Is an Oil-for-Food Program Plausible for Venezuela?

In the past month economist Francisco Rodriguez and political scientist Dorothy Kronick have each called for the creation of an “oil-for-food” or “oil-for-necessities” program to address the dramatic impact U.S. oil sanctions will have on the Venezuelan population this year. Below is a follow-up discussion we had by email.

DS: Senator Marco Rubio and others have suggested that the oil sanctions will not hurt the Venezuelan people because the Maduro government has been stealing all of the proceeds anyway. What do the actual numbers suggest?

DK: By Rubio’s logic, the 60% drop in oil prices between 2014 and 2016 should not have hurt the Venezuelan people, either: if the Maduro government were stealing all of the oil revenue, the decline in oil revenue would not have made a difference to consumers. But of course, the collapse of oil prices did hurt consumers: food imports declined by 61% between 2014 and 2016. In other words, we don’t have to look far to get a sense of how consumption changes when the Maduro government faces a drop in export revenues. We don’t have to draw tenuous parallels with other countries. Recent Venezuelan history provides the numbers we need: export revenue fell by nearly two-thirds between 2013 and 2018, and food imports fell by four-fifths. Why, then, would we expect that an additional 50% drop in export revenue in 2019—the expected decline absent a change in government and/or sanctions—would not affect consumption?

FR: Most countries buy imports with proceeds both from private-sector exports and from government exports. Venezuela has close to zero private-sector exports. In other words, oil and gold—both controlled by the government—constitute the only relevant source of foreign currency, which is needed to buy imports. Most of the food and medicines available in Venezuela are paid with funds originating in government exports, either because the government directly imports the goods or because it provides foreign currency for the private sector to do so. It is thus impossible to cut off the government’s foreign currency earnings without starving off the economy of the hard currency needed to pay for basic imports. In other words, in Venezuela, if the government doesn’t earn foreign currency to buy imports, no one does.

DS: There have been over a $100 million worth of commitments to provide humanitarian aid to Venezuela and there are several initiatives in the US Congress and elsewhere to channel this aid. Why not just focus on these initiatives already in process?

FR: The main issue is scale. Last year Venezuela imported $2.6 billion in food and medicines, and that was far from enough. $100 million in humanitarian aid would thus cover less than two weeks of an already insufficient level of food and medicine imports. And of course, that doesn’t even include other imports that the country needs in order to function—for example, equipment for maintaining the electrical system. Humanitarian aid can provide specific medication and food supplements to address dire circumstances in specific localities. It can not feed 30 million people for months.

DK: There are also political barriers to humanitarian aid. As we saw last month, Maduro can block aid identified with Guaidó; on the other hand, most donors would not agree to deliver aid directly to Maduro without the approval of Guaidó. You thus need political coordination in order to get significant amounts of aid to the Venezuelan people. In fact, the political coordination required to import and distribute aid is not unlike the political coordination required for management of the oil-for-food program that Francisco has described.

DS: In the case of Iraq, the oil-for-food program was plagued by mismanagement and corruption. Why would we think an oil-for-food or oil-for-necessities program would be any different in the Venezuelan case?

DK: The Iraqi oil-for-food program improved access to food despite the widespread corruption and mismanagement. Readers of this blog no doubt share my view that a return to democracy is the first-best outcome of the current impasse. But if a political transition does not materialize, what policy other than a well-designed oil-for-food program would avert famine?

FR: Surely, there is a lot to be learned from the Iraq example in order to avoid repeating the same mistakes. An independent review committee headed by Paul Volcker published a 620-page investigation in 2005 with concrete recommendations for how the program could have been designed differently in order to avoid corruption and mismanagement. For example, in the Iraq program, the Hussein administration was able to choose the buyers for its oil, allowing the government to request buyers make side payments into non-sanctioned accounts. In order to address this problem, the choice of buyers must be made not by the recipient government but by an independent board. A Venezuelan oil-for-food program should also be supervised by the National Assembly’s Oversight Commission.

Discarding the idea of an oil-for-food program because of the risks of corruption is simply throwing the baby out with the bath-water. Corruption in government must be addressed through an appropriate institutional design that reduces the incentives to steal and misappropriate funds, not by eliminating the functions of government.

DS: One of the keys to the Maduro regime’s survival is precisely the fact that it has weaponized access to food through its CLAP program. Would not an oil-for-food program fit right in to this, simply giving Maduro another tool with which to control the population?

FR: An oil-for-food program would not be under the control of the Maduro government. The distribution of food and essentials imported through the program should be carried out by independent agencies and overseen by committees integrated by representatives of both the Guaidó and Maduro administrations. Unlike in the case of Iraq, cooperation between the government and opposition is necessary in order for this program (or any alternative to it) to be minimally operational, as Maduro does not currently have access to the bank accounts necessary to collect payments from oil exported to the United States. Representatives of the Venezuelan opposition must also be involved on the ground in the implementation of the program in order to ensure that access to the program is not politicized.

DK: If it is scarcity that grants Maduro the power to weaponize food, would more scarcity weaken that power? The answer is far from obvious. In her study of Iraq, Lisa Blaydes finds that, while sanctions did encourage coup attempts against Saddam Hussein, they also “strengthened the regime’s hand in a number of meaningful ways, particularly through state control of both the rations system and economic opportunities.” In other words, in the absence of regime change, sanctions could make CLAP boxes even more powerful. Moreover, Blaydes finds that the embargo increased coup risk in Iraq partly because the people most hurt by sanctions—Western Sunnis—were linked (through geographic and tribal ties) to elites with coup-making potential. In Venezuela, it is unlikely that those most hurt by sanctions would be tied to those with coup-making potential.

DS: The Maduro government prevented humanitarian aid from coming in last month. Wouldn’t the same political barriers be present for an oil-for-food program?

DK: Yes, which is why Phil Gunson (echoing others) has written that “All concerned to end Venezuelans’ suffering should vigorously pursue a negotiated transition leading to a power-sharing deal.” Indeed, if Maduro and Guaidó could overcome political barriers to obtaining and distributing humanitarian aid, they would be well-positioned to overcome political barriers to a program that would alleviate the humanitarian crisis on a larger scale.

FR: Yes, and that’s why we must direct our efforts to overcoming those political barriers. Absent regime change, some level of cooperation and coordination between both sides will be needed to avert a humanitarian catastrophe. Even in wars, armies clear the way to protect non-combatants and allow aid agencies to rescue the wounded.  The moral imperative of protecting Venezuelans from famine should command similar urgency.

*Francisco Rodriguez is Chief Economist at Torino Capital LLC

**Dorothy Kronick is Assistant Professor of Political Science at the University of Pennsylvania