Venezuela is perhaps one of the most interesting and relevant cases in which we can study the impact of economic sanctions on living conditions. Sanctions imposed by the United States since 2017 targeted the country’s oil industry, eventually forcing it to sell the few barrels it could produce to China at a deep discount. These are the type of sanctions that one would typically expect to generate major economic effects in an economy overwhelmingly dependent on oil.
Yet clearly sanctions were not the only cause of Venezuela’s dramatic economic contraction. In the decade preceding the sanctions, Venezuela mismanaged one of the largest oil booms that any country in the region has ever benefited from, and its vulnerability to oil price declines and sanctions was clearly affected by that mismanagement. Therefore, careful studies of the Venezuelan data have the potential to help us understand how to disentangle the effects of sanctions from those of other factors that affect the country’s economic performance.
Weighing these two factors—mismanagement and sanctions—is difficult, and reasonable analyses can reach different conclusions. One recent book, however, took its argument one step further, casting sanctions as a tool of benevolent intervention and attributing the entire crisis solely to the actions of the Venezuelan government. In doing so, its authors made a series of analytical errors including miscalculating key indicators, making claims that are unsupported by their data, and choosing an analytical framework that ignores some of the basic structural characteristics of the Venezuelan economy. Correcting these errors overturns the authors’ central claim.
Against The Grain
The work of Santos and co-authors contains several serious analytical mistakes which invalidate their findings.
From Collective Punishment to Constraints on Authority: Rethinking the Impact of US Sanctions on Venezuela is a recent short book published by Miguel Ángel Santos, José Morales-Arilla, and Zinedine Partipilo Cornielles. The authors state that they use “rigorous empirical methods” to show that “the bulk of Venezuela’s economic contraction and deterioration in welfare indicators took place prior to the imposition of sanctions, with no indication of incremental harm attributable to them thereafter.” They further contend that, instead of being seen as a harmful intervention for the people living in Venezuela, sanctions should be conceptualized as principally benign interventions which placed constraints on the authority of the government of Nicolás Maduro to oppress them.
Were these findings true, they would have major implications for the sanctions literature. To date, there is near-unanimous consensus in the literature that sanctions have strong adverse effects on living conditions in target countries. In a recent review I found that out of 53 peer-reviewed published quantitative studies on the effects of sanctions, 52 found negative effects, one found ambiguous effects, and none found positive effects. Were the findings of Santos and co-authors seriously articulated and grounded in rigorous research, they would have the potential to fundamentally transform the field of sanctions studies.
That is not the case. On the contrary, as I show in a set of recent working papers, the work of Santos and co-authors contains several serious analytical mistakes which invalidate their findings.
Misreading The Numbers
While the authors make a series of claims, their argument about changes to the country’s gross domestic product (GDP) pre- and post-sanctions is a crucial part of their wider argument. It is also based on a fundamental misreading of the data.
Santos and co-authors claim that 52 percent of Venezuela’s decline in GDP occurred prior to the imposition of sanctions. They arrive at this number by calculating the decline in GDP that took place between 2013 and 2017—the year in which the first economic sanctions were imposed—and dividing it by the total decline in GDP between 2013 and 2023. This is wrong. If you want to calculate the share of the decline that occurred before sanctions, you need to calculate the decline up to the year before sanctions were imposed (2016) not the year on which sanctions were imposed (2017). Correcting this error yields a share of GDP decline of 35.6% occurring prior to the imposition of sanctions.
Going one step further, Santos and co-authors also claim that the rate of decline in GDP did not accelerate after the imposition of sanctions. This is simply false: Venezuela’s economic growth fell from -6.7 percent in the four years preceding the imposition of sanctions to -23.5 percent in the first four years during which Venezuela was under sanctions. The data shown in Figure 1—which is the same exact series used by Santos and co-authors, drawn from the IMF’s World Economic Outlook database—clearly illustrates the accelerating rate of decline.
Why did Santos and his co-authors make a claim that is plainly contradicted by the data? Apparently, they never calculated the percentage rates of decline. Instead they based their claims on visual inspection of a graph illustrating the trajectory of GDP that looks approximately linear around the years of the sanctions.
That graph is reproduced in the red line of Figure 2. In fact, the slope of that line does not visibly change after the imposition of sanctions. One can understand how someone could look at this line and conclude that sanctions are not associated with a break in trend.
Except that this is not the line that we should be looking at. A linear plot is highly misleading for trying to answer the question that Santos and co-authors have posed because the rate of decline varies significantly at different points in the line. The fact that the slope of the line is constant is not telling us that the rate of contraction did not deteriorate. It is telling us the exact opposite.
Let’s think about this through a simple example. Imagine that GDP falls from 100 to 90: that’s a 10 percent decline. Now imagine that it falls from 10 to 0: that’s a 100% decline. But they’re both declines of 10, and if you graph that GDP series over time, they will both show the same linear slope at these two declines.
In other words, constant slopes in a declining function do not imply equal rates of contraction: they imply increasing rates of contraction. This is why macroeconomists use logarithms to study time series trends. A logarithm has the nice property that the slope of the line at any single point measures the proportionate rate of change. The blue line of Figure 2 plots the logarithm of GDP for the same period, and it shows a clearly accelerating rate of decline following the imposition of sanctions. Had Santos and co-authors plotted this line, they would have reached a very different conclusion.
In a follow up post, Santos and his co-authors claimed that even though growth had worsened after sanctions, the rate of acceleration of the decline had at least stalled. But that’s what happens with any economy that hits rock bottom. Had Venezuela continued to contract at accelerating rates, it would have disappeared.
Leaving Oil Out
Santos and his co-authors use these problematic claims to argue that sanctions cannot explain the bulk of Venezuela’s collapse. But it’s not just the factual claims that are wrong—it’s the whole analytical framework, which ignores the single most important determinant of Venezuelan economic conditions—oil incomes.
Venezuela’s economy is highly dependent on oil revenues and tends to do well when oil prices are high and poorly when they are low. Therefore, for example, if oil prices began rising just as sanctions were imposed, then we would have expected the economy to have begun to recover—or at least to have stabilized—if sanctions had not been imposed. We can’t infer anything about the effect of sanctions from the change in the rate of acceleration of GDP because there are two things happening to it at the same moment: sanctions are being imposed,which is bad for the economy,and oil prices are increasing, which is good for the economy.
This is not just an example. It is an exact description of what happened to Venezuela during this period. Figure 3 shows the evolution of the price of a Venezuelan barrel of oil, which fell from $103 to $36 between 2012 and 2016. This huge decline, combined with the fact that Hugo Chávez had mismanaged the oil boom and not left the economy with enough savings to withstand a negative oil shock, is clearly the main proximate cause of Venezuela’s economic contraction between 2012 and 2016.
But between 2016 and 2022, oil prices rose from $36 to $79. The real puzzle is then why, despite an approximate doubling of oil prices, Venezuela’s economy didn’t recover or even stabilize in the post-2016 period, but rather continued declining at an increasing rate.
What do Santos and his co-authors have to say about recovering oil prices? Nothing. And this is perhaps the most glaring omission in their work. Ignoring the role of oil in the Venezuelan economy implies disregarding nearly a century of writing by Venezuelan economists and thinkers. This reflects a lack of basic familiarity with a literature that should be part of the required curriculum for any student of Venezuelan economics. It is a form of what we economists call omitted variable bias, with the problem that the omitted variable is one that anyone with even a passing familiarity with the country knows is one of the most important determinants of economic conditions.
Unconstraining Constraints
Ultimately, there is a deep tension in the authors’ main argument. To discount the effect of the 2017 financial sanctions, they argue that these had a “relatively limited scope” and didn’t really affect the government’s access to finance, as Venezuela had already been shut out of international financial markets at the time they were imposed. I’ve discussed the problems of that reasoning in much of my work, where I have shown that the joint venture partnerships between PDVSA and foreign partners did have access to finance up until late 2017 and lost it as a result of the sanctions.
Santos and co-authors are arguing that sanctions didn’t affect the government’s choice set while simultaneously crediting them with forcing major policy reforms. But they can’t have it both ways.
But say we were to accept their argument at face value. Then if the 2017 sanctions were essentially symbolic and not binding on the government, how exactly could they then function as “constraints on authority”?
At the basis of the economic concept of a constraint is the idea that it affects the choices that are open to the agent who is being constrained. Say I don’t have a car and ride my bicycle to work every day. Gas prices can’t affect my commuting habits. If I start telecommuting more, it would be quite a stretch to claim that high gas prices led me to do so. If a constraint is not binding, then it can’t change behavior.
Santos and co-authors are arguing that sanctions didn’t affect the government’s choice set while simultaneously crediting them with forcing major policy reforms. But they can’t have it both ways. If you are going to argue that sanctions were non-binding and did not hurt the economy, you can’t also put them forward as the main explanation of why the government liberalized.
There is certainly room for additional research identifying the mechanisms through which sanctions affected the Venezuelan economy, as well as how they shape the incentives of key political actors and stakeholders. Santos and co-authors raise some important hypotheses which are worthy of investigation. How do sanctions affect government choices to carry out economic reforms? How do they differentially impact the oil and non-oil sectors? How can we distinguish the effects of the poor policy choices taken by the Chávez and Maduro governments from those that are directly attributable to sanctions? Regrettably, because of its serious methodological shortcomings, this work fails to meaningfully advance our knowledge of these issues.
Francisco Rodríguez is a senior research fellow at CEPR and a professor and fellow at the University of Denver’s Korbel School of International Studies.