Monday, July 13, 2009

The state of Venezuelan manufacturing - 2008 

As I have mentioned, the Venezuelan Central Bank has finally come out with the 2008 version of its excellent annual economic summary. It can be found here and it REALLY should be read by all who can read Spanish.

However, recognizing that many either can't read it or won't read it for lack of time I will try to summarize some of the key points that will help provide the best understanding of both the strengths and weaknesses of the Venezuelan economy.

In this post I will touch on Venezuela's manufacturing sector.

It is well known that the manufacturing sector of the Venezuelan economy has not been doing well. During most of the oil boom it has grown well below the rate of most of the rest of the non-oil sector. Further, even while oil revenues were peaking in the middle of last year it went into decline and actually contracted in both the third and fourth quarter. And of course, the first quarter of this year saw manufacturing only decline still more.

However, the Central Bank Report gave some very illuminating information with regard to manufacturing that gives both more historical perspective and more depth than just the latest quarterly GDP statistics. So with out further ado here is the first extract from the report:

Now much has been made on this blog about Venezuela's policies on industrialization or lack thereof. I have long maintained that Venezuela has just been riding an oil boom and has done little to create industry. Others have claimed they are following an import substitution industrialization policy.

Well, to help exam which of those claims is nearer to the truth maybe we should look at the above graph which shows what percentage of internal consumption is satisfied by local production and what percentage is satisfied by imports.

Sad to say, it doesn't look good for the import substitution cause. Looking from 2004 to 2008 we see a steady upward march of IMPORTS with their percentage of total supply going from 21% to almost 32%.

That is, a significantly higher portion of the goods consumed in Venezuela today come from imports and a significantly lower portion of goods are produced domestically. In other words, we are seeing the exact OPPOSITE of import substitution in Venezuela.

Now, you could look at 2008, note that the upward trend of imports seemed to stop that year, and conclude "hey, maybe they finally are starting to produce more locally".

Sadly we know that isn't true because manufacturing GDP in 2008 stopped dead in its tracks.

But even worse if you read the sentence immediately below the graph you can see why imports stopped rising - investment in Venezuela dropped significantly and so the importation of capital goods fell significantly. In laymen's terms, in 2008 they kept importing flat screen TVs but cut way back on machinery to be used in factories. Not exactly a winning industrialization strategy.

The next slide begins a highly informative sub-section of the report dedicated to analyzing manufacturing:

The first graph is very interesting as it gives a break down of manufacturing by sector. It is illuminating.

I can remember the days when I was happy that Venezuelan manufacturing was growing fairly rapidly and someone would say to me - "Get a grip O.W., the only thing Venezuela makes is beer". Turns out, they were right. Far and away the main segment of Venezuelan manufacturing is food and beverages which accounts for practically a third of Venezuelan "industrial" output.

Newspapers and printing account for another 7.5%. More serious industry such as automobiles are practically at the bottom of the heap.

This graph certainly doesn't serve to make Venezuelan "industry" look very impressive.

Also, a very important point should be noted in the text of this page. It points out that in terms of value added by manufacturing a whopping 95% of manufacturing is by the private sector!!!! It further points out that this stunning number has held steady since 2000.

Factoids like that probably explain why neither Francisco Toro nor Mark Weisbrot want to read this report, much less comment on it. Francisco's standard line of the Castroite Venezuelan government is taking over the whole economy is obviously total bullshit when 95% of one of its most important sectors is still in private hands. And the notion that the Venezuelan government is leading any sort of industrialization drive, as people like Weisbrot like to contend, is down right silly when the government segment of manufacturing is only 5% and it isn't even growing!!!

On the next page this sub-section continues:

In the graph on this page we see the relative performance of the different manufacturing sectors over the past eight years. Very interestingly, the strongest performing sector by far is printing and publishing. Hey, I guess all the propaganda newspapers and pamphlets did lead to a boom of sorts!!

Sadly, the manufacture of some more important items didn't do quite so well. The manufacture of machinery grew at a paltry 1.4% percent rate while electronic equipment outright declined. I wouldn't think that would be happening if the country was actually industrializing.

Next comes the page with the last part of the sub-section on manufacturing. This contains what is actually one of the most revealing graphs.

The graph on the left shows manufacturing GDP as a percentage of total GDP for Venezuela. The shaded part of the graph corresponds to the period of Chavez's presidency. Note that during that period manufacturing has remained constant relative to overall GDP. Now, that means manufacturing has grown quite a bit as the Venezuelan economy overall as grown a lot.

But note something even more interesting. During the much maligned 70s and 80s manufacturing actually grew much more rapidly as it became an ever larger share of GDP.

That is something you would expect to see in a country that is actually trying to industrialize. Yet we see it under Carlos Andres Perez and Luis Campins, not under Hugo Chavez. The believers in the infallibility of Chavez should have fun trying to explain that one away.

In sum, we have known for quite some time that manufacturing in Venezuela wasn't doing well in the current oil boom. Yet we have now picked up some even scarier details - imports make up an increasing portion of Venezuelan consumption, Venezuelan industry is almost entirely in private hands, Venezuelan industry, such as it is, his heavily comprised of "light" industry, the segments of industry that would be helpful for investment are precisely the slowest growing ones, and the 70s and 80s seemed to show a much better performance by the manufacturing sector than has the Chavez era.

Sorry to all those who don't like the above - but that's just the facts as presented by the Central Bank of Venezuela.

And just as a final point, it should be noted that the Venezuelan government doesn't publish bogus statistics. There is absolutely no indication that they do anything of the sort. Rather, they publish an honest and frank listing of the facts with apparently little concern for whose ox those facts might gore. The real question is how many Venezuelans are interested in reading an honest account of the facts. It would appear, not many.


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