My guest on this episode is Kevin B. Grier of the University of Oklahoma.
Our topic for today is a paper Kevin wrote on the economic consequences of Hugo Chavez along with coauthor Norman Maynard.
I had Francisco Toro on the show last year to discuss Venezuela’s economic history, so you can listen to that episode if you want a refresher on Chavez. For this episode, our main topic is the empirical method Kevin used to quantify Chavez’ effect on Venezuela: synthetic control.
Synthetic control is a relatively new empirical technique. It grew out of an older technique called difference in differences (or diff-in-diff). Diff-in-diff is simple and intuitive: Given two statistics with parallel trends, we can compare their changes before and after some intervention affecting only one of them to see the effect of the intervention. So for instance, if you wanted to know the effect of Hugo Chavez’ rise to power, you could compare the GDP trend in Venezuela to the same trend in Columbia. Then assuming Venezuela and Columbia would have had similar trends if not for Chavez, we say the difference between the GDP growth in the two countries is attributable to Chavez.
But what if Venezuela and Columbia don’t have similar trends? What if there’s no national economy similar enough to Venezuela’s to provide a valid comparison? That’s where synthetic control comes in. Venezuela might not be like Columbia, but it might be like a weighted average of Argentina, Iran, and several other countries. We could construct this weighted average and call it a synthetic Venezuela; it is designed to mimic the dynamics of Venezuela’s economy before the rise of Chavez. Then if the synthetic Venezuela deviates from the real Venezuela after the rise of Chavez, we can attribute that difference to his policies.
This is what Kevin has done to study the impact of Hugo Chavez on Venezuela. Listen to the episode to find out his results!
Photo credit: Victor Soares/ABr – Agência Brasil, CC BY 3.0 br