Venezuela: A textbook case of a resource-rich country?

1
"Venezuela A textbook case of a resource-rich
country?"

• Osmel Manzano (UCAB and IADB)
• Natural Resource Booms, Macroeconomic Management
  and Civil Conflict in Latin America
• Tenth Annual Global Development Conference
  'Natural Resources and Development
• Kuwait, 2009

2
Stylized facts

• Venezuela is a classic example of a resource-rich
  economy

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Oil is the main source of foreign currency
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mayor source of fiscal income
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and an important part of the economy
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Stylized facts

• Venezuela is a classic example of a resource-rich
  economy
• Oil is the biggest exporter, fiscal contributor
  and economic activity.

7
Venezuela represents 7 of the Worlds oil
reserves
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Venezuela was, has been and is abundant in oil
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In fact, Venezuela is among the top 10 in
abundance
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Stylized facts

• Venezuela is a classic example of a resource-rich
  economy
• Oil is the biggest exporter, fiscal contributor
  and economic activity.
• In the world context, Venezuela is abundant in
  oil
• Has it behaved as one?

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Fiscal Performance

• Fiscal expenditure has followed oil exports

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Fiscal outcome followed oil exports
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Fiscal Performance

• Fiscal expenditure has followed oil exports
• As well as GDP

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Collapse of Oil Exports and GDP
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Fiscal Performance

• Fiscal expenditure has followed oil exports
• As well as GDP
• There is formal evidence

16
Response to price shocks

• Fiscal
• Videgaray (1998)
• Panel of Countries
• Elasticity of fiscal exp. to oil exports
• Total Panel symmetric 0.183
• Total Panel asymmetric 0.200 (up) 0.123 (down)
• Venezuela symmetric 0.185
• Venezuela symmetric 0.273 (up) and 0.094 (down)

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Response to price shocks

• Fiscal
• Bozzari and Ricon (2002)
• Time series of Venezuela
• Same results
• Capital expenditures have higher elasticity
• Cycles
• Mendez (2007)
• VARs
• Oil shocks explain 32 of GDP fluctuations and
  last 8 years

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Fiscal Performance

• Fiscal expenditure has followed oil exports
• As well as GDP
• There is formal evidence
• Venezuela has misbehaved as the typical
  resource-rich economy IN THE FLOWS

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Flows vs. stock

• Venezuela has not leveraged its reserves

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Reserves and Debt
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Reserves and Debt
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Flows vs. stock

• Venezuela has not leveraged its reserves
• Different behavior than other countries

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Venezuela seems to behave different
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Venezuela seems to behave different
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All were experiencing higher reserves
?
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Flows vs. stock

• Venezuela has not leveraged its reserves
• Different behavior than other countries
• Venezuela has one of the lowest extraction rates

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Among the bottom 10 extractors
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Flows vs. stock

• Venezuela has not leveraged its reserves
• Different behavior than other countries
• Venezuela has one of the lowest extraction rates
• There is evidence of this behavior.

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Stock and fiscal performance

• Videgaray (1998) For a sample of oil countries,
  Venezuelan flow elasticity is around 80 that of
  the other countries. Stock elasticity 32
• Fernandez, Gomez and Manzano (2001) No impact of
  an heritage fund on future generations fiscal
  accounts

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Flows vs. stock

• Venezuela has not leveraged its reserves
• Different behavior than other countries
• Venezuela has one of the lowest extraction rates
• There is evidence of this behavior.
• Venezuela is saving under the ground (and
  abroad ? )

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Saving under the ground

• Inefficient Bad balance sheet management
• Can we explain why?
• Preservation Principle (Juan Perez A.)
• Institutions?

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Institutions

• Hausmann (2003) Growth collapse due to poor
  conflict management institutions.
• Fernandez, Gomez and Manzano (2006) Future
  generations might not benefit for an optimal
  extraction path.

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Generational accounts
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Institutions

• Manzano and Monaldi (2009) Expropriation cycles
  in the oil sector are due to poor tax rules and
  lack of conflict resolution institutions.
• Manzano (2009) Oil policy does not always follow
  fundamentals

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Extraction path
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Extraction path
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Saving under the ground

• Inefficient Bad balance sheet management
• Can we explain why?
• Preservation Principle (Juan Perez A.)
• Institutions?
• Could it be that Venezuelans do not want to sell
  the crowns jewels because of poor institutions?
• What about the 1999 Constitution?
• What about allocation of new oil fields after
  1999?

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Areas given to IOCs and NOCs
Time Time
Before 1998 After 1998
Type of field Old fields -Auction of 34 operational contracts
Type of field New - Auction of 4 Heavy oil JV -Auction of 8 JV for exploration (only 3 viable) 12 Heavy oil govt to govt JV Auction (2009) of 4 Heavy Oil JV
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Saving under the ground

• Inefficient Bad balance sheet management
• Can we explain why?
• Preservation Principle (Juan Perez A.)
• Institutions?
• Could it be that Venezuelans will not sell the
  crowns jewels because poor institutions?
• What about the 1999 Constitution?
• What about allocation of new oil fields after
  1999?
• What about surveys that find that Venezuelans
  have higher preferences for the State than the
  market?
• Silent conflict?
• Urbaneja (1995)
• Karl (2008)

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Concluding remarks

• With regards to flows, Venezuela has misbehaved
  as the typical resource-rich economy
• Nevertheless, Venezuela is saving under the
  ground.
• Inefficient mechanism Bad balance sheet
  management
• We need a better understanding of the incentives
  to do this.

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"Venezuela A textbook case of a resource-rich
country?"

• Osmel Manzano (UCAB and IADB)
• Natural Resource Booms, Macroeconomic Management
  and Civil Conflict in Latin America
• Tenth Annual Global Development Conference
  'Natural Resources and Development
• Kuwait, 2009

42
The difference holds even after 1987
?
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Current Account
?