Saturday, May 05, 2007

Paying their own way 

In putting together some economic data for an upcoming post I found out something that I hadn't completely realized before. Prior to Chavez coming to power Venezuela actually ran a trade deficit:

In 1998, just prior to Chavez coming to power Venezuela ran a trade deficit of $172 million dollars. That is, it imported $172 million dollars more than what it exported. This is not a huge sum - the United States currently runs annual trade deficits of around $600 billion per year (more on that in a second). However, for a country like Venezuela it is very bad.

The reason is that Venezuela is a net debtor, it owes more money to other countries than other countries owe it, and it must "service", pay interest and principal, on this debt. Just making payments on its national debt would generally consume 3 or 4 billion dollars per year. Hence, although the trade deficit itself isn't that large the larger measure of money flows, called the "current account", would have seen quite a large deficit - several billion dollars at least.

What is the big deal about this? In the short term it doesn't mean that much. But over the long term if countries run trade deficits they have to finance it by borrowing money and/or selling off assets. For example, the United States has been running deficits since the early 1980s. During that time the U.S. went from being a net creditor to a net debtor and the profits and interest paid out to foriegn countries on assets they own in the U.S. now exceeds profits and interest that the U.S. gets from its holdings abroad. This leads to less income for the U.S. and ultimately a lower standard of living.

Although the international financial community never would have let Venezuela run trade deficits for such a long time even having them for a few years is not good. Fortunately the international financial community didn't have to worry about it - Chavez came along and Venezuela started running trade surpluses.

Some are sure to say "but Chavez has had windfall oil revenues so of course he has a trade surplus". But there is no "of course" to this. One can have huge export revenues and still run deficits - the U.S. is the second largest exporter in the world yet runs large deficits. To run surpluses one must restrain imports below the level of exports which is what the previous Venezuelan government failed to do and is exactly what Chavez has done. That last U.S. government to do the same was the Carter administration. Ironic that governments of the left seem to be more financially responsible than governments of the right, isn't it?

There are two more points to this chart:

First, it was interesting to me, and somewhat unexpected, that even during the severe depression from the oil strike Venezuela ran large surpluses. Remember, during the strike Venezuela even had to import gasoline. It shows the government's prudence that they ran surpluses even under such dire circumstances.

Second, the opposition often likes to complain that Venezuelan imports have risen to record levels (which is true) and that they are unsustainable. Popycock. As the graph shows Venezuela has a trade surplus of over $30 billion dollars. Hence oil revenues could drop substantially and the country would still be fine from a balance of payments perspective.

Yet one more example of how Venezuela is better off now with Chavez at the helm.


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