Walter Molano | Venezuela: Static and dynamic forces

Mechanical engineering is one of the main areas of industrial analysis. While the other disciplines may focus on chemical, electrical and civil engineering, mechanical engineers dedicate their investigations to the issue of forces. Statics and dynamics are the main pillars of the approach, and students examine the forces that are at work.

In essence, when all of the net forces are in equilibrium, then an object is static. Otherwise, it is in motion. Hence, the objective of the mechanical engineer is to identity, understand and calculate the various forces that are at work.

The same concept can be applied to economics. An economy is in equilibrium when all of the net forces are zero. Otherwise, the economy is undergoing a major change. The objective of the economist is to understand the magnitude and the direction of the prevailing forces. This perspective can be used to analyse one of the most unstable economies in Latin America, Venezuela.

In a way, Venezuela is the easiest economy to understand. It is the classic monoproducer. It has only one major sector and product, oil. It represents 92 per cent of exports. Therefore, if you understand where international oil prices are going, then you should understand the domestic economic situation in Venezuela.

Given the heavy dependence on oil, there was no way that the Venezuelan economy could escape the collapse in international oil prices. However, the situation in Venezuela is a bit more complex. There are other forces at work. One of the perpendicular forces acting on the economy is politics. Like the economic vectors, the political forces have domestic and international components.

New political force - the US

For more than a decade, the main political forces acting on the country were mainly domestic. This was assisted by some external political pressure provided by Cuba. These forces pushed the economy in a heterodox direction that heightened its instability. However, a new opposing external political force was introduced since the inauguration of President Donald Trump in 2017. It is the United States.

Most Latin American countries have a distant relationship with the US. Despite the existence of the Monroe Doctrine, which warns non-regional countries not to meddle in Latin American affairs, the attitude of Washington towards the region has been one of benign neglect.

The main foreign policy interests of the US government have typically been in Europe and Asia. Most Latin American countries are happy to be out of the spotlight because the experience with US involvement has not been good. Given the asymmetric difference in economic and military power between the US and individual Latin American countries, it is no wonder that Washington has been heavy-handed in its treatment of the region.

The history books are full of dictatorships that were imposed from the North, as well as military invasions and subversive interventions. Unfortunately, Venezuela has now stepped into the US spotlight and this has become a new force acting on the country.

Stymied by sanctions

Under normal conditions, the recovery in oil prices should have led to a corresponding improvement in the Venezuela economy. There are signs that the government is trying to take advantage of the improvement in oil prices by boosting production and trying to clean up debt arrears.

However, Washington's imposition of financial sanctions has stymied the economic recovery and the government's efforts to cure its default. The domestic political reaction to Washington's actions has been to double down and become even more entrenched by calling for elections that will most likely lead to another extension of the Maduro/ Chavevista mandate - even if they were delayed by a few weeks. This, in turn, could lead to further debilitating sanctions by Washington.

As a result, a new dimension of complexity has been added to the Venezuelan situation. The problem is that once a country falls into Washington's spider web, it is difficult to escapejust see what happened in the Dominican Republic (1965), Chile (1973), and Panama (1989).

In conclusion, Venezuela was put in a debilitating economic equilibrium, due to the collapse in oil prices in 2014. It should have moved to a much better equilibrium when international oil markets recovered in 2017. However, a new set of internal and political forces are creating a new dynamic that could overcome the economic forces and push the country into a more unstable situation.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. wmolano@bcpsecurities.com