Abstract
The literature on petrostates tends to blackbox the state. We argue, in contrast, that not all petro-states are configured equally. They thus respond to external crises differently. Despite sharing similar background conditions, the petro-state of Venezuela responded to the external oil shock of 2014–2015 by turning more authoritarian and predatory, whereas the petro-state of Ecuador tried to become more democratic and developmental. To explain this difference, we focus on three within-state institutional differences between these cases: the cohesion of hardliners, the reach of the coercive military and paramilitary apparatus, and the viability of the public and private sectors. In short, even petro-states operating under similar regimes (in this case, left-populist, semi-authoritarian) can exhibit different institutional make-ups, and these institutional differences help explain responses to similar external shocks.
Introduction
When global oil prices fell precipitously in 2014–2015, Venezuela and Ecuador responded very differently. Venezuela became more repressive and authoritarian while failing to take measures to prevent a complete collapse of the economy. By contrast, Ecuador liberalized politically and introduced some market-oriented reforms, including rapprochement with the IMF. Both countries experienced an increase in illicit mining and trade, but the state played a much greater role in promoting these illicit sectors in Venezuela, to the point of nearly becoming a mafia state (Ebus & Martinelli, 2021; Naím, 2012; Salomon, 2018).
These divergent responses are puzzling given that both countries were governed by oil-dependent, leftist-populist, semi-authoritarian regimes at the time of the oil shock. Venezuela’s leaders had long used oil rents to sustain a broad-based coalition and enable its two largest political parties to sweep democratic elections. In 1976, the state nationalized the oil industry, enabling it to capture even more oil rents. Starting in the 1980s, external shocks, institutional sclerosis, and the rise of newly mobilized political actors destabilized the two-party system and paved the way for a populist newcomer, Hugo Chávez, to win the presidential election in 1998. Chávez eventually crippled the traditional parties, deeply eroded checks and balances, and placed the military at the center of power, but he did not dismantle the petro-state. On the contrary, he aggressively channeled oil rents to key constituencies, including the urban poor (Corrales & Penfold, 2015; Dunning, 2008; Halff et al., 2017).
Ecuador began exporting oil in the early 1970s but did not become a full-fledged petro-state until Rafael Correa became president in 2007. Despite initial promises to decarbonize, Correa soon found himself trapped in a dilemma shared by other leftist-populist leaders during the 2003–2013 oil boom (see Escribano, 2013; Fontaine et al., 2019; Kramarz & Kingsbury, 2022; Purcell & Martinez, 2018): only through extractivism could he pursue costly social programs (see Hogenboom, 2012; Mazzuca, 2013; Svampa, 2019) and attract Chinese financing (Kaplan, 2021). To this end, he asserted greater control over the oil sector and used the state’s increased oil rents to construct a broad-based coalition that included the urban poor and middle classes (Polga-Hecimovich, 2018) and to “oil congress,” that is, create conditions that made legislative approval of sweeping reforms more likely (Aldaz Peña, 2021). He also granted more power to the executive (Corrales, 2018), stifled the private media, restructured the judicial system, and staffed the courts with loyal followers (De la Torre, 2013), thereby removing most institutional checks on his power (Posner, 2022). These policies enabled him to remain in office, with strong majorities, for a decade while weakening democratic institutions.
By the time oil prices began their precipitous decline in 2014, both Venezuela and Ecuador were heavily dependent on oil revenues, as shown in Table 1. They were also both in the midst of authoritarian transitions led by polarizing left-populist parties. A few months before oil prices collapsed, Nicolás Maduro won Venezuela’s presidential election by a slim majority in a snap election plagued by numerous irregularities. The election took place shortly after the death of Chávez, whose electoral majorities had been shrinking in the wake of fiscal and monetary mismanagement, the politicization of the national oil company (PDVSA), increased repression, astronomical homicide rates, and consumer shortages and energy blackouts (Corrales et al., 2020; Hernández & Monaldi, 2016; Puente, 2016). Despite autocratization, the regime was fragile even before the oil shock and could easily have collapsed. And, yet, Maduro dug in his heels and survived. He did so by embracing full-blown authoritarianism and resorting to both licit and illicit mining as well as tolerance for some degree of drug trafficking in collaboration with criminal organizations within and outside the Venezuelan state.
Selected indicators of oil economy, 2014–2021.
2013; *EIA (2021a, 2021b); **OEC (2023a, 2023b); ***World Bank (2021a, 2021b).
Ecuador’s left-populist regime appeared in much better shape on the eve of the oil shock. Reflecting his more technocratic approach to economic policy (De la Torre, 2013), Correa delivered significant market stability along with generous public investment and social spending. He also preserved Ecuador’s dollarization model and left the private sector largely alone. His greatest challenge came from dissenting social movements and political parties, including those on the left. He had an especially contentious relationship with Ecuador’s well-organized indigenous movement, which broke with Correa over his authoritarian policies and increasing reliance on oil and mining. Nonetheless, his popularity remained high on the eve of the oil shock. And, yet, a few years later, the ruling party was in shambles, and Correa was in self-imposed exile in Belgium after having agreed not to run for a third term. His chosen successor, Lenín Moreno, won the 2017 election but, unlike Maduro, chose to move in a more democratic and developmental direction.
This paper seeks to explain why Venezuela and Ecuador responded so differently to the 2014–2015 oil shock despite such similar starting points. We find that institutional variations within the two petro-states played a pivotal role. Specifically, we identify three main drivers: the cohesion of the ruling party, the reach of the military/coercive apparatus, and the viability of the public and private sectors. We argue that differences across these variables at the time of the oil shock offer a fuller explanation for why the two regimes went in different directions than either the depth of the crisis or the imposition of sanctions.
Inside the black box of petro-states
Petro-states are defined as meeting at least two conditions. First, they “are rapidly and relentlessly shaped by the influx of petrodollars in a manner that sets them apart from other states” (Karl, 1999, 34). Second, they typically own the majority if not the totality of the oil industry (Ross, 2012). Most petro-states suffer from the economic distortions typically associated with natural resource dependence (Sachs & Warner, 1995), such as neglect of the non-tradeable sectors, pro-cyclical macroeconomic policies, low propensity for fiscal savings, the tendency to overborrow, non-diversified economies, and overall governance failings (Mahon, 2023). The end result is that petro-states easily become locked into boom-and-bust cycles, with pockets of economic distortions proliferating even during boom times.
Much of the literature treats the petro-state like a black box, but a few authors note variations in the type of political bargain sustaining their rule (see, e.g., Barma et al., 2012; Victor et al., 2011; Yom, 2011). At one extreme (e.g., UAE), rulers use oil rents to achieve developmental goals that enable them to deliver programmatic benefits to their population. At the other extreme (e.g., Sudan), oil rents serve as currency in a political marketplace in which predatory rulers sell services in exchange for loyalty to the highest bidder (De Waal et al., 2020). Somewhere in the middle are petro-states whose rulers distribute oil rents to maintain a governing coalition. While generally populist in nature, distributionist petro-states can be either democratic or authoritarian.
Scholars find little evidence that state access to oil rents causes autocratization (see Dunning, 2008; Haber & Menaldo, 2011), but it does appear to entrench authoritarian rule, especially since the 1970s (Karl, 1997; Lucas & Richter, 2016; Ross, 2012; Smith, 2004). There are various mechanisms through which oil can protect authoritarian petro-states from democratizing pressures (see Smith, 2006). First, rulers can afford to ignore citizen demands for political opening because they do not depend on taxation to generate revenue. Second, rulers have more resources to finance a coercive apparatus able and willing to repress dissent. Third, rulers manage large (dollar dominated) budgets that can (secretly) be manipulated to coopt societal actors. Finally, the state’s near-monopoly of access to foreign exchange (because export diversification is minimal) weakens the ability of the private sector to stand up to the state.
The literature has much less to say about how petro-states respond to oil shocks, especially distributionist petro-states that are neither fully democratic nor fully authoritarian. 1 These states face an especially severe dilemma when oil resources dry up. No longer able to use oil rents to “buy” popular support, they must become either more predatory or more developmental. The predatory option requires repressing previously mobilized constituents and finding new modes of extraction to maintain the loyalty of a small ruling elite. The developmental option requires diversifying away from extraction (and/or making it more cost-effective) while constructing an alternative coalition with groups less dependent on oil rents.
We pry open the black box of petro-states by arguing that institutional variation within distributionist petro-states explains which option prevails when faced with an oil shock. Specifically, we identify two types of state variation and one type of political economy variation, which, in turn, is also connected to state institutions. At the state level, our two variables of interest are ruling party cohesion (specifically, the relative strength of hardliners) and the reach of the coercive apparatus (specifically, how reliant the state is on military and paramilitary support). We argue that a distributionist petro-state with a hardliner-dominated ruling party that has close ties to coercive actors is more likely to move in a predatory direction than one with a divided ruling party that has weak links to coercive actors. At the political economy level, our key variable is the strength of the formal public and private sectors. Consistent with the developmental state literature (see, e.g., Evans, 1995; Johnson, 1995; Woo-Cumings, 1999), we argue that a capable public sector and a well-functioning and collaborative private sector are necessary for a distributionist petro-state to move in a developmental direction.
We find strong support for this argument in our two cases. In Venezuela, hardliners dominated the ruling party, coercive institutions were powerful and closely aligned with the ruling elite, and the public and private sectors had been decimated by years of politicization and neglect. When the oil shock hit, the regime responded by turning to mineral extractivism, illicit smuggling, and even more coercion. In Ecuador, the ruling party was divided, the coercive apparatus was somewhat marginalized, and the public and private sectors were still available to help with recovery. Thus, when the oil shock hit, the regime opted for a more developmental path and strengthened its relationship with business and the middle classes. Though Ecuador stopped short of decarbonization and was overwhelmed by the rise of drug-related violence starting in 2019, these reforms marked a meaningful shift in regime orientation that did not materialize in Venezuela.
We believe that our institutional variables offer a better explanation for these outcomes than two rival explanations: the depth of the crisis and the role of sanctions. As Table 1 shows, Venezuela was indeed more dependent on oil exports and royalties before the crisis and suffered a much deeper collapse in oil production after the crisis compared to Ecuador. However, we are not convinced that Venezuela’s predatory response can be attributed to its more dire circumstances. First, oil rents accounted for roughly the same share of GDP in both countries at the time of the price collapse. Second, Venezuela’s deeper crisis could have disrupted vested interests and propelled a more dramatic break with chavismo in the form of market liberalization and democratic opening. Third, and most importantly, the differences in oil dependence and production are endogenous to other political variables that we argue are behind these divergent paths.
We also reject the argument that the oil and financial sanctions imposed on Venezuela in 2019 by the United States, Canada, the European Union, several Latin American countries, and various international organizations pushed the Venezuelan state to become more predatory. While sanctions no doubt exacerbated the country’s economic crisis (Rodríguez, 2023; Weisbrot & Sachs, 2019), the timing does not support the argument that they drove Venezuela toward authoritarianism and deeper extractivism. As we will show, Venezuela was already moving rapidly in this direction well before the sanctions. In fact, the sanctions were imposed precisely because of Venezuela’s turn to authoritarianism and illicit extractivism. If anything, they pushed Maduro in the opposite direction by forcing him to make minor adjustments to the chavista economic model.
Oil price shock as a critical juncture
As Table 2 shows, both countries suffered a major blow when global oil prices fell from $108/barrel in 2013 to $52/barrel in 2015 (Statista, 2021). 2 The situation was especially dire in Venezuela. Unlike other petro-states, Venezuela’s oil production began to decline during the boom decade (2003–2013) because of political mismanagement and massive underinvestment in PDVSA (Corrales et al., 2020; Monaldi et al., 2020). This slide turned into an avalanche after the price shock. Daily oil production fell from a peak of 3,461 million barrels/day (Mb/d) in 2000 to 2,687 Mb/d in 2014 before crashing to a historic low of 555 Mb/d in 2020 (EIA, 2021b). By 2017, Venezuela’s economy had shrunk by 56%, export revenue had fallen to below its 2000 levels, and inflation would reach an eye-popping 65,374% the following year (IMF, 2021). The unemployment rate grew rapidly, and more than 92% of households found themselves living in poverty.
Selected socioeconomic indicators, 2014–2018 a .
The World Bank stopped reporting these statistics after 2015 but this figure had reportedly increased to 94% by 2020 (Universidad Católica Andrés Bello, 2021).
Because of incomplete data, the United Nations Inter-agency Group for Child Mortality Estimation has been unable to provide complete data on Venezuela. In 2017, the infant mortality rate estimate ranged from 18.84% to 23.49% (United Nations Inter-agency Group for Child Mortality Estimation, 2021).
The economic catastrophe was so profound that it inspired tragic parodies. For instance, critics talked mockingly about the “Maduro Diet,” a reference to widespread food shortages and dependence on government assistance to get basic goods like rice and milk. Reports emerged of the desperately hungry rummaging through trash piles for food scraps and overdosing on cyanide poisoning from ingesting raw cassava (yuca) (Rendon, 2018). Some reports estimated that the average Venezuelan lost 24 pounds in 2017 and that 300,000 children were at risk of dying from malnutrition while mortality rates for children skyrocketed across all age groups (Ibid). Local surveys and reports suggest that living conditions continued to deteriorate. 3 More than 7 million Venezuelans fled the country between 2015 and 2022 (UNHCR, 2023), representing one of the largest refugee crises in the world.
The oil shock had a less severe but still politically relevant impact on Ecuadorians. In 2015, the economy shrank by 2% (IMF, 2021), and the share of the population living on less than $3.2/day rose from 8.6% to 9.4% (Romero, 2021). Export revenues fell dramatically while unemployment increased, affecting millions of Ecuadorians who had achieved a higher standard of living during the oil boom. A strong dollar further damaged the country’s export competitiveness, especially in the non-oil sector (IMF, 2015). Correa, who prided himself on being the people’s economist and initially boasted about his economic success, called it a “‘perfect storm’—an unpredictable, destructive force that had befallen the nation and its resources” (Lyall & Valdivia, 2019, 356). Yet, unlike in Venezuela, most indicators began to improve in 2016. As shown in Table 1, the price collapse caused a slight downturn in oil production but nowhere near as severe as in Venezuela.
Comparing state responses
Despite similar playbooks prior to 2014, the left-populist regimes in Venezuela and Ecuador adopted very different economic policies in response to the oil shock. In Venezuela, Maduro made superficial monetary and fiscal adjustments that only deepened the recession. As the economy unraveled, he turned to non-oil extraction, particularly illegal mining and drug trafficking, to keep his regime afloat. In Ecuador, Correa took steps to stem the hemorrhaging of the economy even while resisting across-the-board liberalization and closer ties with the IMF. His successor, Lenín Moreno, made a more dramatic break with past policies by tightening adjustment, strengthening ties with Western capital, and revitalizing traditional sectors such as manufacturing and services. Ecuador also invested in mining but to a lesser degree and with more emphasis on deals with formal mining corporations.
Macroeconomic and sectoral policies
Maduro responded to the oil shock with a series of massive devaluations (which produced more capital flight), reconversion of the currency by dropping zeros (which did nothing to stop inflation), and rationing of consumer goods (which accentuated shortages). He also adopted foreign currency controls that crippled the private sector’s access to imports. Without the ability to import, the already hyper-regulated business sector’s capacity to produce or sell shrank even further. Business bankruptcies escalated, and inflation accelerated. From every angle, business conditions became dismal. The only groups that survived and, in fact, did quite well were business groups with close political ties to the government whose monopoly power and contracts with the state enabled them to make money while still underdelivering on goods and services for the rest of the population. Even as the economy continued to unravel, Maduro did little to alter the Chávez model of expanded state presence, widespread price controls, and strong restrictions on the private sector.
In 2019, Venezuela suffered the additional blow of external sanctions. Together with continued public sector collapse and the inability to secure new financing from China or Russia, sanctions pushed the regime to adopt partial dollarization, partial relaxation of price controls, a few privatizations, and more opportunities for some private domestic and foreign investors to start businesses. Bull and Rosales (2023) argue that these reforms represented a change in the economic model in favor of what they call “authoritarian capitalism.” We view these reforms more critically as patches that allowed the state to coopt some private actors without liberalizing the economy and to provide some relief to some distressed sectors (through partial dollarization) without having to revamp the state’s ineffective model for welfare provision. The established model of state-heavy extractivism, ties with illicit businesses, stifling overregulation of the private sector, and reliance on state resources to coopt a small portion of the private sector remained hallmarks of Venezuela’s post-shock economic policy.
The Ecuadorian regime was quicker to adopt effective adjustments and reforms, starting under Correa but deepening under Moreno. Correa slashed spending and raised taxes to cover the state’s revenue losses. He also reportedly signed a deal that committed 80% to 90% of Ecuador’s future oil production to China until 2024 to secure new loans immediately after the price collapse (IMF, 2015). Moreno took further steps to stem the crisis with more market-oriented, anti-extractivist moves. While retaining the China deal, he opened free trade talks with the United States and pivoted toward the IMF as a source of external financing. 4 In March 2019, he negotiated a $4.2 billion IMF loan conditioned on austerity measures such as tax reform and the removal of fuel subsidies. Despite withdrawing the latter in response to violent protests, a new deal was reached totaling $6.2 billion with an immediate disbursement of $2 billion in addition to several hundred million that had already been distributed. These measures did little to address Ecuador’s resource dependence or inequitable income distribution, but they helped the country weather the economic storm much better than Venezuela.
Reform stagnated during the subsequent administration of center-right Guillermo Lasso (2021–2023), mostly due to pandemic-related troubles, new threats stemming from rising criminality, intransigence from Correa loyalists (correístas) in the opposition, and the ruling party’s minority status in Congress. Nonetheless, Ecuador’s turn toward more democratic developmentalism was not derailed. Political turmoil in Ecuador escalated under Lasso but did not reverse the country’s new development model. If anything, the new model was embraced by Lasso’s successor, Daniel Noboa (2023–present). Shortly after taking office, Noboa obtained Congressional approval for a new energy reform bill that was both business-friendly and clean-energy friendly, in line with the model introduced by Moreno of greater political and economic openness. 5
Non-oil extraction
Venezuela and Ecuador both turned to ore mining as a way to substitute oil revenues that quickly dried up after the price collapse. But the ways they did so were entirely different. Whereas Ecuador developed its mining sector through international partners and tried to discourage informal mining practices, Venezuela bet heavily on mining and allocated mining concessions to quasi-state-owned enterprises (SOEs) and nefarious non-state actors. Maduro adopted mining as the country’s new economic pillar, allowed illicit activity to dominate the sector, and used mining revenues to fill the pockets of military leaders, ruling party officials, and criminal gangs that included drug dealers as well as guerrillas from Colombia operating in Venezuelan territory. In other words, mining in Venezuela funded the rise of a new narco-mining mafia state operating in a political marketplace.
Before continuing, it is worth noting that there is almost no reliable data on the Venezuelan mining industry after 2014. While the government has officially expressed its support for developing mining activities, producing visuals such as mining maps (see Figure 1) and political propaganda calling for this kind of extractivism, most government entities stopped reporting reliable numbers, and violent criminal activity has made it all but impossible to report from inside Venezuela. For example, the official Bolivarian Government Investor Prospectuses and Reports lauds the sector’s “strategies for growth and development” and outlines the capital investment needed for certain mining areas to reach productivity, but it offers no examples of success or current production metrics (Venezuela Export, 2019). Our analysis is thus based on a compilation of journalistic, anthropological, and government reports that, when pieced together, tell a more complete story.
Official map showing Venezuela’s mining regions.
Venezuela’s semi-legal mining industry boomed after the oil price collapse. This expansion was led by the regime’s designation of the mining sector as a core source of revenue in the Venezuelan economy. The mining engine was spearheaded by the opening up of the Arco Minero (Orinoco Mining Arc), a strategic development zone that is rich in gold, copper, diamond, coltan, iron, bauxite, and other minerals. The designation not only called for increased development in a mineral-rich area but also created a special military zone for the newly established Anonymous Military Company for Mining, Oil and Gas Industries (CAMIMPEG) to “guarantee the continuity of mining activities and block resistance movements that might obstruct operations…placing the military sector squarely and openly in the extractive business” (World Rainforest Movement, 2021).
One result has been a massive discrepancy between official and unofficial export numbers. Government figures state that 25.4 tons of gold were extracted in 2019 while opposition figures estimate closer to 80 tons (Voz de América, 2019). While the number is likely to be somewhere in this range, it is not unreasonable to conclude that it skews closer to the 80 tons number given that 1,899 illegal mining sites have been detected in Venezuela, more than any other country in South America, as well as about 189,000 workers in the mines of the Venezuelan Amazon (Amazon Georeferenced Socio-Environmental Information Network, 2020).
Through a complex web of extraction, transportation, and bribery that involves artisan miners, gangs, guerrillas (many from neighboring Colombia), members of the military, and high-ranking government officials, legally and illegally mined ores are extracted and exported to trade partners such as China, Turkey, and the United Arab Emirates (Martiz, 2018). The extensive military presence, combined with the broad network of official SOEs and unofficial non-state actors friendly to the Venezuelan regime, placed the development of the Arco Minero and much of the mining industry overall in the hands of the regime (Martiz, 2018). While official accounts say that the state only has up to a 55% stake in mining operations via SOEs like Minerven, unofficial state participation is likely much higher. Once operations were up and running, the government secured additional revenue and loyalty through bribes, revenue funneling, and direct control over some gold mines with little attention paid to those outside close-knit circles.
Drug trafficking also exploded with the onset of oil shock. Already a source of revenue for the regime, cocaine trafficking between the Cartel of the Suns, an alleged network of transnational drug-trafficking and criminal cells embedded in the Venezuelan military and government (InSight Crime, 2022), and former ELN and FARC militants grew to unprecedented levels. In 2020, the U.S. Department of Justice went so far as to accuse the country’s top leaders of running a “narco-state” (United States District Court, Southern District of New York, 2020).
State control of these fragmented networks is far from absolute (Rosales, 2019), but for most of the late 2010s, the regime actively sought to encourage and capture these illicitly generated rents. The state aimed to construct a political marketplace in which a narrow group of state and non-state cronies were rewarded for their loyalty. Meanwhile, most of the population was left mired in poverty, criminality, and environmental catastrophe. No longer able to rely on oil rents to hold together its distributionist coalition, the regime resorted to predatory practices to sustain its rule.
Ecuador’s regime also turned to mining extractivism but through more formal mechanisms and processes than in Venezuela. Mining has played a small role in the economy since the 1980s, and Ecuador increased investment and production significantly after the collapse of oil prices. Copper, gold, and other forms of ore mining across Northern Ecuador provided a windfall in the years after the oil shock (Harris, 2020). Between 2016 and 2017, the Ecuadorian Ministry of Mining increased exploratory mining concessions across the country from roughly 3% to around 13% of the country’s continental land area, distributing concessions to a mix of Canadian, Australian, Chinese, and other multinational companies as well as the state SOE, Ecuacorrientes (Roy et al., 2018). The result was a near tripling of total mining exports from 2016 to 2020, with the first large-scale copper and gold mines starting production in 2019 in a joint venture between SOE Ecuacorrientes and Lundin Gold (Harris, 2020). In 2020, an estimated 32,000 people in Ecuador worked in mining, with about 11,000 depending on artisanal or small-scale mining (PlanetGOLD, 2020). Nonetheless, this number pales in comparison to the roughly 500,000 workers involved only in illegal mining operations in Venezuela (Rendon et al., 2020).
Formal mining in Ecuador was not without controversy. Despite their leftist credentials, Correa and Moreno allowed the widespread neglect of environmental and indigenous rights in extractivist activities. Indigenous communities decried several of the concessions as unconstitutional and responsible for human rights abuses as some companies evicted locals from their homes to access the ore. One project, in particular, was conflict-ridden from the start: the San Carlos Panantza mining project. The project is owned by ExplorCobres S.A., a Chinese subsidiary in Morona Santiago, and has been paralyzed since 2016 because of opposition from the Shaur-Achuar Nankints indigenous community. The resistance was initially triggered by the displacement of eight families and the elimination of the ancestral village of Nankints, leading to a violent attack on two mining camps. In 2017, additional evictions by the government generated fierce backlash, followed by a state of emergency order that led to a government crackdown on protests (Aguilar, 2017). In March 2020, one of the mining camps from the 2016 attack was hit once again with guns and heavy weaponry, including dynamite (Harris, 2020). Although domestic legal attempts to halt the project have been unsuccessful, indigenous communities are now trying the never-before-used tactic of filing a formal complaint against Ecuador in the International Labor Organization.
Nor has all non-oil extraction in Ecuador been carried out by legal entities. Illegal mining grew rapidly in response to higher gold prices in 2011, the collapse of oil prices in 2014, a major earthquake in 2016, and the 2016 Colombian Peace Deal. Local gangs and former Colombian guerrillas (FARC and ELN) encroached on concessions to set up illegal mining operations and sell their commodities through corrupt channels that mix the illegally and legally extracted ores. Illegal mining is concentrated near Ecuador’s border regions, particularly in the northern provinces of Esmeraldas, Carchi, and Imbabura in addition to Zamora Chinchipe y Morona Santiago in the south.
An illustrative example is the illegal mining operations in the sprawling town of La Merced de Buenos Aires from 2017 to 2019. Initially thought to have only about 50 illegal miners, reports indicated between 7,000 and 10,000 illegal miners by 2019 in a parish with a population of only 2,000 (Redacción Primicias, 2019). That same year, government operations against illegal mining rose to record highs in response to a June 2019 skirmish between the government and local gangs (see Figure 2) that left over 19 injured. President Moreno declared a state of emergency and deployed 2,400 armed forces into Buenos Aires to arrest miners and criminal gang members for illegal mining operations as well as other violent, sexual, and white-collar crimes (Secretaría General de Comunicación de la Presidencia, 2021). One government press release estimates that, between January 2018 and July 2019, government authorities arrested 809 people in connection to illegal mining and dismantled 92 criminal groups who controlled mines and engaged in human trafficking, tax evasion, smuggling, and murder (Todd, 2019).
Ecuador: Expansion of the mining town of La Merced de Buenos Aires, Ecuador.
The violence associated with these illicit activities increased dramatically after 2020, when Ecuador became embroiled in a violent, transnational struggle for control of drug routes in the wake of reductions in the U.S. presence under Correa (e.g., curbing the influence of the Drug Enforcement Administration and closing a U.S. military base), drastic cuts in spending for the justice ministry and law enforcement agencies under Moreno, and the 2016 peace agreement in neighboring Colombia, which reportedly “cracked open the narcotrafficking business and led to new groups and routes” (Glatsky & Cabrera, 2023). Following a pattern seen elsewhere in Latin America (Phillips, 2015), organized crime took advantage of greater openness in the context of weak institutions to make incursions. When violence reached crisis levels, the state finally responded vigorously, which prompted criminal groups to retaliate with more violence.
This toxic mix unleashed a massive crime wave in a country accustomed to feeling safe. Ecuador’s homicide rate (murders per 100,000 inhabitants) skyrocketed from approximately 6.7 in 2018 to 45 in 2023 (The Economist, 2024). In August 2023, criminal gangs allegedly murdered an anti-crime presidential candidate, Fernando Villavicencio, in broad daylight in Quito. A few months later, in early 2024, escapees from a prison caused turmoil on university campuses and took control of a TV station to issue threats against the government on live TV while pointing guns at several staff. These events shocked the nation and prompted newly elected President Noboa to declare the existence of an “internal armed conflict.” 6
Nonetheless, direct state involvement in non-oil extractivism and illicit trade remained less extensive in Ecuador than in Venezuela. Though local police and judicial officials in Ecuador have been accused of participating in illegal mining operations (Bargent & Bonilla, 2019), and international criminal organizations, including two of Mexico’s most notorious drug cartels, have joined forces with local gangs and corrupt officials, most of these activities take place without the direct sponsorship or participation of high-level government officials. In fact, the executive branch has tried to rein in the country’s escalating criminality, prompting a violent reaction from organized crime. Nothing comparable has occurred in Venezuela, which suggests more collusion between the state and organized crime in Venezuela than in Ecuador.
Explaining the divergent paths
To explain why Venezuela became more predatory while Ecuador tried to become more developmental in response to oil shocks, we focus on three institutional variables: (1) the cohesion of the ruling party; (2) the reach of the military/coercive apparatus, and (3) the relative strength of the public and private sectors.
Cohesion of the ruling party
A major reason why Venezuela moved in a predatory and authoritarian direction is that hardliners were firmly in control of the ruling party when oil prices collapsed—no dissenting factions were clamoring for political opening or anti-extractivist policies. By contrast, the ruling party in Ecuador was split between hardliners and soft-liners, the latter including many anti-extractivist sectors. This split made it easier for Ecuador to democratize and change models in response to the oil shock.
By the time Maduro took office, hardliners had become the strongest faction within Venezuela’s ruling party. They were led by Chávez’s second in command, Diosdado Cabello, who was in a strong position to unseat Maduro if he did not toe the party line. 7 Thus, Maduro had strong incentives to align closely with the policies of his predecessor (i.e., reaffirm the status quo) and court Cabello, who controlled an increasingly important part of the ruling coalition: elements of the military and illicit business connections with cronies.
Maduro used predatory tactics to gain the support of hardline factions within the ruling party. First, he granted them “power quotas” (cuotas de poder) and greater autonomy within the regime. Specifically, the military got further access to economic activities while civilian leaders holding public office or management positions in SOEs got more freedom to act with impunity. Second, he reassured party members that they were politically safe by cracking down on the opposition. Faced with massive street protests in 2014 and a landslide victory by the opposition Democratic Unity Roundtable (MUD) in the 2015 legislative elections, he employed authoritarian tactics to retain his party’s control. In addition to harshly repressing demonstrators, he crippled the opposition-controlled National Assembly by stripping its budgetary oversight powers and nullifying nearly all legislation passed by its members. In 2017, he convened a Constituent Assembly composed entirely of supporters to de facto supersede the National Assembly as the main lawmaking body.
The authoritarian option was less available in Ecuador than in Venezuela because of internal dissent against hardliners. As already noted, the populist ruling party’s coalition included anti-extractivist and anti-authoritarian factions (indigenous groups, feminists, and environmentalists) that became disaffected by Correa’s turn to heavy extractivism and attacks on leftist parties and progressive civil society groups. As a result, the party split between pro-Correa hardliners and anti-Correa soft-liners. The contrast with Venezuela was stark. In Venezuela, anti-extractivist constituencies were never part of the Chavista populist coalition. And the liberal progressive voices within Chavismo had largely defected by the end of Chávez’s first term in 2006. When Maduro decided to turn to authoritarianism and extractivism, licit or illicit, in 2015, he did not need to worry about an internal fissure like the one Correa faced.
Ecuador’s ruling party fissure became a crevice after oil prices collapsed. In 2015, indigenous groups, labor organizations, and anti-tax demonstrators staged massive protests, and Correa’s approval ratings dropped from 60% in January to 45% in July (EIU, 2015), fueling a growing anti-Correa faction within the party. Ecuador’s hardliners wanted little change to the economic model (i.e., no IMF-style economic adjustment or rapprochement with the United States) and no negotiations for power-sharing with the opposition. If anything, they preferred turning more repressive. But they faced significant pushback by soft-liners willing to make economic and political accommodations. These divisions constrained Correa from pursuing reelection in 2017 and then provided Moreno with the backing he needed to break with Correa and move in a more democratizing direction.
Moreno also had incentives to push back against Correa’s continued meddling in party affairs. Tacitly during the campaign, and overtly once Moreno became president, Correa sought to undermine Moreno. He used both social and traditional media to openly criticize his successor’s policies, which Moreno, in turn, viewed as an unwelcome attempt to curtail his autonomy. Correa’s betrayal compelled Moreno to turn away from him, which prompted Correa to repudiate Moreno further, resulting in a reinforcing process of mutual distancing. And because there were anti-correístas available to the court, Moreno gravitated toward them with a shared preference for more transparency in government.
Once Moreno decided to de-autocratize, his main challenge was to diminish Correa’s still-pervasive influence within the party, the bureaucracy, and society at large. He began by stripping Correa’s key ally, Vice President Jorge Glas, of all his powers and accusing him of taking $13.5 million in bribes from the Brazilian construction firm Odebrecht. Glas was sentenced to 6 years in prison and impeached by the legislature, and Correa went into self-imposed exile in Belgium. Moreno then held a national plebiscite to restore term limits and prohibit any citizen convicted of financial crimes from running for public office. The plebiscite passed with 64% of the vote (De la Torre, 2018, 83), and judicial authorities ordered Correa’s arrest a few months later for failing to testify in a bribery case. In April 2020, Correa was found guilty of corruption, sentenced to 8 years in prison (in absentia), and banned from politics for 25 years (Cabrera, 2020).
Moreno could have turned more authoritarian to deal with Correa and the correístas. He did try some authoritarian tactics, such as purges of the bureaucracy, but he was also constrained by the split within the ruling party. To challenge Correa, he needed to gain the support of other groups within and outside the party, and the only available groups were more pro-democracy actors. Moreno’s own standing with his party was too circumscribed to challenge the correístas independently. He needed allies. And many of these potential allies had no interest in supporting an authoritarian turn by Moreno.
Reach of the coercive-military apparatus
When oil prices collapsed in 2014–2015, the Venezuelan military was thoroughly entrenched in the ruling party, the state bureaucracy, and strategic economic sectors, and paramilitary groups helped carry out policing functions. By contrast, the Ecuadorian military no longer played a pivotal role in the country’s political economy, and domestic security was mostly in the hands of an underfunded and disgruntled police force. These differences in ties with coercive actors shaped each state’s response to the oil shock.
In Venezuela, the military abandoned its decades-long tradition of staying out of politics when a nationalist faction led by Hugo Chávez attempted a military coup in February 1992. 8 The coup failed, but Chávez earned a broad following that got him elected 6 years later. Under his rule, Venezuela’s military became highly integrated into government structures and gained control of a vast economic empire that stretched into illicit activities.
Planting the seeds of a political marketplace, the government’s close alliance with the military enabled Chávez to establish off-budget mechanisms of revenue generation through mineral extraction, military-run businesses, and the National Development Fund (FONDEN), whose funding came primarily from oil revenues (Tian & Lopes de Silva, 2019). 9 The Ministry of Defense took over firms in agriculture, banking, and insurance (Perera, 2019), and military leaders were appointed to run dozens of state-owned companies and institutes, including PDVSA (Avilés, 2009, 1559). According to one estimate, over 1,600 active or retired military officers held positions in public administration between 1999 and 2013 (Strønen, 2016, 23). Chávez also mobilized the military to implement his ambitious social programs, sending more than 40,000 troops to clean up streets and schools, deliver healthcare, and rebuild infrastructure in poor neighborhoods during his first term (Avilés, 2009, 1559).
Chávez also turned to pro-chavista paramilitaries, known as colectivos, to serve as the regime’s shock troops against protesters and dissidents. 10 Over time, the colectivos received impunity from the regime, often engaging in crime, in return for their coercive “services” (Bautista de Alemán, 2019). Chávez extended this strategy of creating parallel institutions when he restructured the state’s coercive apparatus in 2009. Two new institutions—the Bolivarian National Police and the General Command of the Bolivarian Militia—joined the colectivos as key actors in the regime’s coercive apparatus.
Meanwhile, the military’s economic involvement spread from the formal economy to informal and often illicit activities such as drug trafficking and illegal mining. Although evidence is murky, there have been multiple arrests and repeated allegations of high-level military officers engaged in drug trafficking (McDermott, 2018; Strønen, 2016). It seems that the state tolerated some forms of military involvement in illicit trades, though not all. The military’s primary role in the drug trade appears to be allowing the safe passage of cocaine shipments, especially in states bordering Colombia, where Chávez set up military operations after the 2002 coup attempt (InSight Crime, 2022). Journalists and defectors also report military officers hoarding and reselling goods in informal domestic markets, smuggling goods across borders, and engaging in fraudulent export-business activities using favorable exchange rates with the tacit support of the state. By the time Maduro took office, the military was firmly entrenched in these sectors and poised to capture the associated rents when oil prices crashed and food scarcity created new smuggling opportunities (Tian & Lopes de Silva, 2019). Investigative journalists suggest that the Chávez-era “Cartel of the Suns” became under Maduro a “system of criminal patronage in which cocaine is used to help prop up the Maduro government” (Insight Crime, 2022). The groundwork was thus laid for Venezuela to transition to a full-fledged political marketplace once the state lost its capacity to operate as a distributionist petro-state.
Ecuador’s military moved in the opposite direction under Correa. For most of the 20th century, Ecuador’s armed forces had either governed directly or “arbitrated between competing political factions vying for control over the Ecuadorian state” (Avilés, 2009, 1551). They also played a direct role in the economy and created a vast network of military-owned enterprises (Avilés, 2009; Shifter, 2016). Viewing the military as a potential challenger to his centralizing project, Correa attempted to reverse this pattern by asserting his authority in the political sphere and stripping the military of some of its economic prerogatives. In the process, the Ecuadorian military lost some of its economic power and institutional autonomy but remained politically independent.
Correa signaled his intentions early when he broke tradition by appointing a civilian as his first minister of defense. He went on to eliminate compulsory military service, remove references to the military’s tutelary role from the constitution, and form a truth commission to investigate military human rights abuses (Shifter, 2016). He also challenged the military’s economic prerogatives with a constitutional provision prohibiting the armed forces from owning companies not directly related to defense.
The military pushed back against these encroachments but ultimately accepted them in return for concessions. Correa allowed control of PetroEcuador to remain in the hands of the navy and stood by while the military transferred around 150 non-defense military corporations to the Social Security Institute of the Armed Forces (ISSFA), whose revenues benefit the military despite not being under its direct control (Shifter, 2016). He also approved pay increases, arms purchases, and targeted promotions (Reuters Staff, 2008). In return, the military protected him during a tense and violent standoff with striking police offers in 2010 and exercised restraint after a very public spat between Correa and the high command in 2016. 11 They also stayed in their barracks amidst protests by military pensioners against cuts in ISSFA’s budget.
These divergent levels of military involvement in governance (high in Venezuela, constrained in Ecuador) go a long way toward explaining responses to the 2014–2015 oil shock. Maduro had the perfect instrument for autocratic survival: a highly politicized military with vested economic interests and well-established smuggling networks in non-oil sectors accompanied by paramilitary groups that could ramp up repression as economic conditions deteriorated. This parallel coercive apparatus influenced the response in two ways: (1) by partnering with the state to engage in predatory mining and illegal smuggling and (2) by helping to repress dissent (i.e., facilitate the turn to authoritarianism). Correa had no such instrument. Instead, he faced a largely tamed and politically independent military with little capacity to generate non-oil rents and was reluctant to engage in mass repression in defense of the regime. He also lacked a loyal police force and had never cultivated a parallel coercive apparatus comprised of gangsters, militias, paramilitaries, or armed civilians. Moreno inherited these constraints, as evidenced by the military’s resentment when asked to repress demonstrations against the removal of fuel subsidies in 2017 (Pion-Berlin & Acácio, 2020). As a result, Ecuador’s presidents had limited opportunities to move in a more autocratic direction in response to the oil shock.
Strength of public and private sectors
The last variable influencing how distributionist petro-states respond to oil shocks is the relative strength of the public and private sectors, especially in enabling non-rent-seeking growth. If these sectors are reasonably strong, as in Ecuador, the state has the option to move in a developmental direction. If they are weak, as in Venezuela, the developmental option is less available, resulting in a higher probability that the regime will become more predatory.
A functioning public sector is required to mount a developmental response to an oil shock for at least two reasons. First, the government bureaucracy must have sufficient autonomy and technical capacity to adopt reforms when faced with an economic crisis. Second, SOEs, which are ubiquitous in most petro-states, must be sufficiently viable and efficient to withstand a fall in revenues and invest in more efficient modes of production. Neither condition is likely when the public sector is bloated, highly politicized, and/or starved of resources.
A robust, non-rent-seeking private sector is also key to enabling a distributionist petro-state to become more developmental. On the economic front, a strong private sector can move into new areas of investment during downturns, taking advantage of depressed prices, and thus becoming the engine of new economic activity. Profitable businesses are also available to pay taxes and thus alleviate fiscal pressure on the state (Karcher & Schneider, 2012), which may lessen the incentive to turn too heavily toward (illicit) extractivism (see Bates, 2001). On the political front, a strong private sector can use its influence to support government policies that help the economy recover (Weyland, 2009). Perhaps more importantly, it offers the regime an alternative base of support when the oil-financed distributional coalition falls apart.
The public and private sectors were far weaker in Venezuela than in Ecuador at the time of the crisis (Corrales, 2023). As already noted, the Venezuelan bureaucracy proved incapable of preventing a near-total collapse of the economy, and especially the oil industry, after the oil shock (Hernández & Monaldi, 2016). This failure reflects three related trends within the Venezuelan state. First, the state was overstretched. Chávez went on a nationalization spree that began with greater restrictions on private investments in the oil sector in 2004 (Monaldi et al., 2020) and then spread to include nationalization of firms in sectors other than oil. By 2016, the state owned more than 500 firms, giving it control of one-third of banking, most agricultural production and distribution, and all of the cement, iron, steel, aluminum asphalt, and port industries, as well as dominating media and telecommunications (Wyss, 2017). 12 Second, the state suffered from excessive politicization. Jobs in the public sector, especially at the managerial level, were offered to party loyalists or military leaders, and job performance was rewarded in terms of contribution to political goals rather than profits. Third, the state faced a growing deficit in technical expertise. The politicization of the public sector, together with the country’s economic crisis, led to a brain drain as professional staff left for the private sector or migrated abroad.
SOEs in Venezuela not only failed to incentivize economic growth but more importantly, served as hubs of rent-seeking. Party officials used SOE contracts as economic favors to private actors in return for political favors. There were almost no controls over public sector managers and little interest in turning SOEs into efficient firms designed to meet customer demand. Graft multiplied across the public sector. By the early 2010s (before the oil shock), SOEs were producing far less than during the wave of nationalizations in the 2000s, with most in the red or fully shut down by 2015. Most SOEs had negative operating results, and 74% of the 160 SOEs sampled by Transparencia Venezuela had public denunciations of corruption or bad practices (Anzola, 2018). To revive the SOEs, the regime would have needed to make enormous investments (which was impossible due to the fiscal constraints produced by the oil shock) and fire most of the personnel (which would have been too risky for a regime facing electoral decline).
As collapsed as the public sector was, Venezuela’s most serious predicament was the decimation of the non-rent-seeking private sector. By 2015, the private sector in Venezuela was too weak to play any of the roles necessary to support a developmental response to the crisis. The decimation of the private sector was mostly regime-made. Starting in the mid-2000s, Chávez adopted an aggressive anti-market orientation—the most market-hostile of any leftist regime in the region other than Cuba at this time. More precisely, he adopted a bifurcated policy toward the business community. On the one hand, he allowed a small group of loyal groups, the so-called boliburgueses, to profit handsomely with almost no regulation. These were the rent-seekers. On the other hand, he saddled the rest of the private sector with daunting regulations such as excessive price controls, restricted access to foreign exchange, unfavorable judicial rulings on labor disputes, frequent tax audits accompanied by unjustified fines, and of course, onerous taxes. Only a few boliburgueses were granted exceptions. The net result was a contraction of the non-rent-seeking private sector well before the oil shock (Corrales, 2010). To revive the private sector, the government would have needed to abandon its leftist policies and make friends with enemies.
In Ecuador, by contrast, the public and private sectors entered the crisis in reasonably better shape than in Venezuela. This was partly the result of the continued presence of economic technocrats within the Ecuadorian bureaucracy (Conaghan et al., 1990). For all his leftist credentials, Correa was a trained economist who avoided the worst excesses of macroeconomic mismanagement, massive nationalizations, or heavy restrictions on business activities. He also preserved dollarization, which kept inflation low, fostered domestic credit, lowered transaction costs, facilitated private imports and exports, and helped preserve a stable investment environment (Castillo, 2017). In addition, he left Ecuador’s oil SOEs, Petroecuador and Petroamazonas, largely autonomous, which kept them from becoming as inefficient as PDVSA. As shown in Table 1, the price collapse caused a slight downturn in oil production but nowhere near as severe as in Venezuela.
For similar reasons, the private sector was much stronger and more cooperative with the state in Ecuador than in Venezuela. Although Correa initially adopted an anti-business approach, his relations with the private sector improved over time (Wolff, 2016). The combination of economic growth, stable macroeconomic policies, and softer rhetoric led to dialogue rather than confrontation in government–business relations. When trade relations with the United States deteriorated in the early 2010s, Correa even offered business subsidies as compensation. His more business-tolerant policies enabled non-rent-seeking enterprises to survive and even thrive in the context of oil-financed economic growth.
As a result, a functioning private sector was both available and willing to partner with the state behind a developmental response to the oil shock hit. It did so by pressuring the government not to further radicalize economic policy and offering it a non-extractive alternative to oil-financed growth. The availability of these options, in turn, empowered the soft-liners in their struggle for dominance within the ruling party.
Conclusion
Venezuela and Ecuador offer an ideal structured comparison (similar regime, similar oil dependence) to study reactions to oil shocks. In both cases, the 2014–2015 oil shock unleashed a serious fiscal crisis and a decline in the ruling party’s electoral competitiveness. The regimes responded differently. Venezuela moved in a predatory direction. Economically, the regime eschewed reform of its state-centric economy and turned to mining extractivism and collaboration with illicit actors engaged in smuggling and drug trafficking. Politically, it became more repressive and more hardline. By contrast, Ecuador chose a more liberalizing and developmental path. Economically, the regime adjusted its state-centric model, seeking loans from international financial institutions and attempting to diversify toward manufacturing and formal mining. Politically, it retreated from semi-authoritarianism, offering greater pluralism and more respect for interest-based politics than was the case during the oil boom era.
We argue that these divergent responses are best explained by institutional variations within the two petro-states. In particular, we focused on three variables: the cohesion of the ruling party, the reach of the coercive apparatus, and the viability of the state’s relationship with the formal economy, both public and private. Table 3 summarizes our argument.
Summary of our argument.
That said, we do not wish to overstate the power of institutions. In retrospect, neither country’s response was inevitable. As historical institutionalism reminds us, exogenous shocks create uncertainty and often dislodge entrenched institutions, thereby allowing for greater contingency (Alesina & Drazen, 1991; Thelen, 1999). In these moments, the strategic calculations by leaders can make a major difference. Maduro gambled—successfully—that becoming more hardline would allow him to retain power even when the opposition appeared to be on the cusp of victory. His gambit paid off politically (he survived), but at the expense of Venezuela’s economy. By contrast, Correa gambled—unsuccessfully—that, if he stepped aside and let Moreno run as the party’s candidate, he could return to power a few years later under more favorable conditions. His retreat pulled Ecuador back from the brink of authoritarianism but cost him his political career. Either leader could have taken a different bet, especially given the depth of the crisis and the high levels of uncertainty. Nonetheless, their choices reflect the institutional constraints they faced at the time of the oil shock.
Despite their differences, there is one commonality between Venezuela and Ecuador: neither state is decarbonized. In Venezuela, where the public sector and PDVSA, in particular, remain weak (Frangie-Mawad, 2023), the state responded to oil price recovery by returning to reliance on oil rents to supplement the new political economy of licit and illicit mineral extractivism. Venezuela’s latest round of recarbonization has occurred under even worse social, political, and environmental conditions than before. In addition, a small but well-connected rent-seeking elite, with access to dollars, can thrive with the regime’s very minimal reforms (including partial dollarization), while the rest of the population lives in dismal conditions resulting from autocratic, state-dominant predatory economics, and licit and illicit extractivism (Herrera & Robles, 2023; Peñaloza, 2022). 13
Recarbonization has been more fraught in Ecuador. On the one hand, Correa’s immediate successors rejected the idea of rebuilding a distributionist petro-state, and the country’s anti-extractivist movement remains strong and highly mobilized. On the other hand, the refusal or inability to rely on oil extractivism has deprived the state of the ability to “oil congress” (Aldaz Peña, 2021), which has created huge governance difficulties. Thus, even if the correistas never return to power, the temptation to recarbonize remains. And the effort to wage a war against organized crime, with weak state institutions, has unleashed a degree of violence that could very well undermine the liberalizing steps made by the state since Correa left office.
In sum, not all petro-states are created equally. Even those erected with similar ideological and coalitional orientations can still display different institutional configurations regarding the unity of the ruling party, the coercive apparatus, and the productive sectors. These institutional configurations are likely to influence the response to economic shocks (liberalizing or autocratizing, predatory or developmental). However, they are not fully deterministic. Faced with strong leaders enjoying broad electoral coalitions, continued economic decay, and/or an assault by transnational criminal actors, even the strongest institutional fabrics of a petro-state are likely to fray.
Footnotes
Acknowledgements
We are grateful to Alfredo Ramirez and Michael Mason for their excellent research assistance.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: We are grateful to the United States Institute for Peace for funding our research.
Data availability statement
All of our data can be found in publicly available secondary sources.