El pasado martes 14 de abril pillé a tiempo un tweet de la embajadora (E) Vanessa Neumann en el Reino Unido anunciando que en unas pocas horas la Sociedad Británica-Venezolana y Cámara de Comercio iba a ofrecer un webinar por Ricardo Hausmann sobre el COVID-19. Seguí las instrucciones para inscribirme y descargué la APP de Zoom en mi celular, y zas! Al llegar la hora de la convocatoria ahí me encontraba, uno más de unas 500 personas que también se inscribieron para asistir telematicamente.Many thanks to the three of you (also Peter West) for the very interesting webinar you organized and that I was able to tune in via @zoom_us— Juan Mayoral🇻🇪🇵🇷🇺🇸🇲🇽🇪🇸🇫🇷🇭🇺🇨🇴🇮🇳 (@Quintajayuya) April 16, 2020
Please provide a link to the video so that I may share it
Its very helpful to understand the predicament we are facing with coronavirus pic.twitter.com/KTgNDnnslW
Fue un verdadero privilegio poder asistir en vivo esta presentación del economista venezolano Ricardo Hausmann. Ante la crisis de la pandemia, el equipo con 50 economistas que él dirige denominado «Growth Lab» ha orientado sus labores académicas para ofrecer asesoramiento a diversos países de cómo hacer frente a los retos que se les han venido encima.
Nos habló entonces sobre lo que ha aprendido el grupo sobre la enfermedad y la pandemia para luego enfocarse en lo que les atiene: el punto de vista de un economista en el asunto.
A continuación transcribo sus palabras en este webinar (fue impartido en inglés). Al finalizar la charla el moderador, Peter West le hizo unas preguntas que él contesto brillantemente. Muchas de ellas sobre Venezuela. Hay más preguntas y respuestas que transcribiré próximamente. Aunque yo también me encuentre en #YoMeQuedoEnCasa #Lockdown, transcribir casi una hora de audio me tarda entre 5 y 6 horas! Pero buscaré el tiempo porque es interesantísimo el contenido y vale la pena documentarlo. Que a estas voces no se las lleve el viento, pues.
British Venezuelan Society & Chamber of CommerceThanks British Venezuelan Society & Chamber of Commerce for uploading the video to your Events Notice Board: https://t.co/keTQAWt3KF— Juan Mayoral🇻🇪🇵🇷🇺🇸🇲🇽🇪🇸🇫🇷🇭🇺🇨🇴🇮🇳 (@Quintajayuya) April 27, 2020
The link to the video is:https://t.co/yq39AsLHtY
Peter West: —So without further a due, Ricardo we start with you
Ricardo Hausmann: —Thank you very much Peter. Thanks for the opportunity to be with you guys wherever you may be. I am going to share with you my thinking on the COVID-19 crisis. The thinking will apply in different ways to different countries in the world and we can focus in Latin American countries. The issues in Venezuela look a little more daunting because it is one extra crisis that is happening on top of many others.
I want to focus on three areas, I will tell you what those three areas are and I hope to make it through in those 40 minutes so I am going to share my screen.
So I have called this “In the Fog of War” because right now governments are dealing with this in real time and in real time you don’t necessarily see what you think you see. You see very little. I do this not as an individual I do this as a leader of a group that is called the “Growth Lab” which has got fifty people in it. Normally we do academic research that gets published in journals and so on, and we do also applied work that helps different countries where we try to figure out what strategies they should adopt, or have or whatever. But since COVID-19 started we created a task force and this task force has been having meetings with very senior policy makers in these different countries: Honduras, El Salvador, Panama, Ecuador, Peru, Albania, Saudi Arabia, Ethiopia, Namibia and South Africa. So I know more or less what the situation is in these places and I want to share a little bit of what I have learnt. We are all most interested in Latin America but the lessons are a little bit general.
So, there are three impact of COVID-19. One is the disease itself. A second one is the direct economical effects of the disease but the more important one, the third one is that even if all your citizens were immune to the disease you still would have seen a collapse in export prices, a collapse in tourism, a collapse in remittances, a sudden stop in capital flows. So this would have been a massive macro economic shock just because of the global impact of Corona virus not of the national impact of the virus. So we are going to talk about these three things.
The other thing that is really humbling is the gaps in knowledge and information on which people have to be making decisions. You know, we have been talking to very distinguished epidemiologists at Harvard and, you know, they would tell you: “Your question is great, we have no knowledge of that, we don’t know, we need to find out, we don’t know.” So there is a lot of things that are not known. Key things that are fundamental to know that we don’t know.
So the three topics that I am going to cover are Epidemiological, The Creation of the Policy Space, and the Use of the Policy State.
On the Epidemiological side we all know the basics of these models. We have a group of susceptible people that is everybody at the beginning of the story. Some of them get infected, the infected infect others. Those that get infected, most of them thank God recover and presumably —this is one of the things we don’t know— they develop immunity, but this is still an open question.
The dynamics of this is that you start with everybody being susceptible then some people start getting sick—so these are the infected— some people start getting recovered —these are the recovered the blue [line]— and eventually you end up in a situation where something like 80% of the people got the disease and then the pandemic is over. This is for a certain set of parameters that you can play around with them but that gives you a flavor of what a pandemic looks like.
You have probably seen this graph [entitled: The Logic of Flattening the Curve]. I think it is one of the most misunderstood graphs in several ways. This says, you know, there is certain capacity of the health care system to tend to people, say in Intensive Care Units and ventilators and if you don’t do anything you are going to get a very rapid spike. You know, there is this fundamental parameter here which is Rate of Transmission —we call it the R Factor— it was estimated at around 2.7 to 3 under no constraints. That parameter would mean a very very sharp, economists don’t like epidemiologists because economist like to endogenize human behavior, we would like to say if people don’t do that we can change behavior so your parameters change because people change their behavior. So in any case, this would be a very sharp pandemic so you have heard a lot about flattening the curve so that we don’t overwhelm the health care system and that is the rich country approach to it because supposedly if you have sufficient health care capacity something good happens. But two of the countries I work with have yet to save one life by putting people in a ventilator. Everybody that has gone to a ventilator in those two countries has died.
So, the number of people will get sick which is this area under the curve is slightly smaller [points to the area under the flattened curve “with Public Health Measures”] here than there, [points to the area below the “without Public Health Measures” curve that peaks rapidly]. Less than you might think, so this is [the latter] 80% of the people get sick or 90%, and this [the flatter curve] is 65% of people who get sick. So still the majority of people get sick but this is extended, so instead of having soon this will happen later [pointing at the flattened curve]. I am saying this because yesterday the International Monetary Fund came out with its projections for the future in something I wish the world was as the International Monetary Fund imagines it. That is, that somehow after the lockdown comes the end of the problem and you can start recovering the economy. As you know the R-Factor, the lockdown what it does is it tries to bring the R-Factor below 1 so you start getting a decline in the number of cases. And some people have said: “No, we’ve reached the peak, in some countries it is starting to come down so soon enough we will be able to open up.” But the moment you open up the R-Factor goes up because more people interact and you get another peak, a much bigger peak and in the most optimistic scenario, say in Italy and New York, in very optimistic scenarios, you just let the disease go over, they have seen a fourth of the deaths that they are going to see. So people are going to be fighting for this issue for a long time.
So for example, this is Spain after four weeks of lockdown. In principle people die 18 days after being infected so this is after 32 days of lockdown they still have 700 hundred people dying every day and before they imposed the lockdown they had 90. So under the lockdown they have not been able to bring the number of cases down fast enough. I grant you that maybe all the people who died in the first 18 days or 20 days got infected before the lockdown but afterwards you still see an enormous trend in the number of deaths and this is in spite of a very severe lock down.
So we have been trying to help countries figure things out. So we have been trying to estimate their R-Factor and this is one of the countries we work with in Latin America. This is the rate of growth of imported cases, so before the lockdown the implied R-factor was 2.7, after the lockdown the implied R-factor was one point seven. One point seven is still very large and it is happening in the context of a lockdown. So here is a simulation we did for another of our partner countries. This is a country that has about 30 million people. So one question is, what happens if they don’t do anything? They will have a peak on the 29th of July and at that time they have about 20% of the population simultaneously sick [6 million 3 hundred thousand people]. If they impose a lockdown and then they open up and don’t do anything else then they have a peak of more or less the same magnitude [6 million people] but it peaks in October. And if they impose substantial mitigation schemes, meaning that a lot of economic activity will be shut down, then they will get a peak in January [2021], the peak will be smaller but in the end, total people infected are not going to be a lot different [2 million 7 hundred thousand].
This is another Latin American country. With these measures they have been able to lower the R but still it is way above one [R-Factor 2.09]. This is worrisome.
So we are here, we impose lock downs so we prevented this thing here, but if we open up we will get this peak here [peak shifts forward in time] and I don’t think that is what is going to happen. Governments are going to intervene and lock themselves down again, and this is not the last lockdown so it will be one of many and societies will be living with that for a long time.
So this is one of our partner countries [“One European country with 2.9 million people”]. So this is what would happen if they control the R-factor. If they controlled it at one, they will get a total of 314 deaths. If they cannot keep it at one and it goes to one point two, this goes to seven thousand five hundred deaths. So this is a factor of 25 or so. And if it goes to one point five, this doubles [15 thousand deaths]. And if it goes to two, this goes up by 60% [total 21 thousand deaths]. So this is just to say, control over this R-factor is going to be critical for the shape of what is to come and I think countries are going to be adopting what I call is R targeting. They are going to be targeting R, they will be measuring R in real time the way I have just shown you we do, and they will be making decisions based on what happens on that R. This disease is way too contagious to be left alone. Any number bigger than one sends you to a very bad place. [Angela] Merkel said yesterday, or the day before I believe, she was explaining this to people in Germany, she said: “if we control it to one point one we have a peak in October”. Then she said: “If we go to one point two we have a peak in July, no that we have a peak, we overwhelm the healthcare system in July and if it goes to one point three we overwhelm the healthcare system in June”. So she is targeting R.
So, I think whether they realize it or not, political systems will end up adopting a policy that achieves R=1 or less, and wait for the vaccine. Essentially the only way this thing is going to go away is if something like 80% of the people develop immunity. And there are two ways of developing immunity: getting sick or getting vaccinated.
If the vaccine is going to appear, I don’t know, sometime beginning of the next year then we might as well wait for it. By the way, I don’t think that things like tourism and travel are going to recover if there isn’t a vaccine. Nobody is going to let people from other countries come in without proving they are not going to be transmitting the disease. So the same way as the older people in the crowd, remember when we had these yellow certificates, we would get shots in order to get to weird countries and so, you know, yellow fever. We will have the same certificate for Corona Virus and when that happens then international travel will restart, but not before.
So countries right now are adopting lockdown measures. So essentially except Ethiopia which has some constraint or social distancing measures, all other countries are under lockdown. And once they adopt the lockdown, its very —that is why I call it the fog of war— because once you adopt the lockdown there are so many questions that you need to think about that you are not prepared to think about and that you have to make decisions on. OK, I can lockdown but not everything. What needs to remain open? The value chains in food, in medicine, basic services, and son. And if people are going to abide by the lockdown how are they going to pay for things and are not working. Do we need to make social transfers? How are we going to make them? What mechanism? What targeting? With what money? Etc.
It is very hard for many of these countries now to have the bandwidth to think about what happens after the lockdown. The intuition was, we do the lockdown, things will improve a lot and then we will see. Things will improve somewhat in the sense that if you really get R below 1 you will have fewer number of new cases, fewer number of daily deaths, but if you then just open up you will go back essentially to the same peak you had before. What you were looking at before, you just postpone it in the amount of the lockdown. So that is not going to happen people will not have invested this amount of sacrifice just to get a horrible peak anyway.
I think that the price is in coming up with intelligent ways to open up. Intelligent ways where we maximize economic activity while minimizing contagion. And there are some interesting ideas that are out there. One idea by Baruck Barzel, professor at Ba-Ilan University in Israel, he says: “look, if you divide households in to two, say the red and the blue, the even and the odds, which ever way you want, preferably do it somewhat randomly, maybe the right hand of the street vs the left hand side of the street or one block yes, one block no. Divide them in two, then half of them are in lockdown one week, and the other are locked down the next week. So every week 50% of the people are working, but the next week after working they have to go into lockdown. And the trick here, which is a very smart trick in my opinion, is that this disease takes a few days, like 5 days for you to become contagious. So if you got infected the week you were working then when you are most contagious you are in lockdown and you are not spreading the disease elsewhere. And this should lower, we simulated this and it seemed to work very well, but no one has done it yet because it is new and every country wants to know what is the previous experience with one thing like this and there isn’t any, so.
You can do whatever you want in terms of flattening the curve. In my mind, with these alternating lockdowns you can get a world like this [points to a low and horizontal level in the curve] and then just wait for the vaccine. There are other ideas that you may allow people under forty to work but I think the best idea will be to plague with decisions and see reactions, decisions, reactions. I call it R-Targeting because it reminds me of inflation targeting. You know what your goal is, your goal is inflation and then you use your instruments, interest rates or something, but your goal is inflation. And then try to discover how changing your instruments achieves your goal. But your goal is inflation. In this case your goal is R, and then we will decide if we open schools or not, we open sport facilities or not, we open large sports arenas, etc. and I think we will be in it until the vaccine.
So how do you limit contagion. Now I am moving on to the economics of this. We strain the R [Rate of Infection] by restricting economic activity, by restricting human activity. And human activity includes parts of Gross Domestic Product. So, the first things to close were, to say, universities. I think Harvard was a leader in sending us home, I think it was two weeks before our governor, theatres, airlines, bars, restaurants, gyms etc. Or lockdowns which impact all activities. Now most countries are in these lockdowns which have enormous impacts on activity. You saw that in three weeks 17 million Americans lost their jobs. That is on an employment base of 150 [million workers] that is 12% in three weeks. That is impressive and dramatic. It has never happened before. These decisions once adopted are going to percolate through the economy. They are going to lead to lay-offs because companies have no cash flow, they are going to lead to bankruptcies, they are going to lead to non performing loans in the banking system. They are going to lead to supply chain disruptions and then people are going to get scared and people who can spend are going to be very cautious.
Companies are going to be delaying investments and this is going to cause a negative demand shock. So all of this started as a negative supply shock but then it expands as a negative demand shock.
One of the implications of intervening in these economies is that when you are fighting COVID-19 the economy is not producing, not because there is no demand but because people are not allowed to work, because you are restricting their activity. So flattening the curve means generating a recession. So if you do not flatten the curve, you generate this recession [points to the smaller area recession curve] but if you try to flatten the curve you generate the big recession. So we are really, really trading off lives for low income. We are sacrificing, we are saying: “we might as well solve this down because if we are trying to live 50 more years, I can suffer one year, have low income for one year but then I have the rest of my life”. So there is this trade off that is happening but depending on the policy, if you do not support the economy then you may get a collapse of this magnitude [points to a curve peaking sharply below the horizontal axis on anther graph], if you support the economy maybe in doesn’t fall by as much, or at least in terms of income and welfare it does not take as long to recover.
So the solution seems to be clear, use social distancing and lockdown to prevent infections, fiscal action with monetary accommodation to prevent the amplification and long term damage. So this is going to be good for people in the short run, its going to be good for the eventual recovery of the economy. And typical instruments are to maintain payments of payrolls, provide unemployment insurance and loose unemployment insurance funds to keep people in the payroll, provide special loans to businesses. Banks in these conditions are not very happy to give loans because they think companies are struggling and they are right, so these are guaranteed loans. Everybody is playing around with how big is the guarantee. We know from economic theory that if you guarantee 100% will be a moral haphazard, but the truth is we don´t know if we will need to guarantee up to 90% if the banks will be willing to lend. And then how can you use the Central Bank to support banks and then, you know, regulatory forbearance for banks to restructure and lengthen the maturity of loans without considering those as troubled loans, that would incur in the provisions.
All of this is fine but it assumes that the government has plenty of resources to support its people, to support firms, guarantee loans, etc. etc. What if countries don’t have fiscal space? Well, many countries don’t have fiscal space in good times and with the COVID-19 shock their fiscal space may have completely disappeared. Tax revenues decline, especially if the get terms of trade shocks, say like the oil exporters and mineral exporters, if they get a tourism shock, for all the countries in the Caribbean and Panama, Cartagena Colombia and the tourism in Peru, Ecuador. So all of that tourism sector is essentially shut down and in addition you need more money for health expenditure. And none of this is good for your credit worthiness, so you are now showing lower revenues, increased expenditure needs, but if in addition, financial markets simply shut down because there is a sudden stop in capital flows, and spreads just go sky high then you may be into a very tough situation. You may not have the fiscal space to compensate people, to abide by the lockdown, so that they feel that at least if they remain home they have enough income with which to buy necessities and so on. So without fiscal space flattening the epidemic curve is costlier, so countries may choose or forced to not fight the virus by as much, leading to faster spread, more deaths and a faster end to the epidemic. So lack of fiscal space costs lives.
The policy problem is that the country wants to run a larger deficit, they also want the private sector to also run a larger deficit, they want firms to have negative cash flows, they want households to lose their savings to survive. Now there is this simple accounting thing that Peter West knows very well and that is that the sum of the private deficit and the public deficit is the current account deficit [of the balance of payments]. So if you try to do these things, in the end you need to run a current account deficit. Resources have to come from somewhere, and it has to come from the ROA [Return on Assets], that needs to be finance either by issuing foreign liabilities, or you bring money from other ROA on by liquidating your assets. And the countries that we work with are in radically different positions regarding to how much they have in foreign assets, how much they can issue foreign liabilities. So two countries in our group, the minute we talked for the first time we said: “go out and borrow”, they did, they played successfully and now they are sitting tight as I like to say: “borrowing too early is like arriving five minutes to early to the train station, borrowing too late is like arriving five minutes after the train left.”
Given the magnitude if the crisis most countries need financial assistance. So right now countries are finding others ways of borrowing at home, in many cases with the support of the Central Bank. Countries are beginning to explore with quantitative easing. That is amazing, I find it really, really astonishing that something that was only done by the FED, then by the European Central Bank and maybe by the UK, the Bank of England, now there are countries like Colombia who are thinking, who have done some quantitative easing, flattening the yield curve and so on. There is an issue on how countries can use their foreign assets. For fixed rate countries this happens automatically. For inflation targeting countries its more complicated. I think they will eventually need to use part of those reserves but they need a strategy of how they communicate it, how they intervene, do they auction it? Do they announce? Etc. Do they just lend those reserves to the government? So foreign assets are maybe going to be part of the equation, or maybe, I don’t know, there are other ways you can engineer this where gross reserves don’t come done but net reserves do. I think many countries are forced into funding non priority expenditures, including public sector wages. Interestingly Uruguay did it to a great acclaim, so it was a political winner. But you know, the private sector is really struggling, the public sector normally pays better wages than the private sector, except at the very top and if people are struggling the sense that the public sector —except for medic and healthcare people— they should make some contribution to the war effort.
One of the ideas I have been playing around —I have not had too many customers yet, maybe one not I am not sure— is that if the price of gasoline is going to collapse, BRENT went from sixty something to twenty something, maybe thirty [dollars per barrel of oil] now, and if futures for 2025 think of BRENT in the fifty’s, well maybe you want to bring gasoline to the long term price, and the difference, say from 50 to 30 you pocket for the government. That may be a good way of raising money without too much suffering because it will be like taxing a decline in price that people otherwise would have seen but didn’t.
And use your financial system and Central Bank to the hilt, to the extent possible. In this sense, monetary independence, flexible exchange rates make a huge difference. If you look at Chile, Peru, Colombia, they have been using very aggressively the Central Bank. If you look at Ecuador, Panama, El Salvador, those are dollarized countries, they don’t have a Central Bank really, they are in a very different situation. And then you have countries that peg, and well, they peg to the dollar and the dollar has appreciated and their terms of trade have declined, so you know, are you going to devalue in the middle of a pandemic?
Now there is a lot here that would be eased with international creation of policy space. And here we have been putting all the attention to the IMF because, you know —its not for a particular preference for the institution— but as a consequence of something that the world did without noticing. Because the IMF was deployed to fight the European crisis, the IMF became huge and the rich countries were willing to increase the size of the IMF. But the rich countries were not happy about increasing the size of the World Bank or the Inter-American Development Bank IDB. So the IDB bending over backwards has said that they can add 3 billion dollars to their lending capacity, you know, if they bend things. Three billion and the IMF said that they are ready to lend a trillion. The World Bank said that they are going to put an extra 14 billion and the IMF said a trillion. We are talking the difference between 14 and a trillion is a factor of 70. These are just not in the same league. The IMF has a product called the Rapid Finance Instrument, they have given a ton of them, they have doubled it in size and many of the countries I work with have already collected on it and I think it should be much bigger. But the other institutions simply don’t have the capacity. So if you don’t have the bandwidth just deal with the IMF, the others are just too poor institutions and they are well meaning, they have great people in it but they don’t have the balance sheet.
I think we need to move to debt standstills, Mark Walker and Chris [Cavanaugh?] have a paper out there trying to promote a debt standstill of private and public debts. They have a strategy on how to convince the private sector that instead of waiting for defaults they just agree on a standstill and probably a long enough standstill so that fog clears a bit so say 2020 to 2021 and then we will see which countries need restructuring or not. We need much more international liquidity. We need creation of Special Drawing Rights SDR’s. I have been pushing for that and so on. And then we will try to help countries thinking of what to prioritize in their healthcare system, how to be able to track and monitor the disease and the lucky ones that have sufficient low numbers of people infected to track and trace new infections. Some countries have done it very effectively, not the US, this is completely beyond the US’s capability right now. And then different schemes that countries have been adopting on supporting people with cash transfers, funded in different ways. For example, Peru gave them access to their pension funds, they have given access to the severance payments funds, so people are trying to find ways where people use their implied assets or transfer money to them. Support firms, delaying taxes, delaying other payments, trying to give loans etc. Support banks and probably in that order.
Let me stop then by saying that this is not going to be a short war. This is not a 100 meter race. Many countries got into the idea of a lockdown because, say India, the prime minister of India said if we don’t do this in 21 days we will lose 21 years. But he gave the impression that after 21 days they we be gone free and now he has had to extend it. But you know, what comes afterwards is not back to normal. Its back to a super weird new normal. Countries will have a choice between extending emergencies until the vaccine. I think, this is going to become the only viable solution and we should be much more knowledgeable about which vaccines are out there, which tests are being conducted, what is the authorization process, can it be sped up? Because there are vaccines that are in clinical tests. There are people writing about ways in which clinical tests can be accelerated that rise some bio ethical issues and countries should have the sovereignty to deal with those bio ethical issues. Countries will need more policy space under current policies and practices, and we need much more international coordination. The two Gordon Brown letters, there are other initiatives. We signed a letter yesterday by four former American presidents, former ministers and Central Bank governors asking the international community to act. And then, once we get through the epidemiology we need to think hard about how to speed up the recovery.
Let me stop there, stop sharing screen, so here we are.
Vanessa Neumann: —Excelente, Peter, you are moderator.
Peter West: —Yes, sorry now, I was just pressing to un mute. Yes, thank you Ricardo for the impressive and somewhat sobering tour de force. We’ve got a few questions here, perhaps we start off with one general one. In terms of all this analysis your making, fiscal space and what have you, policy options, how does Venezuela stand?
Ricardo Hausmann: —There are two things. One of the things that the collapse of economical activity meant is that the transportation system collapsed, the shortage of gasoline, there is sky high unemployment, there is an economy that is not working and a s a consequence the society has become much more isolated. As a consequence, it was late to get into the disease. So part of Ethiopia has three confirmed deaths. It’s a country of 100 million people. Probably there may be more but not many more. Why does the US have past 26 thousand deaths and Ethiopia has three? Well in part it is because modernity, complexity means that a lot of people interact. There is a lot of international connections, a lot of businesses involved, a lot of people interacting and that creates a fantastic ground for the virus to evolve. Well that connectivity in Venezuela is subdued. I don’t know the numbers in Venezuela because I don’t trust the official numbers but I wouldn’t be surprised if they are actually low. And I here from people who know the numbers of people with the disease in private hospitals in Caracas that there seem to be very few cases. So I think that does not mean that this is not going to affect Venezuela it just means that they are late in the curve but the curve is more or less similar. So this is something that is somewhat delayed, the government imposed a lockdown but again, the question is what happens after the lockdown? And after the lockdown the R-factor goes up. By the way, you know there is a very simple math. If you don’t wait for the vaccine, the peak of the disease is going to happen when 1/R people have not been infected. So if R=2, the peak happens when 50% of the people have not been infected. Meaning that the other 50% have been infected. So if the R is 2 in Venezuela the peak will happen when 50% of the population is infected unless they wait for the vaccine and so on. So my guess is that right now you are seeing deaths in Venezuela for preventable reasons due to the collapse of the healthcare system, due to the collapse of food conditions, due to the collapse of water and electricity and so on. Due to the shortage of gasoline that is implying an enormous breakdown of transportation and so my guess is that one day we are going to have the daily death rates in Venezuela. By the way, this is a statistic that many countries are starting to look at because daily deaths statistics are fairly stable and you look at them for a long time, and if there is a spike in daily deaths and they are much bigger than those caused by COVID —officially by COVID— maybe they are not capturing all the dead. In countries that have good deaths statistics because they have death certificates and so on this is a poor man’s way to estimating the impact of COVID. And in some countries, like in New York, they have estimated that they may have lost some three, four thousand dead, that probably died but did not get counted.
So in Venezuela we know we must have a highly elevated death rate, we don’t know what all the disastrous conditions may be underpinning it.
Peter West: —Right, I have got a bunch of other questions here of Venezuela but perhaps we will start off with a more general one. The question is, which Latin American countries have the financial muscle and clear public policies to overcome the crisis cause by COVID-19? Which countries are best placed and worst placed? Well, we know Venezuela is worst places, so.
Ricardo Hausmann: —I think this is going to be the worst economic crisis in my professional career. I finished my PhD in 1981 and I went to Caracas and I think it was either 1981 or 1982 that I met Peter and in February 1983 was “El Viernes Negro” and we got pulled in to advise the Ministry of Finance so we worked together. And that was sort of “The Crisis”, right? Well that was the Latin American debt crisis which lasted a decade and so on. It was a traumatic event for all Latin America. Then came the 1998 crisis that had major realignments in different countries, then the 2008 crisis. I think this is going to dwarf everything, its going to dwarf everything. So, you have to read what I am saying with that in mind. Peru announced a fiscal package of 12 percentage points of GDP. That is amazing! The fact that they had to ware with all, to mobilize 12% of GDP that’s amazing. We are discussing with them how to invest it more efficiently, that does not mean that they are not going to suffer. They are going to suffer because they are going to have the economic consequences of the lockdown, the are going to suffer the economic consequences of tourism, that is important for them. But they have a government that can help people in the process. I think Chile has ample policy room and for example they announced a 25 billion credit guarantee scheme for firms. It’s amazing if you think 25 billion dollars for Venezuelans, Chile has about half the population of Venezuela, so per capita it would be… Just in credit cards guarantee 50 billion dollars, I think the GDP for Venezuela this year will not reach 70 billion dollars. So they have shown enormous capacity. Other countries are, I think Colombia they have a fiscal responsibility act that it constrains what they can do, I think they will just have to go to congress and say that it is an emergency, that they have an escape clause. Other people have done it already and then they will have a much bigger deficit than is authorized. But for people who discuss the convenience of alternative exchange rate regimes, having your own monetary system with floating exchange rate, with an independent Central Bank, inflation targeting and so on, gives you in these crises, in these crises, degrees of freedom that pegs and dollarization don’t give you. And in a world where the international community is missing in action, in 2008-2009 George Bush and Obama were internationalists. So the first thing they did was convene the G20 and to coordinate international action. In this crisis there is almost nothing, I mean, close to nothing in terms of action. Except there has been action, it has been through the very courageous leadership of the heads of those institutions, not because they have been pushed by governments. So…
Peter West: —Lets move on to questions specific to Venezuela. How much money do you think Venezuela will need to rebuild its economy over the coming years? Where is it going to come from? I think you already answered that and will PDVSA require some sort of package?
Ricardo Hausmann: —Well, I was wondering whether PDVSA needs a rescue package or a burial. But let me share with you my experience in estimating Venezuela’s future. So we created at The Growth Lab this group that advised in terms of analyzing the political situation, economic situation of the country and tried to design a program on how to get out of the mess. And I started it in late 2015 because I thought, you know, that the opposition was going to win the elections for National Assembly and the change was in the air. So we started to do numbers etc. And in July 2017 I was completely convinced that change was imminent and that, so we did a whole analysis of the numbers. And then in September 2018 we did again, a whole analysis of the numbers. And then in 2019 we again did the same thing. At the beginning we would say: “well in 2017 we needed 60 billion”. But in 2018 the deterioration of PDVSA had been so dramatic and unexpected that to achieve the same targets as before were no longer feasible and the recovery will just take longer. So we thought that we could not really justify more than 60 billion in borrowing because we would not be solvent, so we said, 60 billion in borrowing and 20 billion in grants. We start to put grants into the picture. So in 2018 is heaven compared to now. So I think that what is going to happen is that we are going to get all the support we might mobilize from the international community but it will allow a recovery of a certain magnitude and the rest will have to be done by market forces. And it may not be a quick as a recovery as we expected and it may not be as, because, for example 2017, even 2018, we had no electricity problems. We had no gasoline problem. Just the generalized collapse of the whole system has been growing increasingly. So the first year we are going to need a lot of money just to make basic services work. And I don’t see people giving us money to fix our investments in PDVSA. I think we are going to have to partner with people that are going to develop these fields and that, that is not going to be part of the budget or public sector budget. And we will have more than enough means in terms of supporting people, recovering the electricity sector and putting it in shape until maybe we can allow private investment in the sector, later on, when cash flows are positive, and so on. And we need a lot to fix other, water, security, other of these basic needs. So the fact that change did not happen earlier is going to be paid in a slower recovery that will mean that every year in the future we will not be as rich as we would have been had changed happened earlier. [MIN 59]

