President Trump Imposes Sanctions on Venezuela—This is a Bad Idea
Today President Donald Trump told Reuters he was prohibiting US financial institutions from lending money to either the Venezuelan government or its state oil company. Why? Because he wants to prevent financing to Venezuelan President Nicolas Maduro’s dictatorship.
Ideally, the loss of US creditors will make it difficult for Venezuela to refinance its heavy debt-burden, and hasten the collapse of the de facto dictatorship—as we have seen, even far-left socialist countries are not immune to basic economic logic.
Economics, not war, is what broke the USSR after all.
US Treasury Secretary Steven Mnuchin had this to say about the sanctions:
Maduro may no longer take advantage of the American financial system to facilitate the wholesale looting of the Venezuelan economy at the expense of the Venezuelan people.
As I write this, Venezuela has not yet issued an official response.
Before I get into my argument, I want to be very clear: Venezuela is a horrible place to live, and it’s the government’s fault.
The leftist state, however pure their intentions, has destroyed Venezuela’s once-prosperous economy. Through its own gross ineptitude it has caused extreme poverty in an oil-rich country, and starvation in one of the world’s most fertile regions—people are literally breaking into zoos to eat the zebras to survive.
Venezuela is a disaster. The government is to blame.
But here’s the deal: American sanctions will do more harm than good.
5 Reasons Why Sanctions Don’t Work
Politicians love sanctions—they’re an easy way to score political points, to take “firm action” without dealing with the fallout. This is because the consequences of sanctions are deferred—there’s very little immediate risk from imposing sanctions, and if there is fallout, it’s the next guy’s problem.
For this reason, sanctions are always the first step in dealing with the bad guys. The problem is that they don’t really work.
Let’s look at the logic behind them. Venezuela does something America doesn’t like. America stops exporting to them (imposes sanctions). The denial of imports hurts Venezuela’s economy, who changes their ways. America resumes exporting, and Venezuela’s economy grows again. The concept is simple (which is another reason why people like it), and combines both incentives and disincentives. Sanctions look good on paper.
The problem is that the logic is based on a few faulty underlying premises.
1. Sanctions are Useless if Imposed on Fungible Commodities
The first assumption is that the export ban will actually harm said country—often this isn’t the case. There are two reasons for this. The first is that the vast majority of internationally traded goods and services are fungible, meaning that they can be purchased from different suppliers for the same prices. Credit is no exception.
Essentially, it doesn’t matter to Venezuela where it gets its credit from, provided it still gets credit. Both China and Russia are big lenders to Venezuela, and will probably step in to fill America’s void. Likewise, European countries don’t have the same hangups regarding Venezuela (nor do many South American countries), and will continue to lend to them.
All these sanctions will do is deny American lenders access to Venezuela’s market—Venezuela itself likely won’t suffer.
2. Sanctions may have Unintended Hormetic Effects—they could Help the Sanctioned Economy in the Long Run
The second problem with the first assumption is that it presumes sanctions won’t trigger a hormetic effect (strength from stress) that actually benefits the sanctioned economy, or at least key parts of it. Sometimes the denial of a product spurs innovation and compensatory growth which makes the country better-off, or more self-sufficient (and therefore immune to sanctions) in the long run—this is what happened to Britain during the Napoleonic Wars, after all.
Here’s another example: the British blockade of the German Empire in World War I denied it one of its most important resources: rubber.
This is one of the major reasons the German Empire capitulated (although it is not common knowledge), since they increasingly lacked the rubber to make conveyor belts and other industrial equipment (crippling their industrial complex), tires (destroying their mechanized capabilities), and insulation for wires (making telegraph communication and electrical networks fail).
Anyways, given the stress of war, this was enough to defeat Germany. However, it also led to the heavy investment in synthetic rubber manufacturing. Although Germany didn’t produce enough synthetic rubber to maintain their war effort, the technology made Germany largely immune to rubber restrictions in World War II—the blockade (sanctions) were only effective because of the added pressure of conquest.
Another example: the current sanctions against Vladimir Putin’s Russia have greatly increased domestic investment in Russian food production, causing an agricultural boom—yes other areas of the economy have suffered, but much of this has been offset by industries that benefit from the de facto economic protections.
3. Dictators don’t Suffer from Sanctions—the People do
A second assumption that undermines the logic of sanctions is that the ruling class cares about the welfare of the general population. This is barely true in America, and it is certainly not true in most dictatorships—do you really think the North Korean aristocracy cares at all about its starving people?
The fact is that most dictators would rather let millions die than relinquish their power. They’re psychopaths, so this comes as no surprise.
Venezuela is no different—brutal street battles have been fought, people are starving, and still the government continues trying to make manifest its socialist utopian vision. Imposing monetary sanctions on them will not cripple the government aristocracy, it will just reduce the share of wealth the eventually filters down to the ordinary people—this will do little to change their minds.
We have many historical examples that prove my point. Recall how our sanctions on Syria caused starvation, and contributed to the rise of ISIS, but had literally zero impact on the welfare of Bashar al-Assad, or the rest of the ruling elite. We made Syria poorer, not its ruling class.
A good article to read on the futility of sanctions is from the Foundation for Economic Education. They look at the impact of sanctions in the Balkans, and again come to the same conclusion: sanctions don’t work, they just further concentrate power in the hands of the ruling class.
4. Economic Sanctions Give Dictators Political Ammo, Strengthening their Regimes
Economics and politics are intertwined (something economists routinely forget); so too are economic and political currency. This means that when we “attack” a regime with economic sanctions, we unwittingly play into their political narrative, thus strengthening the regime.
Consider the case in the former USSR. Every time America engaged in economic warfare against the USSR, no matter how much damage it did, we gave credence to the Soviet government’s narrative: the US is an evil empire trying to destroy the USSR and harm its people. We played right into their hands.
And of course, we did the same thing in North Korea and Cuba—the political strength of the regime was intimately tied to their economic hardship.
We have no reason to believe the case will be any different in Venezuela: all we’ll do is unite Venezuelans against a foreign “enemy”.
5. Sanctions Limit the Organic Spread of Western Values & Capitalism
Western values terrify dictatorships. Why? Because freedom is natural. It’s desirable. It spreads all by itself. This is why authoritarian regimes expend great time and energy to scrub the internet of Western influences—they don’t want their people “getting any ideas”.
And of course, these values don’t just spread through popular culture, they spread through business. When we do business with foreigners, we give them a glimpse of what it’s like in America. They experience a little bit of freedom, and wealth. The spread of free markets, and the riches they generate, is what ultimately opened up China, and it is what continues to reduce the power of the Communist Party.
By imposing sanctions, we end up helping dictators. We do their dirty-work for them.
If we want to liberalize Venezuela, the best way to do it would be to increase our connection with them, not restrict it.
In this light, sanctions are fundamentally counter-productive.
Economic Sanctions Have Not Worked Historically, They Will Not Work in Venezuela Today
I understand the desire to do something about the situation in Venezuela—no one wants to feel like their sitting on their hands, and ignoring human suffering.
But sometimes doing nothing is the best option, even if it doesn’t feel right.