Sunday, April 29, 2007

An investment too good to pass up 

The time has long since passed when Chavez's opponents could claim the Venezuelan economy was doing poorly. Sure, in 2002, 2003 and even to some extent 2004 things were rough - never mind that most of the difficulties in those years were the direct result of the opposition's attempts to run the economy into the ground with their "oil strike".

However, after posting a 17% growth rate in 2004 the Venezuelan economy has gone on to grow about 10% in both 2005 and 2006. Now no-one can deny that the Venezuelan economy is booming. Additionally, consumption has grown to such an extent that one has to go to the late 1970s to find a time when the Venezuelan people had it so good from an economic point of view.

Given these realities those who still wish to criticize Venezuela's economic performance generally say something along the lines of "this is all an oil boom, everything is being consumed, and there is little investment that will help spur future growth".

Venezuela having a consumption boom with little new investment does sound like a problem. After all, without new infrastructure, factories, buildings, and other items that allow more wealth to be created in the future how can the present growth be sustained? It can't.

However, you needn't stay up at night worrying about it for one simple reason. It isn't true. And a quick look at the actual investment numbers will show why:

Above is total investment in the Venezuelan economy from 1995 through 2006 listed in billions of dollars.

Before going more in depth lets cut to what jumps out from this graph. Last year Venezuela had just shy of $30 billion in investment. Looking at the years before 1999 we can see that last year Venezuela had almost 50% more investment than in any of the four years before Chavez came to power. So much for Chavez being bad for investment - one more piece of opposition propoganda out the window.

Lets examine the numbers a little more. First, it is interesting to note that from 1999 to 2001 investment was pretty consistent with what it had been in the years before Chavez. Clearly Chavez as such wasn't so bad for investment.

Now there was a huge drop of in investment in 2002 and 2003. Yet that is quite easy to understand - it corresponds to the period when the economy went into a deep depression thanks to the political instability and oil strike. When the economy is in a depression and factories are being underutilized as it is there is little incentive for new investment.

This brings up an important point - invesment is a lagging indicator. That is, investment only increases after the economy as a whole has been growing for some time. Only after current productive capacity is fully utilized will people invest in new capacity.

This can be seen in 1999 where investment dropped off due to the recession that Chaevez inherited from the outgoing Caldera administration. It took a couple of years for invesment to recover.

Note also that after the opposition induced depression of 02/03 it took years for investment levels to return to normal. However as the economy has continued to boom demand could not be met with existing capacity - hence investment now being at record levels.

And here is the good news. With the momentum that the economy now has and its continued growth investment is sure to continue rising rapidly.

To sum up, we can see that not only is their plenty of investment taking place in Venezuela it is actually much higher than when Chavez took office. With an economy in full growth mode and consumers with money in their pocket investors know a good opportunity when they see it.

[The numbers for the graph come from the Venezuelan Central Bank web-site: http://www.bcv.org.ve/c2/indicadores.asp

Under "AGREGADOS MACROECONÓMICOS" one can download "Oferta y Demanda" in both the 1997 and 1983 series. The provides the "Fixed Capital Formation" numbers. All the rest is just arithmatic.]


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