Venezuela's downfall

Venezuela was once the poster child in Latin America on how to do well (the opposite being Argentina), growing richer than European economies in the 1950's from quite modest means in less than two generations. And then all went downhill, and the country continues to slide into poverty. While many like to put blame on Chavez and his "revolution," the trend started long before he came to power.

Omar Bello, Juan Blyde and Diego Restuccia, instead of going through the usual case study that just rehashes anecdotal evidence, perform a growth accounting exercise to give the start of an answer. They find that the exceptional growth episode was due to a combination of plain old capital accumulation along with total factor productivity growth originating in the booming oil industry and its foreign direct investment transferring know-how to locals. The following collapse shows the undoing of this but with a very different origin. A severe misallocation of resources lead to a drop in total factor productivity, which then triggered capital loss. And how did the government manage ti create the mess? First, it steered the economy away from oil, which may be a good idea for diversification. But the second error was to favor heavy industries, a common development mistake. And third, general government meddling in affairs it should not be looking at. Chavez has just continued a long tradition in this regard.