could be my wish of a policy to be put in play.
- [29:46]
David Evans
What we see here is that Venezuela is at a turning point. It is in dire circumstances, but there are paths forward on these major economic challenges, but that institutions are fundamental to being able to put those solutions into place. Thank you so much, Liliana. Thank you so much, Danny. And thank you to all of you listeners for joining us today on the center for Global Development podcast.
- [30:21]
Liliana Rojas Suarez
Thanks for listening to the CGD podcast. You can learn more about the topics discussed on our website at cgdev.org@cgdev.org See you next time.
- [30:39]
Danny Bahar
Sam.