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<h1><font size=4><b>The Chávez Administration at 10 Years: The Economy
and Social
Indicators</b></font></h1><font size=3>
<a href="http://www.venezuelanalysis.com/analysis/4182" eudora="autourl">
http://www.venezuelanalysis.com/analysis/4182<br>
</a>February 6th 2009, by Mark Weisbrot, Rebecca Ray and Luis Sandoval -
CEPR <br><br>
For the full report in its original PDF format,
<a href="http://www.cepr.net/documents/publications/venezuela-2009-02.pdf">
click here</a>. <br><br>
<b>Executive Summary <br><br>
</b>This paper looks at some of the most important economic and social
indicators during the 10 years of the Chávez administration in Venezuela,
as well as the current economic expansion. It also looks at the current
situation and challenges. <br><br>
Among the highlights:
<ul>
<li>The current economic expansion began when the government got control
over the national oil company in the first quarter of 2003. Since then,
real (inflation adjusted) GDP has nearly doubled, growing by 94.7 percent
in 5.25 years, or 13.5 percent annually.
<li>Most of this growth has been in the non oil sector of the economy,
and the private sector has grown faster than the public sector.
<li>During the current economic expansion, the poverty rate has been cut
by more than half, from 54 percent of households in the first half of
2003 to 26 percent at the end of 2008. Extreme poverty has fallen even
more, by 72 percent. These poverty rates measure only cash income, and
does take into account increased access to health care or education.
<li>Over the entire decade, the percentage of households in poverty has
been reduced by 39 percent, and extreme poverty by more than half.
<li>Inequality, as measured by the Gini index, has also fallen
substantially. The index has fallen to 41 in 2008, from 48.1 in 2003 and
47 in 1999. This represents a large reduction in inequality.
<li>Real (inflation adjusted) social spending per person more than
tripled from 1998-2006.
<li>From 1998-2006, infant mortality has fallen by more than one third.
The number of primary care physicians in the public sector increased
12fold from 1999-2007, providing health care to millions of Venezuelans
who previously did not have access.
<li>There have been substantial gains in education, especially higher
education, where gross enrollment rates more than doubled from 1999/2000
to 2007/2008.
<li>The labor market also improved substantially over the last decade,
with unemployment dropping from 11.3 percent to 7.8 percent. During the
current expansion it has fallen by more than half. Other labor market
indicators also show substantial gains.
<li>Over the past decade, the number of social security beneficiaries has
more than doubled.
<li>Over the decade, the government's total public debt has fallen from
30.7 to 14.3 percent of GDP. The foreign public debt has fallen even
more, from 25.6 to 9.8 percent of GDP.
<li>Inflation is about where it was 10 years ago, ending the year at 31.4
percent. However it has been falling over the last half year (as measured
by three month averages) and is likely to continue declining this year in
the face of strong deflationary pressures worldwide.
</ul>The current situation and challenges: <br><br>
Venezuela's most important immediate challenge is, as for most countries,
the world economic recession. This affects Venezuela's economy mainly
through oil prices, which have fallen about 70 percent from their July
peak last year. At oil prices below $45 per barrel (for Venezuelan oil),
Venezuela would begin to run a current account deficit. However, because
Venezuela has an estimated $82 billion in reserves, it could finance a
modest current account deficit for some time - e.g. even if oil prices
were to remain at their current depressed levels for the next two years.
But economists and the futures markets are not predicting oil prices to
remain at current levels for that long: futures markets are pricing oil
at above $60 per barrel in December 2010. <br><br>
With balance of payments constraints unlikely, Venezuela's main challenge
in the near future will be to come up with an adequate fiscal stimulus
package. Over the intermediate run, it will also want to adjust its
exchange rate to a more a competitive level, in order to diversify its
economy away from oil. However, because of its ample reserves, the
government is unlikely to suffer a forced devaluation in the foreseeable
future. <br><br>
<b>Introduction</b> <br><br>
Hugo Chávez Frías was first elected president of Venezuela in December
1998 and took office ten years ago, in February of 1999. Chávez is a
controversial figure, and most discussion of his tenure is polarized or
otherwise ideological, and mostly negative. This paper looks briefly at
some of the most important economic and social indicators over the last
decade, and also at the current situation and challenges. It relies on
data that are not in dispute. Some of the most important data have been
largely unreported, although they are publicly available. <br><br>
<b>Economic Growth</b> <br><br>
<u>Figure 1 </u>shows Venezuela's real quarterly GDP from 19982008
(second quarter).[1] As can be seen from the graph, growth appears to be
heavily influenced by various shocks, including political instability and
strikes. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Figure_1.jpg" width=499 height=431 alt="[]">
<br><br>
<br><br>
There are different ways to evaluate the growth performance of the
Venezuelan economy during the Chávez years. One is to simply look at GDP
growth since Chávez became president in the first quarter of 1999. The
latest (seasonally adjusted) data available are for the second quarter of
2008. On that basis, the economy has grown 47.4 percent, or 4.3 percent
annually over 9.25 years. On a per capita basis, this is about 18.2
percent, or 1.9 percent annually. Although this is a vast improvement
over the two decades of economic decline that preceded Chávez, it is
modest growth, about the same as the regional average. <br><br>
However, looking at the entire decade is misleading because the Chávez
government did not control the state owned oil company until the first
quarter of 2003. So for the first four years, the state owned oil company
(PDVSA), which at the time accounted for more than half of government
revenue and 80 percent of export earnings, was controlled by people who
were hostile to the government. Furthermore, the managers of the company
actually used their control over these vital resources to destabilize and
even topple (temporarily) the government. Under these circumstances there
was not much that the government could do to promote economic growth.
<br><br>
We could therefore measure growth from the time that the government got
control over PDVSA, in the first quarter of 2003. This has the
disadvantage that part of the growth since that time is a rebound from a
deep recession. Nonetheless it is a better measure to evaluate the
performance of the Chávez administration than is the whole ten year
period. Also, it could be argued that this measure is relevant because
even the early part of the recovery was a difficult achievement for the
government. This was not a normal business cycle but a deep economic
recession that involved considerable sabotage in the oil industry. When
the strike ended, analysts quoted in the business press predicted a slow
and painful recovery, with much difficulty restoring oil production.
<br><br>
Looking at growth from the first quarter of 2003, real GDP grew by 94.7
percent over 5.25 years, or <br><br>
13.5 percent annually. This is extremely rapid growth by any historical
or international comparison. On a per capita basis, it was 78.8 percent,
or 11.7 percent annually. <br><br>
Finally, another way to measure growth that cancels out the effect of the
rebound from the 20022003 oil strike is to start from the point where GDP
reached is pre recession peak. This would be the third quarter of 2004.
On this basis, GDP grew 37.2 percent over 3.75 years, or 8.8 percent
annually. On a per capita basis, this is 28.2 percent, or 6.9 percent
annually. This is also very rapid growth by almost any international or
historical comparison. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Table_1.jpg" width=520 height=170 alt="[]">
<br><br>
<br><br>
By any reasonable comparison, then, the growth experience of the
Venezuelan economy during the Chávez years has been very successful. Of
course this is even more true if we compare to the two decades prior to
Chávez's election, when the Venezuelan economy actually suffered a
decline in per capita GDP, and one of the worst in the world during this
period. From 19781998, Venezuela's per capita GDP declined by 21.5
percent. <br><br>
<u>Figure 1 </u>shows some detail about how the economy was influenced by
external shocks, especially those related to political instability.
Chávez took office with the lowest oil prices in 22 years; the first year
was marked by negative growth. This trend reversed by the first quarter
of 2000, and the economy grew until the third quarter of 2001, a time of
great political instability. In December of 2001 the Venezuelan Chamber
of Commerce (FEDECAMARAS) organized a general business strike against the
government. This political instability, with much capital flight,
continued through April 2002, when the elected government was overthrown
in a military coup. The constitutional government was restored within 48
hours, but stability did not return, as the opposition continued to seek
to topple the government by extralegal means. Growth remained negative
through the summer and fall of 2002, and then the economy was hit with
the opposition led oil strike of December 2002 - February 2003. This
plunged the economy into a severe recession during which Venezuela lost
about 24 percent of its GDP. The economy began to recover in the second
quarter of 2003 and has grown very rapidly since then, with one dip in
the first quarter of 2008. <br><br>
<b>Components of Economic Growth <br><br>
</b>As can be seen from <u>Figure 2 </u>and <u>Table </u>2, the non oil
sector has accounted for the vast majority of the growth during the
current expansion. In fact, the oil sector had negative growth for
20052007, after a 13.7 percent jump in 2004 after production was restored
following the strike. Even in 2004, however, the non oil sector grew
faster than the oil sector. <br><br>
It is also worth noting that in spite of the expansion of government
during the Chávez years, the private sector has grown faster than the
public sector. This has also been true throughout the current expansion,
with the exception of 2008, where the public sector accounted for almost
all of the growth in the first three quarters. <br><br>
The fastest growing sectors of the economy have been finance and
insurance, which has grown 258.4 percent during the current expansion, an
average of 26.1 percent annually; construction, which has grown 159.4
percent, or 18.9 percent annually; trade and repair services (152.8
percent, or 18.4 percent annually); transport and storage (104.9 percent,
or 13.9 percent annually); communications (151.4 percent, or 18.3 percent
annually). Manufacturing grew 98.1 percent during the expansion, or 13.2
percent per year. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Table_2.jpg" width=500 height=500 alt="[]">
<br><br>
<br><br>
<br>
<b>Poverty and Inequality <br><br>
</b>As can be seen in <u>Table </u>3, there has been a huge decline in
poverty and extreme poverty during the current economic expansion. The
percentage of households in poverty declined by more than half, from 54
percent in the first half of 2003, to an estimated 26 percent at the end
of 2008. The percentage of households in extreme poverty fell by even
more: a 72 percent decline, to seven percent of total households. This is
a significant achievement, and puts Venezuela within reach of eliminating
extreme poverty altogether. It is worth noting that the United Nations'
Millennium Development Goals call for a reduction in extreme poverty by
half over the period 19902015. <br><br>
If we take the first half of 1999 as the starting point, the percentage
of households in poverty has been reduced by 39 percent, from 42.8
percent to 26 percent. Extreme poverty fell by over half, from 16.6
percent to seven percent. <br><br>
There has also been a sharp drop in inequality, as measured by the Gini
index. Since Chávez's election, the Gini index has dropped by almost six
points, from 46.96 to 40.99. In this most recent expansion, the drop has
been even greater: over seven points, from 48.11 to 40.99. For a rough
idea of the size of such a change in the distribution of income, compare
this to a similar movement in the other direction: from 19802005, the
Gini index for the United States went from 40.3 to 46.9,[2] a period in
which there was a large (upward) redistribution of income. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Table_3.jpg" width=500 height=480 alt="[]">
<br><br>
<br><br>
<br>
<b>Health and Education <br><br>
</b><i>Health <br><br>
</i>Venezuelans, especially children, have benefited from the
government's social policies over the past decade through improved health
outcomes. As shown in <u>Figure </u>4, infant mortality has decreased by
over onethird, falling from 21.4 to 13.7 deaths per 1,000 live births.
Likewise, child mortality has fallen by over onethird, from 26.5 to 17.0
deaths per 1,000 live births. The greatest benefit has been for children
between the ages of one and eleven months: post neonatal mortality has
been cut by more than half, falling from 9.0 to 4.2 deaths per 1,000 live
births. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Figure_4.jpg" width=500 height=397 alt="[]">
<br><br>
<br><br>
<br>
Venezuelans have seen a similar improvement in food security. Average
caloric intake has risen from 91.0 percent of the recommended levels in
1998 to 101.6 percent in 2007. Even more importantly, malnutrition
related deaths have fallen by more than 50 percent, from 4.9 to 2.3
deaths per 100,000 in population between 1998 and 2006. Two new programs
have helped reach this goal. First, the PAE school feeding program, which
provides a free breakfast, lunch, and snack, began in 1999 serving a
quarter million students and has risen to over four million students in
2008. <br><br>
Secondly, the Mercal network of government food stores began in 2003
selling 45,662 metric tons of deeply discounted food and has risen to a
level of 1.25 million metric tons in 2008.[3] <br><br>
A third improvement in health outcomes has seen potable water and
sanitation accessible to many more Venezuelans than before Chávez's
election. As <u>Figure 5 </u>shows, in 1998, 80 percent of Venezuelans
had access to drinking water and 62 percent had access to sanitation. In
2007, 92 percent had access to drinking water and 82 percent had access
to sanitation. Compared to 1998, then, roughly four million more
Venezuelans now have access to clean drinking water, and over five
million more Venezuelans now have access to sanitation. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Figure_5.jpg" width=500 height=380 alt="[]">
<br><br>
<br><br>
<br>
These achievements have been facilitated by a large expansion in access
to medical care. From 1999 to 2007, the number of primary care physicians
in the public sector increased more than twelve times, from 1,628 to
19,571, providing health care to millions of poor Venezuelans who
previously did not have access to health care. In 1998 there were 417
emergency rooms, 74 rehab centers and 1,628 primary care centers compared
to 721 emergency rooms, 445 rehab centers and 8,621 primary care centers
(including the 6,500 neighborhood clinics, usually in poor neighborhoods)
by February 2007. These new community healthcare centers have had over
250 million healthcare consultations: nearly 37,000 each since the
program began. Since 2004, 399,662 people have had eye operations
<br><br>
<br>
that restored their vision. In 1999, there were 335 HIV patients
receiving anti retro viral treatment from the government, compared to
18,538 in 2006.[4] <br><br>
<i>Education <br><br>
</i>Improvements in education are visible for both young and
nontraditional age students. Traditionalage enrollment has risen
significantly, as shown in <u>Figure </u>7. Net enrollment at the basic
(grades 19) level has risen from 85 percent to 93.6 percent, and
secondary enrollment has risen even more, from one fifth to over one
third of the population. <br><br>
The increase in basic education enrollment represents 8.6 percent of
children age 5 through 14, or nearly a half million children in school
who would otherwise be without education. For secondary education, the
increase means that 14.7 percent of children ages 15 through 19, or
nearly 400,000 children, have been able to stay in school as a direct
result of improved social investment.[5] <br><br>
The largest gains have been seen in higher education: from the 19992000
school year to 20062007, enrollment increased by 86 percent; estimates
for the 20072008 school year put the increase at 138 percent from the
19992000 base.[6] <br><br>
The Chávez administration has also initiated the Ribas Mission to provide
secondary education for returning adult students. The Ribas Mission began
in 2003 and its first students graduated in 2005. In its first three
years of operations, the program has graduated over half a million
students - about three percent of the country's adult population.[7] The
government also carried out a large scale literacy training program,
Mision Robinson.[8] <br><br>
<b>Labor Market and Social Security <br><br>
</b><i>Labor Market <br><br>
</i>Venezuelan workers face a substantially better labor market than a
decade ago, as shown in <u>Table </u>4. There are now 2.9 million more
jobs than in 1998, which represents a one third increase. The
unemployment rate has dropped from 11.3 percent to 7.8 percent; it rose
to 19.2 percent in 2003, but has fallen by over half since that time.
There has also been a significant increase in job quality, as measured by
formal sector employment. Over half of the labor force - 51.8 percent -
is now employed in the formal sector, up from 45.4 percent in 1998. Most
of the job growth have been in the private sector, but both sectors have
outpaced the growth in the labor force: the decade has seen a 47.2
percent increase in public sector jobs and a 30.6 percent increase in
private sector jobs. <br><br>
Also, the rate of employment (employed as a percentage of the labor
force) has increased enormously during the current expansion, from 80.8
percent to 92.2 percent. Measured from 1999 it is much less but still
substantial, increasing from 88.7 percent. In sum, the labor market
indicators, by any comparison, all show substantial improvement during
the Chávez administration. These are consistent with the reduction in
poverty as measured by cash income. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Table_4.jpg" width=499 height=379 alt="[]">
<br><br>
<br><br>
<i>Social Security <br><br>
</i>For those beyond employment age, widowed, orphaned, or unable to work
due to a disability, the social security programs have vastly expanded
their protection, as shown in <u>Figure </u>8. The reach of old age,
disability, and survivors benefit programs has more than doubled since
1998. Among the entire population, this figure has risen from 1.7 percent
receiving benefits to 4.4 percent. As is the case for other indicators,
social security's performance was slow at the beginning of Chávez's term,
actually fell slightly during the oil strike, and has grown very rapidly
since 2003, when Venezuela recovered from the oil strike and the
government gained control over the oil sector. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Figure_8.jpg" width=500 height=378 alt="[]">
<br><br>
<br><br>
<br>
<b>Government Finance and Current Account <br><br>
</b>Government revenues have benefited enormously from the rising price
of oil until last year; world oil prices rose from an average of $19.3
per barrel in 1999 to $99.7 per barrel in 2008.[9] However, it is worth
noting that nonoil revenue also increased significantly as a percentage
of GDP over the decade, from 11.7 percent of GDP in 1998 to 14.2 percent
of GDP in 2007. This was due to improved tax collection. <br><br>
Revenue and spending are shown in Table 5. As can be seen, revenue
increased from 17.4 percent of GDP in 1998 to 28.7 percent of GDP in
2007. Spending also increased, from 21.4 to 25.7 percent of GDP over this
period. The government ran a fiscal surplus of 3 percent of GDP for 2007;
there are still no official figures available for 2008. <br><br>
It is important to note that not all government spending is included in
these figures for central government finances. Much of the government's
spending has, in recent years, been carried out directly from PDVSA, the
state oil company. For example, in the first three quarters of 2008
(January through September) PDVSA had $13.9 billion, or 6.1 percent of
GDP in public expenditures. <br><br>
It is also worth noting that real (inflation adjusted) social spending
per person more than tripled from 1998-2006.[10] Over the decade, the
government's total public debt has fallen from 30.7 to 14.3 percent of
GDP. The foreign public debt has fallen even more, from 25.6 to 9.8
percent of GDP. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Table_5.jpg" width=500 height=238 alt="[]">
<br><br>
<img src="http://www.venezuelanalysis.com/files/images/Table_6.jpg" width=500 height=265 alt="[]">
<br><br>
<img src="http://www.venezuelanalysis.com/files/images/Figure_9.jpg" width=500 height=345 alt="[]">
<br><br>
<br><br>
<br>
<i>Inflation and the Exchange Rate <br><br>
</i>Figure 10 shows the monthly year over year inflation over the past
decade, as measured by changes in the Caracas Consumer Price Index.
President Chávez took office with inflation at 29.5 percent. This dropped
to 12.3 percent over the next three years, then soared to a peak of 38.7
percent in February of 2003 as a result of the economic destruction
caused by the oil strike at that time. After the strike ended in that
month, the economy grew very rapidly while inflation declined sharply to
a low of 10.4 percent in May of 2006. It then began an upward climb that,
except for a dip from FebruaryDecember 2007, brought inflation to a peak
of 36 percent in September of 2008, from which it has since declined to
32 percent. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Figure_10.jpg" width=501 height=303 alt="[]">
<br><br>
<br><br>
<br>
However, the year over year numbers give only a rough picture of current
trends. For a more detailed picture, it is better to look at three month
intervals and separate out the core (excluding food and energy) from
headline inflation. This is especially important because food and energy
prices surged worldwide in the 15 months from April 2007 to July 2008,
and then fell back sharply. <br><br>
As can be seen in Figure 11, headline inflation in Venezuela during the
year ending July 2008 averaged 33.7 percent with core inflation averaging
28.7 percent over the same period. Both figures are significantly higher
than they were in the two previous years -17.2 and 16.5 percent
respectively. However, recent inflation has been concentrated in the
first half of 2008 and has abated considerably in the second half. The
three month average headline inflation peaked in January at 54.3 percent
and for the three months ending in December ran only 31.4 percent. Core
inflation also peaked at 43.8 percent in the three months ending in
January, but now stands at 24.7 <br><br>
percent. While this rate of inflation is still much higher than the
previous couple of years (although still low by Venezuela's historical
standards) the considerable deceleration of inflation during 2008 does
not appear to be cyclical, but rather the passing of temporary price
shocks. <br><br>
Given the trajectory of the regional and world economy, inflation is
likely to continue declining this year, in the absence of unanticipated
events and/or serious shortages. Inflation itself, then, does not seem to
be a direct threat to economic growth in Venezuela, although the
government will want to bring it down over time.[11] <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Figure_11.jpg" width=500 height=348 alt="[]">
<br><br>
<br><br>
<br>
The more serious problem posed by Venezuela's inflation is that, due to
Venezuela's fixed exchange rate regime, it contributes to a growing and
ultimately unsustainable overvaluation of the country's real exchange
rate. The bolivar is pegged at 2,150 to the dollar; it was fixed at 1,600
in February 2003 when the government implemented foreign exchange
controls. If we assume that the currency was neither overvalued nor
undervalued when the exchange controls were implemented - more likely it
was already overvalued - we would expect a depreciation to about 4,200
(or 4.2 Bolivares Fuertes) as a result of Venezuela's inflation.
<br><br>
Thus the Venezuelan currency is at least 49 percent overvalued relative
to the dollar. It is worth noting that this is not necessarily overvalued
to the extent indicated by the parallel market rate, which fluctuates
considerably and is currently at about 5,400 bolivares to the dollar.
Nonetheless the currency is still very overvalued. This is something that
will have to be remedied if Venezuela is going to pursue a long term
development strategy that diversifies the economy away from oil. An
overvalued currency discourages the development of non oil sectors,
exports and import competing sectors, and especially manufacturing. It
makes imports artificially cheap and the country's exports more expensive
on world markets, thus putting the country's tradable goods at a serious
disadvantage in both international and domestic markets. As can be seen
from the data on sectoral growth, manufacturing did not grow. This is a
serious long term development problem. There are also distortions and
inefficiencies associated with the system of exchange controls and the
parallel market. <br><br>
The overvalued fixed exchange rate, combined with present levels of
inflation, thus presents a significant intermediate term problem. Even if
inflation is stabilized and begins to be reduced, so long as it remains
at or near current levels and the nominal exchange rate remains fixed,
Venezuela's currency will become increasingly overvalued in real terms.
This will increasingly squeeze domestic production outside of oil and non
tradables, and would eventually become unsustainable. It is worth noting
that the growth in manufacturing has fallen sharply in 2008 (see table 2
above); it is possible that the overvalued exchange rate has contributed
to this decline, and very likely that it has limited the overall growth
of manufacturing relative to other sectors of the economy (see above)
during the current economic expansion. <br><br>
Nonetheless, Venezuela's overvalued exchange rate does not present the
kind of immediate threat that e.g., overvalued exchange rates in
Argentina, Mexico, Brazil, or Russia presented in the 1990's, where a
sudden and forced devaluation was imminent. The Venezuelan government
still has a number of options for bringing the currency to a more
competitive level over time. There is no reason to think that the
government would be forced to devalue, nor would a devaluation
necessarily have to be sudden or drastic. <br><br>
<b>The Current Situation and Looking Forward <br><br>
</b>The Venezuelan economy slowed in 2008, to an estimated 4.9 percent
growth rate, from 8.4 in 2007. The slowdown was probably at least partly
due to government efforts to slow inflation in 2007. From February to
September 2007, monthly year over year inflation dropped from 20.4 to
15.3 percent (see <u>Figure </u>10, above), before rising again. Another
change that may have contributed to the slowdown in growth was a decline
in public sector capital formation. Table 7 shows that public sector
capital formation slowed sharply in 2007. It had previously grown quite
rapidly throughout the expansion, although not as fast as in the private
sector. For 2008, there is not yet a breakdown between public and private
capital formation, but total capital formation (public and private)
actually declined by 1.5 percent. This is a problem that will have to be
addressed if the economy is to continue at a healthy rate of growth;
right now it appears likely that the government will address this problem
in the near future through a stimulus program that includes public
spending on infrastructure and other public investment. <br><br>
<img src="http://www.venezuelanalysis.com/files/images/Table_7.jpg" width=500 height=138 alt="[]">
<br><br>
<br><br>
<br>
Like almost all developing countries, Venezuela faces a number of
challenges in 2009. World economic growth is falling drastically; the IMF
has now lowered its estimate for World GDP growth to 0.4 percent, the
lowest since World War II and down from an actual GDP growth of five
percent in 2007. The ILO estimates that between 30 and 50 million people
will be added to global unemployment. The global financial crisis, which
the IMF now estimates will result in $2.2 trillion in losses in the
United States alone, is still not resolved, and it is increasing the cost
and reducing the availability of credit in developing countries.
<br><br>
Venezuela does not receive any significant foreign investment from the
United States or other countries that have been hard hit by the financial
crisis and economic slowdown. The most important, and practically the
only, direct impact of these external events on Venezuela is through oil
prices. Petroleum exports are currently about 93 percent of Venezuela's
exports. <br><br>
The relevant question for Venezuela is therefore how far oil prices would
have to fall before the country would begin to run an unsustainable
current account deficit. This is the binding constraint for developing
countries. In other words, the United States, Europe, and Japan will -
inasmuch as they choose to do so - pursue expansionary monetary and
fiscal policies, including deficit government spending, in order to
counteract the current recession. Developing countries can and ideally
should do the same, but unlike these rich countries, they face a
constraint due to the fact that their national currencies are not
"hard" currencies. Therefore they cannot count on being able to
borrow nearly as much, relative to GDP, or for so long a period of time,
as countries with hard currencies, to cover their import needs. For this
reason, the balance of payments - not the central government budget,
which can be covered in local currency - is the most important and
binding constraint on developing countries such as Venezuela in the
present situation. <br><br>
Venezuela ran a current account surplus estimated at 13.9 percent of GDP
for 2008. This huge current account surplus would fall to zero at about
$45 dollars a barrel for Venezuelan oil. Venezuela's oil is currently at
approximately $38 per barrel, so if oil prices remain at present levels,
we would expect a current account deficit by the end of this year.
However, this would not cause any balance of payments problems, as
Venezuela has approximately $82 billion, or 25 percent of GDP, in foreign
exchange reserves - more than twice what the country needs. A current
account deficit of 2 or 3 percent of GDP, which is what we might expect
if oil prices remain at this level, is not significant in the face of
such large reserves. This could even continue through next year without
posing a significant problem. <br><br>
Of course, oil industry analysts, as well as futures markets, do not
expect oil prices to remain this depressed for very long. The futures
price for December 2010 crude (WTI) is over $60 per barrel. So, unless
oil prices remain depressed for years longer than anyone is expecting,
Venezuela is not likely to have to dip very far into its reserves.
Venezuela is also fortunate in that its foreign public debt is low, at
about 9.8 percent of GDP. Principal payments for the next four years are
about $1.5 billion a year, which is very modest. Therefore Venezuela
could also increase its borrowing internationally if necessary, but it is
extremely unlikely to encounter any balance of payments problems.
<br><br>
The main determinant of Venezuelan growth in 2009 and probably 2010 is
likely to be the size, speed, and efficacy of a fiscal stimulus. The
government has recently announced a major public spending program of
about $12 billion, or 3.6 percent of GDP. As in most other countries in
the hemisphere, including the United States, it will be important to move
quickly on this program. In the face of strong deflationary pressures, as
discussed above, Venezuela's inflation is likely to continue falling in
the near future. As in most countries today, the government should not be
overly concerned about inflation, so long as it continues falling; nor
does it need to worry about adding to the public debt, which is not very
high at 14.3 percent of GDP. The challenge is to compensate for falling
private demand until the world economy begins to recover, so as to avoid
an unnecessary recession. It is worth noting that Peru, Chile, Argentina,
Mexico, and other countries in the hemisphere have already announced
significant fiscal stimulus programs, some of them comparable to that of
the United States, relative to their economies. <br><br>
The main challenge for Venezuela in the next couple of years will
therefore be to implement an effective stimulus package that can keep the
economy on a steady growth path. It would be even better if, as the
Chinese government did during the Asian crisis ten years ago, Venezuela
could make infrastructure and other public investments that will increase
productivity in the years that follow. <br><br>
<b>Works Cited <br><br>
</b>BCV (Banco Central de Venezuela), 2009. "Indicadores:
Información Estadística. Online database. Consulted 2 February 2009.
<a href="http://200.74.197.130/c2/indicadores.asp">
http://200.74.197.130/c2/indicadores.asp</a>. <br><br>
SISOV (Sistema Integrada de Indicadores Sociales de Venezuela), 2007.
"Logros." Caracas: Ministerio del Poder Popular para la
Planificación y Desarrollo.
<a href="http://www.sisov.mpd.gob.ve/estudios/detalle.php?id=158">
http://www.sisov.mpd.gob.ve/estudios/detalle.php?id=158</a> <br><br>
SISOV (Sistema Integrada de Indicadores Sociales de Venezuela), 2009.
"Indicadores." Caracas: Ministerio del Poder Popular para la
Planificación y Desarrollo. Online database. Consulted 2 February 2009.
<a href="http://www.sisov.mpd.gob.ve/indicadores/">
http://www.sisov.mpd.gob.ve/indicadores/</a>. <br><br>
INE (Instituto Nacional de Estadística), 2008. "Resumen de
Indicadores Sociodemográficos 19982008. Caracas: Ministerio del Poder
Popular para la Planificación y Desarrollo..
<u>
http://www.ine.gov.ve/resumenindicadoressociales/descarga/ResumenIndicadoresSociode
</u>mograficos.zip. <br><br>
INE (Instituto Nacional de Estadística), 2009. Homepage. Caracas:
Ministerio del Poder Popular para la Planificación y Desarrollo. Online
database. Consulted 2 February 2009.
<a href="http://www.ine.gov.ve/" eudora="autourl"><u>
http://www.ine.gov.ve/</a></u>. <br><br>
Rosnick, David and Mark Weisbrot. 2009. "Inflation Experiences in
Latin America, 20072008." Washington, DC: Center for Economic and
Policy Research (Forthcoming). <br><br>
Weisbrot, Mark and Rebecca Ray, 2008. "Oil Prices and Venezuela's
Economy." Washington, DC: Center for Economic and Policy Research
(November).
<a href="http://www.cepr.net/index.php/publications/reports/oilpricesandvenezuelaseconomy" eudora="autourl">
<u>
http://www.cepr.net/index.php/publications/reports/oilpricesandvenezuelaseconomy</a>
</u>. <br><br>
<b>About the Authors <br><br>
</b>Mark Weisbrot is CoDirector; Rebecca Ray and Luis Sandoval are
Research Assistants at the Center for Economic and Policy Research in
Washington, DC. <br><br>
<b>Acknowledgements <br><br>
</b>The authors would like to thank Dean Baker and Dan Beeton for their
comments, and Jake Johnston, Juan Vazquez and Kunda Chinku for editorial
and research assistance. <br><br>
<b>Endnotes</b> <br><br>
[1] Seasonally adjusted. <br><br>
[2] United States Census Bureau. 2006. “Current Population Survey, 1968
to 2006 Annual Social and Economic Supplements, Table A3.”
http://www.census.gov/hhes/www/income/histinc/p60no231_tablea3.pdf]
<br><br>
[3] SISOV (2009). <br><br>
[4] Ministerio del Poder Popular para la Salud, 2007. "Logros de la
Misión Barrio Adentro I al 16 de febrero de 2007" (As<br>
of February 16, 2007). <br><br>
[5] These estimates use the Instituto Nacional de Estadísticas (INE)
population estimates by age for 2008: 5,522,489<br>
children ages five through 14, and 2,703,056 children ages 15 through 19.
(INE, 2009). <br><br>
[6] The estimates for enrollment in higher education for the 2006-2008
period are from Ministerio del Poder Popular para la Planificación y
Desarrollo, 2008, "Logros de la Revolución en un país de 28 millones
de habitantes", October,<br>
Caracas, Venezuela. Population estimates are from the Instituto Nacional
de Estadísticas (INE). <br><br>
[7] SISOV (2009). <br><br>
[8] There has been some debate over the size and effectiveness of Mision
Robinson -see Rodríguez, Francisco and Daniel<br>
Ortega. 2006. "Freed from Illiteracy? A Closer Look at Venezuela's
Robinson Literacy Program." Middletown, CT: Wesleyan University,
Department of Economics and Rosnick, David and Mark Weisbrot.2008.
"'Illiteracy' Revisited: What Ortega and Rodríguez Read in the
Household Survey". Center for Economic and Policy Research,
Washington, D.C. <br><br>
[9] These prices refer to WTI oil, according to U.S. Energy Information
Agency data. <br><br>
[10] Real per capita social spending in Venezuela increased by 218.3
percent over the 19982006<br>
period. This calculation includes social spending by both the central
government and PDVSA, deflated by the Caracas Consumer Price Index. Data
for central government social spending are from SISOV and for PDVSA from
the company's financial statements. Consumer price data are from the
Banco Central de Venezuela. <br><br>
[11] See Weisbrot, Mark and Luis Sandoval. 2008. "Update: The
Venezuelan Economy in the Chávez Years." Center for<br>
Economic and Policy Research, Washington, D.C., p.18. <br><br>
[12] This is based on the ratio of Venezuela's cumulative consumer price
inflation since February 2003, which is 201.4<br>
percent, to U.S. inflation of 14.8 percent. <br><br>
<br>
Source:<br>
<a href="http://www.cepr.net/index.php/press-releases/press-releases/report-examines-economy-and-social-indicators-during-the-chavez-decade-in-venezuela/">
CEPR </a><br><br>
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