Oil Wars

The fruits of incompetence.

2010-07-06T20:01:00.000-07:00

Some recent economic growth rates from around Latin America:

Brazil 9% in Q1

Mexico 4.3% in Q1

Peru 9.3% in April

Paraguay 11% in Q1

Ecuador .6% in Q1

Colombia 4.4% in Q1

For the record, Venezuela's economy shrank 5.8% in the first quarter of 2010.

Clearly, Chavez's assertion that Venezuela is in a recession because of external factors beyond its control is bogus as countries all around Venezuela are growing - big countries, small countries; countries with Left governments and countries with right wing governments, oil exporters and agricultural countries - across the board they are growing. Yet Venezuela remains in a sharp recession.

Of course, it was always bogus that Venezuela was in a recession for reasons out of their control. Countries with half way decent economic policies - such as China and Vietnam - never went into a recession at all. But even Venezuela's cohorts, often with their own shortcomings, are way outperforming Venezuela.

That is was incompetence does for you.

Walmart socialism

2010-06-18T19:14:00.000-07:00

The "socialism" of Hugo Chavez has always been notable for its lack of clear definition.

Well today maybe it became a bit clearer when President Chavez said:

"Socialism sells more, sells better, and sells cheaper"

Funny, but that sounds an awful lot like Walmart, and I"ve never really thought of Walmart as being the incarnation of socialism.

But if buying a bunch of cheap goods from China and selling them cheaply in big box stores, which is what Hugo Chavez is now doing, is socialism maybe Sam Walton was really the progenitor of 21st Century Socialism.

In the good old days I'd have gotten all giddy over this...

2010-05-19T18:36:00.000-07:00

Back in the days when I actually believed Chavez when he talked about new projects and plans I would have gotten all worked up and excited over this:

We are told the Chinese will help set up factories in Venezuela to build appliances such as refrigerators, ovens, and washing machines. Additionally, they will set up a research and design center for Venezuela to increase its technical capacity and be able to design its own appliances in the future. If what is said in the video is true, within little more than a year Venezuela will be producing more than a million appliances annually.

Let me first say, IF this is true and is really carried out this is very good news. This is EXACTLY the sort of thing that Venezuela should be doing... on a massive scale.

Further, the choice of appliances is excellent and one I have always favored. The reason is that while many countries start out making very simple things like textiles, toys, and other very simple products Venezuela probably can't do that because its wage rates are already too high (due to oil) to ever allow those industries to be feasible.

On the other hand, big industries such as autos and ships require huge investments and lots of technology in a addition to a very highly trained work force - hence it is hard to start off your industrialization process with those sophisticated industries.

Things like appliances strike a happy medium - they are high enough value added that they can support and justify the higher wages of a country like Venezuela yet not so sophisticated that they are beyond the technical capacity of the country. They are not the ONLY thing Venezuela should be building - Venezuela needs to start LOTS of industries - but they are certainly a key industry that Venezuela is absolutely right to target and invest heavily in. In short order all appliances sold in Venezuela should be MADE in Venezuela and exports should be actively promoted.

So this all sounds awesome, right??? Yeah, it does. But sadly the reality of the last several years has taught me not just to take this news with a grain of salt, but with the whole salt shaker. Here are some key reasons why:

First off, this project should have been started, at a minimum three years ago. Why, for gods sake, have they waited until now?!?!?!? What prevented them from doing this years ago?

If they had begun it earlier they could have these factories fully up and running and possibly even be almost self-sufficient with these important products. Yet because they have done NOTHING on this up to this point they are now having to import 300,000 appliances from China (not even counting all their regular imports of this over the past years)!?!? Those are appliances that should already have been made in Venezuela.

Once again, this is very late in coming and Venezuela has wasted huge amounts of time and money - two very precious things it can ill afford to waste.

Then there is an even bigger reason for skepticism. That is, although many industrial projects get announced very few actually get built, particularly of the larger ones, or turn out to be much reduced shells of what we were told the would be.

Examples?

The Venezuelan-Iranian car company housed in a tiny warehouse in Maracay - how many cars is it assembling? Who knows, we almost never hear of it any more.

The Venezuelan-Iranian tractor factory was supposed to be producing multiple tractor lines by now and have mainly Venezuelan made components. Again, its seems to have fallen off the earth as we almost never hear of it or how much it is producing.

We've been hearing about what is supposed to be the largest car parts factory in South America for years now. Yet when we last looked into it it turned out almost no progress had been made in building it. And since then, not a word.

The Venezuelan-Chinese cell phone factory? They were supposed to make hundreds of thousands of them, yet apparently only made less than a third of the projected number. Sadly, that probably makes it a success relative to other projects.

The seamless pipe plant and petrochemical plants are presumably (hopefully) progressing - but very slowly.

As you can see just from the few examples presented above Chavez has a long and sad history of announcing things with much fanfare which then never come to pass - or only as a shadow of what they were supposed to be.

It would be great to believe this announced factory will be different. But would it be realistic?

Yet more subsidies for the rich...

2010-05-16T07:53:00.000-07:00

As is well known, Venezuela has an official fixed exchange rate between the its Bolivar currency and the U.S. dollar. It is also well known to be an overvalued currency and while the government gives it to sectors of the economy that it wants to prioritize not everyone gets dollars at the official exchange rate. Hence, there has been a parallel market where currency is exchanged at free market prices (technically it is bonds that were traded, not currency, but it winds up being exactly the same).

So, for example, stores that were needing to import basic food items or medicines could get dollars at the most favorable exchange rate of 2.6 bolivares per dollar.

People importing less essential items, maybe clothes, would use the less favorable rate of 4.3 bolivares per dollar.

Finally, there were people who were importing things that were not a priority of the governments at all such Ipods or Whisky and they would have to get their own dollars. They would go to the parallel market and pay upwards of 8 bolivares for a dollar.

This blog has long been critical of the government giving out way to may "cheap" dollars via an overvalued exchange rate. However, at least they did tell SOME people wanting some totally frivolous things to bug off and get their own dollars.

Well, it looks like someone got pissed that their whisky was getting expensive or the Ipods whey wanted to give their daughter for her 15th birthday were costing too much because it was determined that the parallel market rate was too high.

Chavez has complained that the parallel market was selling dollars at too high a rate, has threatened and forced to shut down blogs that listed prices, and even raided brokerage firms. The central bank will now make arrangements to give people who formerly used the parallel market directly, at presumably a more favorable rate - may 5 or 6 bolivares per dollar.

Lets back up and think about this for a minute. The government, which controls virtually all the dollars coming into the country due to its controlling the State oil company, has long given "cheap" dollars to many sectors it considered important, and even some rather frivolous ones.

However, there were certain sectors that even the government thought were two frivolous to subsidize with cheap dollars - people importing Ipods, whisky, or simply wanting dollars to take them out of the country - ie capital flight. In fact, as it turns out, of the $29 billion dollars sold on the parallel market last year 70%, yes 70%, were simply people wanting dollars to take them out of the country - ie CAPITAL FLIGHT. Less than 30% went to actually importing anything.

Yet the government considers it important to keep the parallel rate low!?!?!? Why??? Why would any sane government want to subsidize capital flight????

Of course, they shouldn't. And the more expensive dollars were for people wanting to take them out of the country they better - they should have been happy if people wanting to buy dollars to deposit them in a bank in Miami had to pay 20 bolivares for them.

But not this government. The people running it are so confused and so equate a favorable exchange rate for Bolivares with being a sign of success and power that they always want the fewest bolivares to be able to buy dollars. That is probably a big reason why they have always insanely had an fixed and overvalued exchange rate and why they now are in the completely absurd position of giving dollars more cheaply to rich Venezuelans taking money out of the country.

So here we go, billions more dollars to be pissed away on the rich while the country itself stagnates and can't even make its own washing machine!!!

Even Chavez doesn't buy Venezuelan products

2010-05-08T09:23:00.000-07:00

Want to see a clear example of why Venezuela is not developing? Take a look at the beginning of this video:

Chavez shows off his shiny new Blackberry cellphone and asks rhetorically why he shouldn't he have one.

As is often the case with so much of the discussion around issues in Venezuela the question is incorrectly framed. He questions why he should be accused of having a capitalist product when in fact a Blackberry is neither capitalist nor socialist but simply a device, or technology.

He is correct about that, but he entirely misses the point. A Blackberry may be neither capitalist nor socialist but in Venezuela's case buying one is most definitely anti development.

How so? Because for Venezuela to progress as a country it must develop its own industries and technologies and not simply import everything.

In recognition of that Venezuela even set up a cellular telephone assembly plant with Chinese assistance. To the greatest extent possible all resources devoted to cellphones in Venezuela should be put into building up that plant, expanding its technology and production, and having more of its components produced in Venezuela. To further that goal, cellphone imports should be restricted to the greatest extent possible with very high tariffs, or banned outright.

Apparently, that is not happening as Venezuelans buy hundreds of thousands or even millions of Blackberrys. And none other than the President himself has scarce dollars spent on purchasing an expensive imported phone for himself rather than supporting local industry.

Following Chavez's lead Venezuela will never develop.

Yeah, but it's not South Korea or Tawain or China either.

2010-05-06T18:48:00.000-07:00

Today Mark Weisbrot wrote yet another interesting article on Venezuela's economic situation - this time entitled "Venezuela is not Greece":

With Venezuela's economy having contracted last year (as did the vast majority of economies in the Western Hemisphere), the economy suffering from electricity shortages, and the value of domestic currency having recently fallen sharply in the parallel market, stories of Venezuela's economic ruin are again making headlines.

The Washington Post, in a news article that reads more like an editorial, reports that Venezuela is "gripped by an economic crisis," and that "years of state interventions in the economy are taking a brutal toll on private business."

There is one important fact that is almost never mentioned in news articles about Venezuela, because it does not fit in with the narrative of a country that has spent wildly throughout the boom years, and will soon, like Greece, face its day of reckoning. That is the government's debt level: currently about 20% of GDP. In other words, even as it was tripling real social spending per person, increasing access to healthcare and education, and loaning or giving billions of dollars to other Latin American countries, Venezuela was reducing its debt burden during the oil price run-up. Venezuela's public debt fell from 47.5% of GDP in 2003 to 13.8% in 2008. In 2009, as the economy shrank, public debt picked up to 19.9% of GDP. Even if we include the debt of the state oil company, PDVSA, Venezuela's public debt is 26% of GDP. The foreign part of this debt is less than half of the total.

Compare this to Greece, where public debt is 115% of GDP and currently projected to rise to 149% in 2013. (The European Union average is about 79%.)

Given the Venezuelan government's very low public and foreign debt, the idea the country is facing an "economic crisis" is simply wrong. With oil at about $80 a barrel, Venezuela is running a sizeable current account surplus, and has a healthy level of reserves. Furthermore, the government can borrow internationally as necessary – last month China agreed to loan Venezuela $20bn in an advance payment for future oil deliveries.

Nonetheless, the country still faces significant economic challenges, some of which have been worsened by mistaken macroeconomic policy choices. The economy shrank by 3.3% last year. The international press has trouble understanding this, but the problem was that the government's fiscal policy was too conservative – cutting spending as the economy slipped into recession. This was a mistake, but hopefully the government will reverse this quickly with its planned expansion of public investment this year, including $6bn for electricity generation.

The government's biggest long-term economic mistake has been the maintenance of a fixed, overvalued exchange rate. Although the government devalued the currency in January, from 2.15 to 4.3 to the dollar for most official foreign exchange transactions, the currency is still overvalued. The parallel or black market rate is at more than seven to the dollar.

An overvalued currency – by making imports artificially cheap and the country's exports more expensive – hurts Venezuela's non-oil tradable goods' sectors and prevents the economy from diversifying away from oil. Worse still, the country's high inflation rate (28% over the last year, and averaging 21% annually over the last seven years) makes the currency more overvalued in real terms each year. (The press has misunderstood this problem, too – the inflation itself is too high, but the main damage it does to the economy is not from the price increases themselves but from causing an increasing overvaluation of the real exchange rate.)

But Venezuela is not in the situation of Greece – or even Portugal, Ireland, or Spain. Or Latvia or Estonia. The first four countries are stuck with an overvalued currency – for them, the euro – and implementing pro-cyclical fiscal policies (eg deficit reduction) that are deepening their recessions and/or slowing their recovery. They do not have any control over monetary policy, which rests with the European Central Bank. The latter two countries are in a similar situation for as long as they keep their currencies pegged to the euro, and have lost output six to eight times that of Venezuela over the last two years.

By contrast, Venezuela controls its own foreign exchange, monetary, and fiscal policies. It can use expansionary fiscal and monetary policy to stimulate the economy, and also exchange rate policy – by letting the currency float. A managed, or "dirty" float – in which the government does not set a target exchange rate but intervenes when necessary to preserve exchange rate stability – would suit the Venezuelan economy much better than the current fixed rate. The government could manage the exchange rate at a competitive level, and not have to waste so many dollars, as it does currently, trying to narrow the gap between the parallel and the official rate. Although there were (as usual, exaggerated) predictions that inflation would skyrocket with the most recent devaluation, it did not – possibly because most foreign exchange transactions take place through the parallel market anyway.

Venezuela is well situated to resolve its current macroeconomic problems and pursue a robust economic expansion, as it had from 2003-2008. The country is not facing a crisis, but rather a policy choice.

Sure, Venezuela isn't Greece. But then again, most Venezuelans probably which that it were - they envy the higher Greek standard of living, freedom to travel, and freedom from crime.

So while this is actually a fairly good article by Dr. Weisbrot it once again brings up a conceptual failing, not only on his part but one that others make as well. And that is that doing slightly less bad on growth numbers than already developed countries like those of North America, or Europe, or east Asia means that Venezuela isn't doing too poorly. That is wrong. Venezuela is a poor country that needs very high growth rates - anything else constitutes failure.

Clearly, Venezuela is failing.

Of course, Dr. Weisbrot is becoming a little more clear in his criticism of the Venezuelan government's economic policy errors. He is now willing to call the overvalued currency (and do note, he still thinks it is overvalued - he is probably right) Venezuela's biggest "long term mistake".

I can only guess at what HE thinks the reasons are why the Venezuelan government has followed such a mistaken policy for so many years.

In any event, until such time as the Venezuelan government itself comes to the realization that this has been, and continues to be, one big mistake, this is all an academic discussion. Venezuela will continue to be left further and further behind by others, with dire consequences for the well being of its citizens.

Imagine if it were PDVSA that was screwing up this badly.

2010-05-01T11:07:00.001-07:00

It looks like the combined incompetence of British Petroleum and the U.S. government are going to wipe out a good chunk of the Gulf of Mexico.

What can I say, shit happens.

Despite all your technology, all your money, and all your effort things can and do go wrong - something of course, that a good chunk of Venezuelan society doesn't understand. Which is why if a mosquito in the Orinoco detla bites someone in the butt the talking heads in Caracas start going berserk. Or if smoke comes out of a smoke stack then something must be terribly, terribly wrong, and of course the government is to blame.

Anyways, for those beach fans out there you might want to forget the Gulf for the next decade or so. I hear Chichireviche, Margarita and Los Roques are all pretty nice.

Don't hold your breath Mark, don't hold your breath.

2010-04-20T19:41:00.000-07:00

When reality keeps smacking you in the face year after year there just comes a point when you can no longer deny it. Mark Weisbrot has apparently reached such a point in acknowledging that the Chavez government simply doesn't have a plan when it comes to the economy.

In an almost confessional article entitled "Venezuela Needs and Economic Development Strategy" Dr. Weisbrot states:

The other major economic problem faced by Venezuela over the last 7 years has been its overvalued currency. In 2003 the government fixed the exchange rate at 1600 (now re-denominated as 1.6 bolivares) per dollar. It was devalued twice, to 2.15 in 2005, where it remained until January of this year.

The problem is that Venezuela's currency has grown increasingly overvalued at this fixed rate. Venezuela's inflation has been much higher than that of its trading partners (it has averaged 21 percent annually over the last 7 years). This means that, if the nominal exchange rate is held fixed, the currency appreciates in real terms. Assuming that the currency was not overvalued when it was originally fixed, it would have to have fallen to about 5.13 to the dollar by the beginning of this year, in order to keep the same real exchange rate. At the fixed exchange rate, it was probably more than 130 percent overvalued.

An overvalued exchange rate makes Venezuela's exports expensive in foreign markets and its imports artificially cheap. This makes it difficult, and perhaps impossible, for Venezuela to diversify its economy away from oil -- and in fact the country has not done so during the past 7 years.

Nothing that hasn't been said over and over here before.

He then goes on to state:

Venezuela would probably be better off with a more flexible but still managed exchange rate regime, keeping its capital controls but maintaining a competitive exchange rate so that the economy can diversify away from oil. This would at least allow for the possibility of pursuing an economic development strategy, something that -- after decades of neoliberalism -- is still pretty much absent among governments in the western hemisphere.

His frustration at the Venezuelan government not having a plan is palpable in this quote. And what can I say, I share it?

So there really is nothing to say, save if you're waiting for a plan out of the Chavez government don't hold your breath.

Turns out agriculture isn't doing all that well after all

2010-04-17T09:38:00.000-07:00

There has been much discussion on this blog regarding how agricultural production has been doing. Some have asserted that production has increased 50% or even doubled.

Turns out, straight from the mouth of the person who oversaw the Ministry of Agriculture, that it has done much less well. In fact, over 10 years production of food is only up 21%:

En diez años de revolución, el Gobierno ha rescatado el 40% de los latifundios y ha logrado incrementar la producción nacional de alimentos en 21%, afirmó el vicepresidente de la República Bolivariana de Venezuela, Elías Jaua, en una entrevista transmitida por el programa Contra Golpe de Venezolana de Televisión (VTV).

That is comes to about 2% per year. Actually less when you take into account compounding. Given that population growth over the same period has also been around 20% there in effect has been no per capita increase in agricultural production and the big boost in consumption has simply come via oil financed imports of food.

Clearly, if the country's development strategy revolves around boosting agricultural production they aren't getting very far.

It's really sad to see how low some will sink...

2010-04-08T19:21:00.001-07:00

In the latest example of how low some will sink and how they really have no principals we have this from Eva Golinger Venezuelanalysis:

Those defending Alvarez Paz shield themselves behind concepts of freedom of expression. But are citizens free to go on live national television and accuse the president of a nation of drug trafficking and terrorism without presenting any evidence? Would that happen in any other country without consequence? Imagine a former governor in the United States going live on NBC news and accusing President Barack Obama of terrorism and drug trafficking with no evidence to back such dangerous claims. The individual would be immediately arrested by Secret Service and prosecuted to the full extent of the law for not only spreading false information, but also for endangering the life and image of the US presidency.

In reading this I have to wonder who is she writing for? Who does she think is dumb enough that they will believe this? Certainly no one in the U.S. Yet it is written in English.

Of course, I can call Barak Obama a terrorist, a drug trafficker, a child molester or pretty much whatever else I want and nothing will happen - and the Secret Service certainly won't take notice or care unless I actually threaten him. Unless Obama were to personally file a libel or slander suit against me I really wouldn't have much to worry about.

And of course, such things really do get said about U.S. presidents all the time - and nothing happens.

Case in point:

CARACAS, Venezuela - The American singer and activist Harry Belafonte called President Bush “the greatest terrorist in the world” on Sunday and said millions of Americans support the socialist revolution of Venezuelan leader Hugo Chavez.

Belafonte led a delegation of Americans including the actor Danny Glover and the Princeton University scholar Cornel West that met the Venezuelan president for more than six hours late Saturday. Some in the group attended Chavez’s television and radio broadcast Sunday.

“No matter what the greatest tyrant in the world, the greatest terrorist in the world, George W. Bush says, we’re here to tell you: Not hundreds, not thousands, but millions of the American people ... support your revolution,” Belafonte told Chavez during the broadcast.

Did Belafonte get arrested? Is he in jail? Did he ever get hauled in by the Secret Service?

Seriously Eva, saying such outlandish and obviously false things isn't going to get you anywhere. If lying had value then the Venezuelan opposition would have actually accomplished something over the past 10 years beside destroying their own credibility.

All Ms. Golinger and Venezuelanalysis are doing is destroying their own credibility and showing how far they are willing to go in defending some very questionable acts.

Freedom of speech is dead in Venezuela

2010-03-25T10:58:00.000-07:00

It is gone now with the high profile arrest of people who simply voiced opinions against the government. If you believe liars should be punished regardless... Chavez and Chavismo lie with equal aplomb and the are not in jail, so there is only freedom if you are with the government.

Dysfunctionality neatly summarized

2010-02-22T18:24:00.000-08:00

If you speak spanish and want to watch just one video to get a sense of the dysfunctionality of the Venezuelan government this would be a good choice:

Watch live streaming video from aporrea at livestream.com

It can also be found here with an article summarizing it.

I don't know how much I need to say - the article and video speak for themselves. But I thought some of the highlights were:

The government of Hugo Chavez - the very same one that ran its mouth in Copenhagen about how others were destroying the environment - has now discovered that hydro-electric power is bad and thermo-electric power is good. They openly brag about canceling hydroelectric power projects and replacing them with generating plants that burn hydrocarbons such as gas and oil.

Next time Chavez talks about how capitalism or rich countries or someone else is messing up the environment maybe someone should tell him - no, idiots who cancel hydroelectric projects and replace them with oil fired power plants are messing up the environment.

Now Chavez is in rush to build more than a dozen thermo-electric plants. Well, if the country was going to need them due to growing electric usage and the country was overly reliant on hydro-electric power why weren't these built 2, 3, 3, or even 10 years ago. The same issues, if studied, would have been obvious years ago, why all the rush at the 11th hour?

Another interesting part is when Chavez talks about how factories need their own power generation systems and that this should be planned for some new steel plant they are (supposedly) building. Well, thank god the Chavez government is as incompetent and slow in building new industry as it is in building electric generation plants. Had they actually built much of any industry their electric grid would be totally screwed.

Continuing on with the lack of planning notice that never once in the article or the video did Chavez mention how much it would cost to fuel all these power plants. If it takes 100,000 barrels of oil per day to fuel these plants and oil costs $80 per barrel that is a cost of nearly $3 billion dollars per year!!!!!! But I guess that they area already losing more than $17 billion per year to domestic consumption (mainly peoples private cars) another $3 billion seems trivial.

And finally the one scene in the video that had me rolling was when Chavez noticed that his jack of trades minister Ali Rodriguez actually took notes during the meeting. This struck Chavez as novel and a great idea!!! This might seem odd to any even mid level manager who has carry out projects of any size. But when you are Chavez and pretty much everything that you do is improvised, and at least half of what you say you are going to do is soon forgotten about never to be spoken of again, why take notes?

Anyways, get some cotufa, pull up a chair, and enjoy.

A discussion on some key questions concerning Venezuela.

2010-01-31T19:59:00.000-08:00

A long time follower of Chavez, and blogger himself, has recently made some interesting observations on my posts and pointed out areas where he disagrees with my analysis. Further, he has sought to "elevate the level" of the discussion here.

Given that his comments are in themselves worthwhile and that they do succeed in elevating the discussion I thought they should be responded to in a post rather than being left in the comments section. What follows are Justin's comments with my response.

Justin's main assertion is this:

I feel the "standards" to which OW tries to hold Venezuela are "utopian" in the sense that they leave little consideration for all the structural, cultural and institutional obstacles to his desired ends.

Governments aren't made up of supermen who can simply brush aside existing cultural mores, political institutions, and economic structures and make the world from scratch. Governments invariably operate within certain constraints. Thus, governments should be judged in light of the constraints under which they operate.

Often OW does not take into consideration that the "standards" to which he tries to hold Venezuela are historically unprecedented. On the one hand, he sets the capitalist mercantilism of countries like South Korea, Taiwan, and China as the "standard" by which Venezuela's economic performance should be judged. On the other hand, he tries to hold the Chavez government to a strict set of democratic "standards," somehow forgetting that the periods of rapid industrial expansion in Taiwan and South Korea did not take place under the political conditions that he demands of Venezuela. On the one hand, he wants Venezuela to have the kinds of "insulated technocrats" characteristic of the Chinese and South Korean models, and he wants these technocrats to take Venezuela to the economic promiseland. On the other hand, he demands the kind of open, democratic politics in which "insulated technocrats" cannot maintain their insulation from political pressures. In sum, OW wants the "best" of both worlds, but what he fails to recognize is that there are inevitable trade-offs between one set of goals and the other. In a democracy, governments face the kinds of political constraints on their economic plans that the South Koreans or the Taiwanese did not encounter in their most rapid stages of industrial development (because these countries had out-and-out dictatorships that didn't have to concern themselves with elections). In democracies (and particularly petro-democracies), politicians often have little choice but to put their short-term political survival ahead of long-term economic plans. So my point is that OW hasn't really paid that much attention to the constraints under which the Chavez government has operated.

That's not to mention the fact that the basic model that OW advocates is not environmentally sustainable. The model of the future cannot be exponential growth because the planet cannot sustain that.

Justin starts off by making the observation that all countries have different cultures and political and social structures. Certainly that is true - almost by definition.

But it is also true that it is largely irrelevant unless something can be shown that is unique to Venezuela's society and culture and which somehow impairs its ability to develop. I don't rule out that such a thing could exist - but it isn't enough to assert it, you have to say specifically what it is.

But Justin does then get to the heart of his point which is that I appear to advocate things for Venezuela that are contradictory. On the one hand I want them to follow a high investment high growth economic model similar to that used by South Korea, Taiwan, and China. On the other hand I want them to be an politically open democracy. Both of those things are true.

Yet as Justin observes South Korea, Taiwan, and China all were/are dictatorships during their economically formative years. Moreover, it is highly unlikely they could have grown anywheres near as fast had they been democracies - they wouldn't have been able to keep investment as high and consumption as low if they had to face periodic elections.

Therefore, advocating an East Asian development model and democracy can be a contradiction.

And if we were talking about Brazil, or Colombia, or Honduras, or Peru, or Argentina Justin would be completely right - it would be a contradiction. The only way those countries could invest enough to grow rapidly would be by asking the population for significant sacrifices. Almost certainly, those sacrifices could only be imposed by a government that didn't have to worry about being voted out of office - ie a dictatorship.

Therefore, in the case of most countries I would have a major contradiction - a country can follow the east Asian development model of rapid growth or it can be a democracy, but it can't do both.

However, having to choose between rapid growth or democracy is one that Venezuela doesn't face. The reason is simple - oil. Venezuela has more money, per capita, than any other country in Latin America. And the government, in particular, has far more money per capita at its disposal than any other government in Latin America - it owns all the oil. And as the statistics that have been gone over before show Venezuela has far, far more money at its disposal than South Korea, Taiwan, or China ever did.

Those huge resources mean that Venezuela can spend heavily on social programs that satisfy important and keep the support of most of the population AND at the same time have tens of billions of dollars to spend on development projects.

In fact, it is very easy to see that they could afford both things: for the past number of years they have spent heavily on social programs AND wasted billions of dollars by giving away absurdly cheap dollars to the Venezuelan upper class (now, even Chavez admits they were doing this though he doesn't say why).

Therefore, the only thing they would have to do differently is stop wasting money on the middle class consumer binge and spend that money on development projects - something this blogger advocated for the past three years. Given that the middle class doesn't vote for Chavez anyways and the poor and working class would still get the social programs they need, and hence would still support Chavez, he could in fact pursue a strong development policy while staying within the confines of a democratic government.

In other words, the apparent contradiction that Justin points out, while it may be valid for most countries, is washed away in the case of Venezuela by tens of billions of dollars in oil revenues.

Finally, Justin says rapid economic growth is not sustainable because of all the environmental degradation that comes with it. My response to that is twofold.

First, I have only spoken with regard to Venezuela and certainly one country of 28 million people developing to first world levels is not going to destroy the planet. Also, Venezuela is hardly a green country as it is, given the Chavez's government wasteful and highly polluting policy of giving away gasoline practically for free.

Second, even if we talk about the whole world developing it is not necessarily the case that the planet would be destroyed. Why isn't that automatically the case? Simple. Technology isn't static and new technology has the capability of having similar devices pollute much less, or similar size plots of land grow more food, or of generating ever greater amounts of energy from renewable resources. And technology isn't advancing anywheres near as fast now as it conceivably could because it is only about 20% of the worlds population that lives well enough to engage in scientific research. As more countries develop their populations will become more educated, they will have large numbers of scientists and the world will quite possibly see the pace of scientific and technological change advance much faster than it currently is. Hence, economic growth that lifts most of the worlds population out of poverty and into developed status could actually lesson environmental problems.

Therefore, I don't share Justin's Malthusian type concerns regarding economic development.

Finally, I want to turn to another comment posted by Justin that is very much worthy of discussion:

No doubt the party-liners exist (just as they do in all political movements), but I don't think you give a proper explanation as to why they are significant in number in Venezuela. This has more to do with the nature of Venezuela's political polarization than with the personality of Chavez. When a government is faced with both external threats and a disloyal opposition (that has never really renounced its legacy of political subversion and economic sabotage), the government's supporters will often be fearful of showing disunity in the face of these sorts of threats. So the dynamics at work are really much deeper than Chavez the man. That's the problem I see in your analysis.

I have a couple of disagreements with Justin's comments above.

First, how much of a "threat" has the Chavez government been facing for the past five years? I would say, very little. Chavez himself has won elections by wide margins, the opposition stupidly boycotted legislative elections so that Chavismo is totally dominant there, the media taken as a whole is probably more pro-Chavez and anti-Chavez at this point, the opposition eliminated itself from the military an oil industry via their stupid coup attempts and oil strikes, and the opposition can't even mobilize people in the streets any more.

So seriously, what threat? Do some students burning tires in the street threaten the governments stability? I think they clearly don't.

More to the point, the real threat to the government comes not from its opponents, as seditious and loony as they still may often be, but from the governments own failings. That is, the principal threat to the Chavez government comes from performing poorly, losing popular support and as a result loosing elections.

If the Chavez government continues to grow the economy, have more jobs created, maintains or even expands the social programs, deals effectively with every day problems such as crime and boost people's standard of living then it will be unbeatable at the polls.

But if it follows the wrong policies and the economy suffers as a result and if it is ineffective at dealing with other problems then it risks being voted out of office.

Hence, what would most benefit the government is open and thorough debate on what the priorities and best policies should be, then followed by action. The best and most effective way to run a political movement is to have a thorough discussion of issues followed by a democratic decision making processes. Then once that decision is made members need to be disciplined enough to follow that decision, even if it wasn't the one they advocated. Not only is that the politically correct way to do things, it is also the way that is most likely to result in correct policies.

But in Venezuela that sort of open decision making process is rarely seen. That is a huge problem.

And I don't buy the notion that it is the rank and file that insists on not having an open decision making process and wants the decisions to come from on high. Referring back to Chavez's speech - that wasn't the rank and file insisting on discipline and saying "I am the people". It was Chavez himself saying that.

It is clear that Chavez has lots of support. But it is a huge leap to go from saying that Chavez has a lot of support to saying that people don't want control over their leadership and a say in how things are done (or even more, to say that it is a good thing to have one person deciding almost all policies). For example, when I was speaking to people in Venezuela during the 2005 legislative elections I remember a lot of Chavez supporters being upset that the candidates were hand picked by Chavez rather than being chosen through internal elections.

And with new legislative elections only 9 months away how will candidate be chosen? I don't know, but the way they are chosen will be very telling.

Hopefully, this post serves to illustrate some of the differences in how people on the left view Chavez.

You know you are too busy with bullshit when you miss this..

2010-01-30T10:19:00.001-08:00

This week, one of the United State's greatest historians died. Truly sad.

Bob Hebert (whose editorials are getting better and better) has something more worthwhile to say about it than I could come up with:

A Radical Treasure

By BOB HERBERT
I had lunch with Howard Zinn just a few weeks ago, and I’ve seldom had more fun while talking about so many matters that were unreservedly unpleasant: the sorry state of government and politics in the U.S., the tragic futility of our escalation in Afghanistan, the plight of working people in an economy rigged to benefit the rich and powerful.

Mr. Zinn could talk about all of that and more without losing his sense of humor. He was a historian with a big, engaging smile that seemed ever-present. His death this week at the age of 87 was a loss that should have drawn much more attention from a press corps that spends an inordinate amount of its time obsessing idiotically over the likes of Tiger Woods and John Edwards.

Mr. Zinn was chagrined by the present state of affairs, but undaunted. “If there is going to be change, real change,” he said, “it will have to work its way from the bottom up, from the people themselves. That’s how change happens.”

We were in a restaurant at the Warwick Hotel in Manhattan. Also there was Anthony Arnove, who had worked closely with Mr. Zinn in recent years and had collaborated on his last major project, “The People Speak.” It’s a film in which well-known performers bring to life the inspirational words of everyday citizens whose struggles led to some of the most profound changes in the nation’s history. Think of those who joined in — and in many cases became leaders of — the abolitionist movement, the labor movement, the civil rights movement, the feminist revolution, the gay rights movement, and so on.

Think of what this country would have been like if those ordinary people had never bothered to fight and sometimes die for what they believed in. Mr. Zinn refers to them as “the people who have given this country whatever liberty and democracy we have.”

Our tendency is to give these true American heroes short shrift, just as we gave Howard Zinn short shrift. In the nitwit era that we’re living through now, it’s fashionable, for example, to bad-mouth labor unions and feminists even as workers throughout the land are treated like so much trash and the culture is so riddled with sexism that most people don’t even notice it. (There’s a restaurant chain called “Hooters,” for crying out loud.)

I always wondered why Howard Zinn was considered a radical. (He called himself a radical.) He was an unbelievably decent man who felt obliged to challenge injustice and unfairness wherever he found it. What was so radical about believing that workers should get a fair shake on the job, that corporations have too much power over our lives and much too much influence with the government, that wars are so murderously destructive that alternatives to warfare should be found, that blacks and other racial and ethnic minorities should have the same rights as whites, that the interests of powerful political leaders and corporate elites are not the same as those of ordinary people who are struggling from week to week to make ends meet?

Mr. Zinn was often taken to task for peeling back the rosy veneer of much of American history to reveal sordid realities that had remained hidden for too long. When writing about Andrew Jackson in his most famous book, “A People’s History of the United States,” published in 1980, Mr. Zinn said:

“If you look through high school textbooks and elementary school textbooks in American history, you will find Jackson the frontiersman, soldier, democrat, man of the people — not Jackson the slaveholder, land speculator, executioner of dissident soldiers, exterminator of Indians.”

Radical? Hardly.

Mr. Zinn would protest peacefully for important issues he believed in — against racial segregation, for example, or against the war in Vietnam — and at times he was beaten and arrested for doing so. He was a man of exceptionally strong character who worked hard as a boy growing up in Brooklyn during the Depression. He was a bomber pilot in World War II, and his experience of the unmitigated horror of warfare served as the foundation for his lifelong quest for peaceful solutions to conflict.

He had a wonderful family, and he cherished it. He and his wife, Roslyn, known to all as Roz, were married in 1944 and were inseparable for more than six decades until her death in 2008. She was an activist, too, and Howard’s editor. “I never showed my work to anyone except her,” he said.

They had two children and five grandchildren.

Mr. Zinn was in Santa Monica this week, resting up after a grueling year of work and travel, when he suffered a heart attack and died on Wednesday. He was a treasure and an inspiration. That he was considered radical says way more about this society than it does about him.

It's amazing what you can say... once Chavez has said it.

2010-01-25T18:25:00.000-08:00

It's been the opinion of this blogger for the past two or three years that the biggest failing of the Chavez project, whatever it is, is its lack of internal democracy, internal debate, the cultivation of new leadership, and a pretty obvious cult of personality around one person.

This, more than anything, dooms the movement to failure. And in large part the problems that I have spent the last 3 years harping on, the waste, inefficiency, self defeating economic policies, etc, really result from this one fundamental failing.

Certainly, this is a problem created by one person - Hugo Chavez. Anyone who watches the video from the previous post can clearly see that.

But there is a flip side to this problem. And that is the servility of so many so called "Chavistas" and "revolutionaries".

It was once famously said that the three qualities a revolutionary needs to have are "audacity, audacity, and more audacity".

But in the Venezuelan "revolution" the people we see calling themselves "revolutionaries" are obsequious, more obsequious, and still more obsequious.

On one level, this is just sad. Although the opposition likes to tar Chavez supporters as dumb and incompetent in reality there are quite a few who are intelligent, well educated, and competent. It's just that they don't dare risk saying anything that might not meet with approval from the big guy who is, after all, not simply a person but rather "the people" and who as such demands discipline and loyalty to the people (read: him).

But there is another level to this, one that is even worse, which is exemplified by this:

Currency Adjustment: Necessary, but is it Socialist?

January 22nd 2010, by Gregory Wilpert - Correo del Orinoco International

There is little doubt, even among some opposition leaders (who normally oppose just about anything the government does), that the recent currency adjustment of the bolivar was economically necessary. It is a matter of basic math to realize that if inflation averaged 22% between 2005 and 2009 and each bolivar thereby lost about 72% of its purchasing power since the last currency adjustment, then maintaining the exchange rate at the same level during this entire period means imports become ever cheaper and Venezuelan-produced exports become ever more expensive in the rest of the world. As a result, unsubsidized domestic production was slowly being killed off and exports could not compete on international markets. The low exchange rate was also unnecessarily subsidizing innumerable imports for the middle and upper classes.

In other words, if Venezuela wants to diversify its economy and export other products besides oil, an adjustment of the currency’s exchange rate was absolutely necessary. The accompanying economic measures that create funds for subsidizing production will greatly help the import substitution effort. [for the rest of the article follow the link]

What could be wrong with that article - doesn't it make some of the very same points I have been asserting for some time?

Yes it does. But that is not the problem. In fact, the article itself is not the problem at all. Sure, I disagree with parts of it but in the main it is a good and thoughtful article which serves as an excellent starting point for informed, necessary, and ultimately very helpful discussion.

Problem is, where was it a year ago? Two years ago? Three years ago?

Not once, in all the reading that I do regarding Venezuela, had I seen one person in the government, in the government media, or simply any person who supported Chavez make any of those points. In fact, they generally went to great lengths to deny all of the above (the sole exception being Marc Wiesbrot who lives outside Venezuela and who probably has nothing to lose even if he does piss off the big guy, er the "people") and denigrated those who did make them.

Yet now, these points are freely made by people in the government and by others such as Greg Wilpert who write about Venezuela from a pro-Chavez point of view. Why? Why now? Why not before?

To put it simply, why couldn't some of the very basic and obvious points in the first two paragraphs of his article have been openly stated before and why couldn't a very fruitful discussion have been had as to what the best economic policies would have been?

As much as it pains me to say this, as I really do respect some of these people, the only reason I can think of is that in everything they say and write these people self-edit by asking "would Chavez approve of this?" and only when the answer is yes do they say it.

Hence, Wilpert could freely say this now because Chavez had said the same just a week or so earlier. So the coast was clear to discuss this!! No way was Wilpert going to say this two months ago - when the "basic math" was presumably equally basic and simple. No, that would have risked being tarred a counter revolutionary and being forever banned.

But now, after Chavez himself apparently came to understand the "simple math" and made these very points, the coast was clear for Greg Wilpert to write this.

To take this further note that there is no discussion in the pro-Chavez media about raising the gasoline prices. The reason for that is simple - Chavez hasn't mentioned it, much less said he approves of it, so the subject is taboo.

Therein lies what in my opinion is the dynamic that most clearly foreshadows doom for true socialism and true progress in Venezuela: one person is allowed to think and have ideas - everyone else either just follows along or gets cast aside.

And even if Chavez were the most selfless, intelligent, wise, hard working, knowledgeable and capable leader it would still be a terrible way to do things. For there to be true and sustainable progress there has to be open and frank discussion across the entire movement and many people capable of exercising leadership.

The value of a leadership of many is that the whole is always greater than the sum of its parts. No one has a monopoly on good ideas or what the right policies are. That is why open debate across the breath of the entire movement, on not limited to isolated tiny think tanks, is so important.

And the lack of this within "Chavismo" is why its failure is pretty much assured.

Sin commentarios

2010-01-24T13:10:00.000-08:00

There just really isn't much you can say about this. It speaks for itself:

If you can't beat 'em, ban them.

2010-01-19T20:02:00.000-08:00

Now that the shooting has largely died down, or at least it's not generally U.S. troops being shot, Iraq has fallen off people's radar screens.

But it should fall too far - otherwise some very important happenings might get overlooked.

For example, just recently the Iraqi government took the interesting step of banning 500 potential candidates from upcoming elections. So much for Iraq being a democracy.

Banning certain candidates is one of the main things that got Iran put squarely in the camp of non-democratic governments. Presumably then there is no reason for Iraq to be viewed differently.

So lets step back and see what this might tell us about the motivations behind the U.S.'s invasion in 2003.

Obviously the invasion didn't happen because of "weapons of mass destruction" because as we all no Iraq didn't have any. The former chief U.N. Arms Inspector, who was also a former officer in the United States Marines, screamed as much at the top of his lungs prior to the invasion.

Further, the invasion clearly wasn't to bring "democracy" to Iraq, as these actions clearly show it isn't democracy that has been brought to Iraq.

Soooooooooo, that leaves what? Oil?

Naaaaah, couldn't be. Could it?

No good options...

2010-01-14T14:39:00.001-08:00

The evidence of the Chavez administrations bumbling, incompetence, disorganization, and incoherence has been so fast and furious over the past 48 hours that it is almost impossible to keep up with.

So, time to start looking for some alternatives you say?

Ok. We always need to keep our eyes open for new leaders who might have something truly good to over. It's just that in Venezuela, as hard as we might try, it seems impossible to find them.

As evidence of that lets look at something from one of Venezuela's major political parties - the UNT (Un Nuevo Tiempo). Recall, this is a fairly new party but it was the party that presented the opposition to Chavez in the 2006 presidential elections.

They had their first "Ideological Conference" not too long ago. And they lived up to my mantra of you learn the most about people when you can see them when they think no one is watching.

Here is a picture from the conference:

There is only one thing worthy of note in this picture - the banner to the right of the speakers table. It lists what apparently are the most important values of the UNT. And what are those values?

Well, there is only one that stands out - Private Property. The is in bold white and is easily the most readable part of the banner.

Below that and less visible we have "human rights" and "personal security". Somewhat important I guess, but not nearly as important as "private property".

Finally, there is something of so little importance on the top of the banner that it can hardly be made out - I think it says "free unions".

Anyways, we can note that on this banner there is nothing about economic development, poverty, jobs, education, or the environment. About the only thing on that banner that most people could relate to is personal security.

There is a lot more that could be said about how messed up that banner is and how indicative it is the the complete and utter bankruptcy of ideas on the part of the "opposition". But I think it is just too obvious to be worth me spelling it out in a post.

Let me just leave it at the following:

Chavez may indeed by horribly inept and leading the country on a downward slope at this point. He also presents no clear and consistent ideas on how to better the country. Therefore, I would agree the country needs a big change, both in leadership and direction.

But to pretend that the people who represent the "opposition" to him present a worthy alternative is simply ludicrous.

Which is why until something else comes along the only sane place for most Venezuelans to be is in the Ni-Ni camp. It sucks, but right now there just aren't any good options.

This is why it is so hard to take them seriously.

2010-01-12T16:04:00.000-08:00

First we have the Planning Minister come out and say that the purpose of the devaluation was to promote exports and help small and medium industry.

That is certainly a very welcomed change and good.

Then we have the Commerce Minister talking about how if prices go up too much as a result of the devaluation (which is actually the idea of the devaluation but apparently the commerce minister hasn't gotten the memo yet) the government will start importing school utensils, toys, and even cars and the very overvalued rate of 2.6BsF per dollar.

Finally, four days into this devaluation and no one yet knows at what price dollars from non-oil exports will be exchanged - 2.6 BsF per dollar or 4.3 BsF.

Combine all this with the fact that this represents a 180% degree turn from what they have been saying for the past few years and, well, it is hard to take them seriously.

The Venezuelan Devaluation: Its' causes and possible consequences.

2010-01-11T17:28:00.000-08:00

By now everyone knows the big news about Venezuela devaluing its currency significantly against the dollar.

Although it is too early to know all the details of what is happening, nor how they will be followed up on and administered in the future, we can do some analysis of what caused this and go through a few of the possible outcomes.

First the causes.

There were two things that made the devaluation inevitable.

1) The Bolivar was becoming more and more overvalued each year due to inflation in Venezuela being high yet the exchange rate to the dollar remaining the same. This created a bigger and bigger hole in the government's budget that could only be solved by devaluing.

Here is an illustration of that problem (all numbers are just approximations to make the point).

Lets say that in 2006 the expenses that the government needed to pay for with oil revenues were $86 billion Bolivares. If they had $40 billion dollars in oil revenue which they converted at the exchange rate of 2.15 Bolivares per dollar they got their 86 billion Bolivares and were set.

Lets fast forward two years to 2008.

In between 2006 and 2008 lets assume there was 25% inflation per year for a total inflation of 50% (no compounding to keep it simple). This means the governments expenses, salaries for employees, supplies, pensions, scholarships, etc, would also go up by 50% so that in 2008 the government would need $129 billion bolivares from oil. But if it earned the same dollar income from oil, $40 billion, they still only got 86 billion Bolivares, as the exchange rate was still stuck at 2.15 bolivares per dollar.

The creates a big deficit - they need 129 billion Bolivares from oil but they are only getting 86 billion.

This is a deficit of 43 billion Bolivares - all because the governments expenses went up by 50%, due to inflation, while their revenues stayed flat, due to the fixed exchange rate.

Clearly, this is something that gets worse as time goes by and is ultimately unsustainable.

The Venezuelan government was only able to deal with this problem for as long as it did because the oil revenues in dollars kept going up - at least through 2008. But as soon as they stopped rising, or even declined, this budget deficit caused by the fixed exchange rate became a huge problem.

That is the most likely immediate cause of Friday's devaluation.

2) The other problem was that having your currency overvalued makes imported items very cheap in Venezuela and makes Venezuelan exports very expensive.

This is a very well known phenomena and causes what is known as the Dutch Disease - as your non-oil exports are too expensive no will buy them and as imports are very inexpensive local industry can't compete and shuts down.

As the exchange rate becomes more overvalued, and the Bolivar was becoming about 20 to 25% more overvalued each year due to Venezuelan inflation and the fixed exchange rate, Venezuelan industry fared worse and worse. In fact we saw that borne out in the economic statistics when in 2008 while the Venezuelan economy as a whole was still growing but manufacturing already went into a recession and declined.

Had the the exchange rate continued as it was and kept getting more and more overvalued Venezuelan industry would have completely collapsed. Hence, the Dutch Disease effect of the overvalued currency also made maintaining the exchange rate as it was impossible.

Those are the main two reasons for the devaluation.

Interestingly, all government announcements have only mentioned the latter - ie that they devalued to help Venezuelan industry. In fact, when Venezuelan Finance Minister Ali Rodriguez was asked point blank by Vanessa Davies if the government had a deficit and that was why it had devalued he said no.

He was not being forthright. In fact the government has been running deficits and even with the rise in oil prices was still in a very tight spot. With an election coming up the government needed more money and with it already having a deficit caused by a fixed exchange rate there was an obvious option - devalue.

Government pronouncements to the contrary I believe the reason for the devaluation was the governments deficit and lack of funds at the same time it was facing an upcoming election for which it needed a lot of money.

Next we turn to the probable consequences of this.

First we will discuss what has already happened as a result of this, what could occur depending on what policies the government follows, and finally what I believe the final outcome will be.

To start off, what has already happened? That is simple. The Venezuelan government, with this one single announcement, just fixed its budget problem. It will now have billions and billions more bolivares coming in for each oil revenue dollar so as of this moment the budget deficit is definitely gone.

Not only that, but they surely have plenty of bolivares to spare. Therefore the Chavez government has plenty more money to spend on social programs, subsidies, public works, and any other projects it wants to undertake.

So right off the bat problem number one from up above, the budget deficit, is completely fixed.

However, while the government's shortage of funds was likely the more pressing issue that led to the devaluation it is problem number two, making your own industry completely uncompetitive, that is more important. After all, when you are a underdeveloped country the last thing you want to do is cause little industry you have to decline.

This brings us to the next part of the analysis, how this will likely effect the Venezuelan economy and what are some possible actions the Venezuelan government might take.

For starters, the devaluation over night puts Venezuelan industry in a much better position to compete and should slow the wasteful and harmful flood of cheap imports coming in Venezuela.

Consumer goods will cost a lot more (yes there will be additional inflation from the devaluation but it is actually desired and has positive consequences) but that is the whole idea. They cost more and so people buy less of them - exactly the desired outcome. Hence, the drop in imports of consumer goods is also pretty much assured.

Along with that Venezuelan industry should start to do better. Instead of buying imported clothes, for example, the Venezuelan textile industry should start to reactivate as Venezuelans buy more Venezuelan made clothes. Similarly, Venezuelan non-oil exports should also start to improve.

However, there are a few unknowns that affect all of this.

First, it is not clear what exchange rate applies to non-oil exports. Do exporters get paid the new 2.6 bolivares per dollar rate? If so, that is still so overvalued that it would make exporting completely unprofitable and there will be no growth in exports. Exporters will only have a chance if they get the 4.3 bolivares per dollar rate. This should be clarified shortly.

Second, will the exchange rate be allowed to become overvalued again? Remember, the exchange rate is still fixed - it is just fixed at a different rate. If Venezuela continues with high inflation and leaves the rate unchanged in the coming years than the Bolivar will become overvalued again very quickly and they will be right back to square one.

This is a particularly critical point because most investments take a couple of years to start producing so that potential investors would have to be confident that that Bolivar won't be way overvalued again in a couple years time. Right now, private investors will probably have no such confidence and hence won't make any new investments. Consequently, it will be up to the government to lead the way and make large investments in industry itself. At the same time, the government should make timely devaluations as needed to make sure the Bolivar does not become overvalued again.

Third, it is quite possible that they didn't devalue the Bolivar enough - ie, that is still somewhat overvalued. Determining the correct valuation of a currency isn't easy. My guess based on relative costs in Venezuela as compared to the United States and other Latin American countries is that the Bolivar is still overvalued and that they probably should have devalued to at least 5.5 Bolivares per dollar. However, that is just a guess on my part, just like the Venezuelan government made a guess when it picked 4.3 Bolivares as the correct value.

Given the proceeding, how will we know when this devaluation worked with respect to making Venezuelan industry more competitive?

Simple.

In the past few years we have seen manufacturing under perform most other non-oil sectors of the economy. That is, when the rest of the economy was growing at say 9% we saw manufacturing growing at a much slower rate of 4% or 5%.

If the devaluation is working we should see that the manufacturing sector starts to not only grow faster than it has been (recently it has been shrinking rapidly) but it should start to outperform other sectors of the economy.

That is to say, if the non-oil sector of the economy grows 1% this year then manufacturing should grow 3,4 or 5%, outperforming the economy as a whole and in particular things such as commerce, transportation, and communications.

If that doesn't happen, or doesn't happen to the extent they want, that would be an indication they should devalue more and make the exchange rate even more favorable for Venezuelan industry.

One ancillary point to all this is that the government will need to ramp up investment in industry significantly. The private sector is very unlikely to invest much in the short term because of their general unease over the business climate as well as the very legitimate concern that the government just did this as a temporary fix for its budget problem and will let the exchange rate get overvalued again.

Hence, while the government now has a lot more money to spend on social programs, and it should have more social spending, it needs to make sure a VERY large portion of its new found resources are invested in the productive sectors of the economy - industry and agriculture. That too is key if the country is truly to reduce its dependence on oil revenues, as Chavez now says he wants to happen.

In sum, for this important measure to be truly successful the Venezuelan government needs to make sure that 1) the more favourable exchange rate applies to non-oil exports 2) that the exchange rate is not allowed to become overvalued again and 3) that the government itself greatly expands its investments in industry.

And finally, what in my estimation is the most likely course of action the Chavez administration will take?

Sadly, I cannot be an optimist. I believe that what likely forced the devaluation was a very big hole in the governments budget that could only be plugged via a devaluation.

Chavez's and other government officials pronouncements of wanting to diversify the economy and start exporting are not convincing to me. After all, why start saying those things now in January 2010 when they have been true all along?

Moreover, Chavez has up until now clearly focused on the political more than the economic. Hence, its hard not to see this as something of a one time action designed to simply help them in an important upcoming election.

Therefore, I believe they will allow the Bolivar to become overvalued again and they will spend most all their new resources on winning votes rather than investing in Venezuela's future.

In other words, I think it is not only possible, but likely, that there will be no lasting benefit from this devaluation.

But, as always, hope is the last thing to die...

Give credit where credit is due.

2010-01-09T16:46:00.000-08:00

It's great to have Chavez read my blog and agree with what I've been saying about Venezuela's currency for the past few years.

But damn, couldn't he at least give me some credit?

Update:

It is awesome to hear Chavez speaking like this today. Everything he said here is true:

Well, I would only say oil isn't necessarily a curse for Venezuela - it could be something that would benefit the country tremendously. But it is a curse if used improperly and Venezuelans, including the Chavez government, have almost always used it improperly.

Anyways, as awesome as it is to hear these very true and very necessary words coming from his mouth the question still does remain - why wasn't he saying this 6 months ago, a year ago, three years ago, ten years ago? It was just as true then as it is now. And he has definitely acted for the past several years as if he didn't know these things or they weren't true.

I won't speculate on exactly why the change has come - there could be many reasons. But I can only hope he sincerely believes all this and will continue to act upon it.

Here is another video of Chavez speaking (at the inauguration of some new subway stations on the number 3 line in Caracas - another very welcomed but very late development):

Here again, a lot of what he said was very accurate, though there were some things that were incorrect. Further, the incorrect statements along with the off the cuff nature of these comments make his statements not as coherent as they should be. I bet a lot of people who don't already understand these issues - which would be the vast majority of his audience - were more confused by this than educated.

That is why he and his government should have been saying the truth all along. Some of these points are complex, subtle and not easy to understand. It is only by thinking about them and hearing about them over an extended period of time that many people will understand them. Now, the Venezuelan government will have to deal with the fact that many/most Venezuelans don't understand these issues and think they just got screwed and will believe the stupidities now said by the opposition media and political leadership.

Finally, it was interesting to see the comments on the textile industry and how they need to build it up. Sadly, I actually was quite familiar with a small clothing factory in the Antimano section of Caracas that in 2001 had between 20 and 30 employees. The recent economic "boom" and overvaluation of the Bolivar wiped it out. When I was last there, in 2007, they were down to five employees, had sold off much of their machinery, and have probably long since sold off all their machinery and entirely closed down.

Unfortunatley, the government being very belated in recognizing this problem and doing something to fix it probably makes it way too late to help many manufacturers.

Great news or too little too late?

2010-01-08T19:07:00.000-08:00

I have to admit - I am stunned by the news. The Chavez administration, which has steadfastly refused to devalue the Bolivar against the dollar in spite of the absurd exchange rate totally screwing the economy finally devalued!!!!!!!

I was not expecting this at all. Everything I saw made me think they would take the existing exchange rate to the bitter end when things would go pop and the economy would implode.

Stunningly, they devalued, and in an election year.

I haven't had a chance to read much about this, to hear how they announced it, nor to get exact details on it so I don't want to say too much more right now. However, it is a dual exchange rate with a more favorable rate for key imports like food and machinery and a much lower rate for imports that really should be discouraged like cars, consumer electronics, and the like.

If this announcement had come in January 2007, when it should have come, I would be ecstatic.

At this late date I am not sure - the main idea behind devaluing is giving the government more money to invest in social programs and industry (and that money comes from private consumers having less for imported consumer goods) and make local industry more competitive so that it expands. I am definitely afraid that this is too little too late to accomplish those things but we'll look at that more closely in the days and weeks ahead.

I am also anxious to see how the government explains this to people given that for a long time they dismissed it as a stupid and bad idea.

Anyways, this certainly reminds me of the old adage - things tend to happen when you least expect them.

Once again, totally messed up priorities

2010-01-05T18:08:00.000-08:00

I have to say, it's bad enough industry in Venezuela is in decline and has been now for a year and a half with no relief in sight. It is bad enough that the government insists in keeping policies that make virtually any manufacturing in Venezuela uneconomical.

But there seems to be an almost irrational hatred for the manufacturing sector.

As has previously been discussed here the government has already ordered large scale reductions in output from the steel and aluminum industries in the east of the country due to the drought induced electric crisis. I have already criticized this as these cut backs on wealth generating sectors of the economy when there are non wealth generating sectors they could make cuts in is crazy.

However, it has now gotten worse.

In today's edition of Panorama we see confirmation that the government actually is willing to shut down all basic industry in the country.:

Sobre el ahorro de consumo en el sector público, Rodríguez declaró en un periódico nacional que “si tenemos que cerrar las empresas básicas de Guayana, porque se está secando el Guri, pues habrá que cerrarlas. Lo otro es dejar al resto del país sin electricidad, y eso no es posible”.

The energy minister says they'll entirely shut down the basic industries if they think the Guri might lose too much water.

Any rational government that was trying to have the country progress, if it thought that things were so bad it could come to that, would already have ordered all air conditioners in the country off (at least in all government offices, shopping malls, private offices, universities, etc), would order stores, restaurants, and malls to close completely for at least 3 days per week, would start turning off street lights, would have banned Christmas lighting, etc., etc. etc. (and WTF: why haven't the bingo parlors already been completely shut down until this crisis if over?????)

But instead of doing those things (and they look like they are already back tracking on the nothing of a sacrifice they asked of the malls) they are willing to take down a huge portion of what little industry the country has and wipe out hundreds of millions or even billions of dollars of wealth.

[As an aside - even their proposal that malls and other businesses can run normally if they get their own generators is crazy. What will power those generators? Oh, that is right, practically FREE gasoline and diesel from the Venezuelan government which in turn will lose the government yet more in revenues. Does anyone in the government even think about this?].

I really don't know what more to say about this insanity. There seems to be either one of two causes for this non-sense:

Either they just plain can't stand industry and want it wiped out.

or

Given a choice between - what is politically expedient in the short term by not imposing much sacrifice on the public but does greatly impact industry or leaving industry alone to keep producing but taking measures which the public will feel and which will annoy some people - they always choose the former.

Take which ever reason you like. They both suck and the government clearly has a really bad set of priorities.

Venezuela's New Socialist Man

2010-01-02T11:52:00.000-08:00

The week before last President Chavez went on national television to announce a new "socialist" automobile outlet that would presumabely sell cars at a discount and not use capitalist measures on loans, such as requiring a down payment.

Well, the reaction was rapid and quite amazing on one of the governments larger web-sites that allows user comment - Radio YVKE Mundial.

You can see there article on Chavez's comments here.

But its not the article itself that is of so much interest. Read 150 or so comments that follow - a record for that site. In it you will get clear evidence of how much Chavez has raised, or not raised, the consciousness of Venezuelans.

Some examples:

wladimir
valencia, venezuela - Viernes, 1 de Ene de 2010. 7:30 pm

BUENAS NOCHES HERMANOS EN QUE PARTE DEL PAIS REALMENTE SE PUEDEN CONSEGUIR ESTOS VEHICULOS............YO QUIERO COMPRAR UN VEHICULO PERO NO BAJO LOS PARAMETROS DE ESTAFA QUE APLICA EL BURGUESISMO CAPITALISTA...................HERMANOS DENLE UNA APURADITA A LA SALIDE DE ESOS VEHICULOS A LA CALLE PARA QUE EL PUEBLO EN GENERAL SE LE ACABE LA ANGUSTIA POR TANTA ESPERA,QUE YA PASA DE AÑOS........MIS RESPETOS Y SALUDOS..........Y VIVA LA REVOLUCION........................

RODOLFO ARCE
CARACAS, VENEZUELA - Viernes, 1 de Ene de 2010. 10:15 am

PATRIA SOCIALISMO O MUERTE
VENCEREMOS ESTO APLICA EN TODOS LOS SENTIDOS ASI QUE COMPAÑEROS UNA VEZ MAS CON ESTE PROYECTO INVOLUCREMOS TODO NUESTRO APOYO CON LA FINALIDAD DE QUE TENGA UN BUEN DESEMPEÑO Y CUMPLA CON LA EXPECTATIVA DE MUCHOS COMPATRIOTAS QUE DESEAMOS ADQUIRIR ESTE BIEN SOCIALISTA
FELICITACIONES HUGO ESPERO QUE LOS DEMAS CUMPLAN CON SU LABOR PARA QUE ESTO SE CONVIERTA EN UNA REALIDAD.

ivàn moreno
mèrida, venezuela - Miércoles, 30 de Dic de 2009. 1:47 pm

deseo tener mi carro para este año 2010 el problema es q tengo sueldo minimo,qisiera sabr si hay chance pa obtener el carro y pagar comodament sin que me perjudique mi sueldo

gregory subero
barcelona, venezuela - Miércoles, 30 de Dic de 2009. 8:48 am

ES UNA MARAVILLOSA IDEA DIOS BENDIGA AL PRESIDENTE YO TENGO UN CATANARE Y AÑO 81 Y QUIERO CAMBIARLO MEDIANTE UN CREDITO POR FAVOR DIGANME LOS REQUISITOS AQUI EN BARCELONA Y PTO. LA CRUZ HAY MUCHA ESPECULACION FELICITO AL GOBIERNO POR ESTA INICIATIVA "PATRIA SOCIALISMO O MUERTE VENCEREMOS"

Neizy
Maracaibo, Venezuela - Martes, 29 de Dic de 2009. 11:26 pm

Felicitaciones al gobierno del presidente Chávez y el ministro Samán por tan noble iniciativa. Desearía conocer los requisitos para que mi hijo pueda optar a un carro; ya que fuimos víctimas del robo del anterior y con el dinero que entregó el seguro sólo pudimos comprar un carro de segunda mano que ya no ofrece seguridad. Lo necesita para ir a su trabajo y llevar a su esposa al trabajo de ella. Gracias.

[I almost cried when I read Neizy's please for a car. It seems his son and daughter-in-law desperately need a car to get to and from their jobs - otherwise they could be forced to use public transportion such as a bus, or worse still, the Maracaibo metro. - O.W.]

JOSE BASTARDO
MATURIN, VENEZUELA - Martes, 29 de Dic de 2009. 4:05 pm

TENGO UN HIJO EN CONDICIONES ESPECIALES, Y EL AÑO PASADO (2008) FUI VICTIMA DE UN ATRACO A MANO ARMADA DONDE PERDI MI VEHICULO, Y PARA REMATAR EL SEGURO SE NEGO A PAGARMELO, EL CASO ESTA EN EL INDEPABIS Y EN LOS TRIBUNALES DE LA REPUBLICA, (SIN RESPUESTA)NECESITO SABER COMO HAGO PARA ADQUIRIR UN VEHICULO SOCIALISTA, TENGO CONSTANCIA DE TODO LO DESCRITO ANTERIORMENTE. SR. PRESIDENTE
GRACIAS POR EL APOYO QUE BRINDA A LOS DESAMPARADOS POR LAS LEYES.
PATRIA, SOCIALISMO O MUERTE VENCEREMOS!

[The above case shows the need for some out of the box thinking. Seeing as the government can't manage to do anything to reduce crime maybe they should consider giving known criminals preference in getting these socialist cars; the thinking being that way they'll be less inclined to steal other peoples cars. So, for example, all people being released from Venezuelan prisons after serving their sentances should be given free cars. Just a thought - O.W]

Johana Ramonez
Valencia,29/12/2009, Venezuela - Martes, 29 de Dic de 2009. 2:00 pm

Hola gusto en saludar a todos. estoy interesada en conocer los pasos y requisitos para optar por uno de los vehiculos socialistas, quiero saber si hay que tener cuenta en el banco venezuela y a donde tengo que ir para obtener la informacion. Necesito un vehiculo para trasladarme a mi sitio de trtabajo y llevar a mi hija a su lugar de estudios. Espero su pronta respuesta y gracias por pensar en nosotros los Venezolanos....Patria Socialismo o Muerte......Venceremos

MARITZA GONZALEZ
valencia, Venezuela - Martes, 29 de Dic de 2009. 1:55 pm

TENGO UNA HIJA MEDICO, VIAJA TODOS LOS DIAS DE VALENCIA A PTO CABELLO COMO PASAJERA. QUISIERAMOS SABER COMO LOGRAR ADQUIRIR UN VEHICULO SOCIALISTA Y DIGO SOCIALISTA PORQUE EL MISMO NO SOLO BENEFICIARIA A MI HIJA SI NO TAMBIEN A DOS COMPAÑERAS QUE SIEMPRE ANDAN CON ELLA. SI ALGUIEN PUEDE DARME UNFORMACION SE LE AGRADECERE INFINITAMENTE.GRACIAS

[OMG, this person is a doctor and has to take a bus!!! Get her a car, STAT - O.W.]

carolina
Maracaibo, Venezuela - Martes, 29 de Dic de 2009. 1:42 am

buenas noches... estuve visitando la pagina de venirauto y a los links que le hice clip no abrieron que pasa todavia esta en mantenimiento? y otra pregunta yo me registre cuando la pag abrio en el 2007... dice asi
Esta recibiendo este correo porque se ha registrado
en nuestra seccion de clientes http://www.venirauto.com/clientes/registro
Este correo confirmara su dirección de correo y activara su cuenta.
Puede accesar a su cuenta por la dirección http://www.venirauto.com
que hago con esto??

[yeah, really, even if they are barely making any cars they should at least get their web site working - O.W.]

Amarili Carrizo Vazquez
La Quebrada, Edo. Trujillo., Venezuela - Lunes, 28 de Dic de 2009. 11:48 pm

FELICITACIONES PRESIDENTE, por esta excelente politica, pensada para nosotros los de menos recursos. Es un paso para atacar el capitalismo que nos esta matando . SUGERENCIA: Para la adjudicación de estos vehículos se deberia investigar si el solicitante no tiene mas autos, ya que son muchos los vivos que acaparan y NO dejan para el que en realidad lo necesita. Deseo saber cuales son los tramites para adquirir uno de estos autos ya que lo necesito para trasladarme hasta mi trabajo. VIVA CHAVEZ

[Yeah, it really sucks when you can't get free shit from the government because some other asshole, who needs the free shit even less than you do, got it first!! - O.W.]

I'm not posting any more of these comments - it is simply too depressing. Anyone who wants to read more can go to the web-site and read them for themselves.

One final comment. Remember how Chavez berated a government banker from the Bank of Venezuela for requiring down payments to purchase a car?

Well, just think about it. Maybe those morgage brokers at Countrywide, and Citibank, and Bank of American weren't really scum bags trying to make obscene profits while scamming people through "no money down" morgages. Maybe they were just trying to intraduce socialist lending practices to the United States!!

No good numbers here

2009-12-29T19:37:00.001-08:00

The Venezuelan Central Bank came out with its year end report. While it is not the very comprehensive report that comes out around May of the following year it does provide some interesting preliminary data. Please keep in mind these numbers are estimates and will change when the final numbers are released in February.

The full report can be read here.

I won't go over the full report but here are the key numbers:

Overall growth for 2009 was a negative 2.9%. Despite what some predicted, Venezuela definitely went into a recession and is likely still in one even as other countries around the world recover.

As stands to reason based on the country having such an overvalued currency, and as I have consistently predicted would happen, the tradables sector got hit the worst with mining down over 10% and manufacturing down 7.2%.

Some commentors would dismiss the above saying that it doesn't matter as the government is concentrating on agriculture.

That may be, but they are clearly failing there too. The sector that includes agriculture grew .1% in 2009. Make sure you read that right - it didn't grow ONE percent, it grew ZERO POINT ONE PERCENT. Clearly agriculture is flat on its back (again likely due to an overvalued currency and insufficient investment among other things) and is not going to rescue the Venezuelan economy.

Consumption fell by 1.8% with private consumption falling by more than that. Brute capital formation (which can maybe be sort of taken as a proxy for investment) fell by 7.6%. Last year it fell by 3.3%. So that is now two years in a row where that is down.

Unemployment averaged .6% higher in 2009 than in 2008. That is probably the least bad number in the entire report.

Imports were down from $49 billion to $38 billion. But exports dropped even more - from $95 billion to $61 billion. So the trade balance, which stayed positive, dropped from a surplus of $37 billion to $12 billion.

BTW, non oil exports were cut in half from $6 billion to $3 billion.

The only important numbers that I couldn't find in the report was on the countries debt. Based on everything we have seen during the year that likely increased sharply.

In sum, not a good year at all for Venezuela. And this with oil actually doing better than predicted. Just goes to show how bad policies can really mess you up.

If only bombast could be converted to something useful.

2009-12-27T20:02:00.000-08:00

At the environmental summit in Copenhagen Amy Goodman of Democracy Now did a very brief interview of President Chavez. A transcript can be found here while the video is here.

In the interview Chavez doesn't actually say anything that is worth while. Still, there is something to be observed and commented upon so lets have a look at part of it:

Amy Goodman: You sell more oil to the United States than any country but Canada. Your economy depends on oil, yet you are here at a climate change summit. What’s your proposal?

President Hugo Chavez: [translated] The problem is not the oil, but what they do with the oil. The United States is the biggest spender of oil and of all the planet resources. Oil is a very valuable resource for life—electric heaters. We must transition ourselves to a post-oil era. And that’s what we must discuss, searching and developing new sources of energy. And that requires scientific research. That requires investment. And the developed countries must be the ones to assume this responsibility first.

Well, certainly global warming is not the fault of Venezuela (and surprisingly Chavez didn't take credit for helping inflate the price of oil and thereby reduce its consumption) but his statement calls for a very strong warning of be careful what you wish for. After all, Chavez has done essentially nothing to make Venezuela's economy less dependent on oil revenues so if oil were to be rendered obsolete it wouldn't be a pretty picture in his country.

Amy Goodman: What level of emissions are you willing to support reductions of emissions?

President Hugo Chavez: [translated] One hundred percent. One hundred percent. We must reduce the emissions 100 percent. In Venezuela, the emissions are currently insignificant compared to the emissions of the developed countries. We are in agreement. We must reduce all the emissions that are destroying the planet. However, that requires a change in lifestyle, a change in the economic model: we must go from capitalism to socialism. That’s the real solution.

Ok, so much of the world very seriously debates how much they are willing to cut back on emissions (predictably the U.S. and China suck on this) and Chavez comes out with the flippant and asinine remark of a 100% cutback.

Sure, that is a really meaningful goal at the moment!! Are Venezuelan scientists about to announce a major breakthrough in nuclear fusion rendering oil, coal, and natural gas obsolete? Somehow I don't think so. And this coming from a country whose emissions are going up, that recently broke records for automobile sales, that gives away gasoline practically for free, and that according to some sources has the highest per capita emissions in Latin America.

Quite frankly, these comments are simply insulting to the person who asked the question and to anyone who might be listening to his answer - but more on this in a moment.

Amy Goodman: How do you throw away capitalism?

President Hugo Chavez: [translated] The way they did it in Cuba. That’s the way. The same way we are doing in Venezuela: giving the power to the people and taking it away from the economic elites. You can only do that through a revolution.

So he really wants to emulate Cuba's "jinatera socialism"? If so, then I am not so sure most Venezuelans agree with his choice of roll models.

Moreover, he never does explain why socialism would somehow automatically lead to less emissions than capitalism - unless of course he means complete economic stagnation for decades on end as we have seen in Cuba.

Then he went on to say some at least half way coherent things - only because he said Obama sucks, and as it turns out, Obama really does suck.

After reading this silliness uttered by Chavez you are probably wondering how this merits commenting on. And the truth is that in and of itself it doesn't.

However, this is completely representative of Chavez's outlandish, and ultimately hollow and meaningless, rhetoric that one of these days some of his adulators should call him on.

He was asked a serious question - how much should emissions be reduced? And he gave a stupid and meaningless answer that simply wastes everyones time.

Just as when asked about how the economic crisis would effect Venezuela he said it wouldn't - that Venezuela was "blindado". Or just as any of his fanciful statements about pipelines and railroads crisscrossing South America. Or his empty rhetoric about constructing "socialism" in Venezuela.

Having pointed out these tendencies a number of times before I've often been told "but he is speaking figuratively".

Ok, sure, everyone speaks figuratively, occasionally.

But that isn't the problem with Chavez - the problem with Chavez is that these literally absurd statements are pretty much the norm in his speaking.

And to make a bizarre tendency even worse this has serious repercussions for Venezuela.

Chavez and his advisers constantly lie to Venezuelans about the state of the country's economy which means that festering problems are ignored and when bad events come along Venezuelans don't understand why those things are happening.

Chavez and his advisers consistently refuse to educate people about important matters - such as, for example, the effects of giving away billions of dollars of gasoline for free. Remember when a year and a half ago we were told that gasoline prices couldn't be increased because the population had to be educated on the issue first? Ok, anyone seen a significant education campaign on that topic? I didn't think so.

Chavez berates Venezuelans for the consumerist tendencies but then carries out economic policies that favor those tendencies and even berates banks for not expanding consumer credit for people to purchase cars.

Sadly, this at best wasteful and at worst self destructive discourse continues.

Yet no one in his ranks calls him on it. I guess that is what happens when you are left with nothing but sycophants and people who don't want to jeopardize their paychecks.

So instead of getting the useful and practical speech of a leader that would help a poor country solve some of the many problems it suffers from we get unending bombast.

Is this any way to deal with the problem?

2009-12-23T16:15:00.000-08:00

Currently Venezuela is facing something of an energy crunch. Most of its electricity comes from hydroelectric plants and due to a drought they, or more specifically the huge Guri complex, are running low. Apparently the situation has become critical and large cuts in consumption of electricity need to be made.

Of course, there has been debate about whether this could have been avoided - that is, should electric generation capacity have been built up over the past years so that the shortages could have been avoided. I am not going to take a position on that as their are a lot of variables involved and it is not really clear to me if the problem could have been avoided.

However, what I do find very problematic is the government's response to the problem.

Faced with the need to reduce power consumption the government has ordered that businesses cut back on electric consumption by about 20%. They have also limited the hours that certain types of businesses, such as shopping malls, can draw power from the grid. So far so good.

But then it turns out that some businesses are being asked to sacrifice and cut back more than others.

Who is being asked to cut back more? Amazingly, Venezuela's steel and aluminum industry.

First a bit of background. Venezuela exports very little save for oil. But of the little else it does export, about $6 billion dollars worth per year, the bulk of it is aluminum and steel from the heavy industry region of Guyana (and no, essentially none of this industry was built by the Chavez government, it was all there before him).

So although it is overwhelmingly an oil producer Venezuela does have heavy industry which brings a few billion dollars more in revenues. You would think they would want it to expand, not shrink.

But apparently not. Turns out, that while shopping malls have to cut back a bit on power consumption the aluminum and steel industries are being told to cut drastically and will drop their output by 40%.

This is simply insane. Manufacturing in Venezuela is already in big trouble as it most recently declined by 9%. Now one of the very few wealth generators the country has his going to be hit even harder, likely losing the country hundreds of millions, or even billions, of dollars.

And its not as if they don't have alternatives.

For example, the restriction on shopping malls forcing them not to use power before 11 am or after 9 pm is a joke - the malls are generally closed, or in the process of closing, outside of those hours anyways. If its truly an emergency the government should just tell them they have to run their own generators and they can't draw power from the national grid - period. It's not a nice thing to do but if confronted with a crisis it is much better to cut back this type of consumption than what industry gets.

Further, all stores could be restricted to operating only very limited hours each day or even be forced to be closed for several days per week. That is, if you want to shop in the Sambil do it on Tuesday, Thursday or Saturday because it is closed other days. The same could be done with most all commercial establishments.

Similarly, evening sporting events could be banned, non-essential street lights could be turned off, and air-conditioned buildings could have their temperatures raised to name but a few examples of what could be done.

The point is, if you have to make some big sacrifices, which Venezuela probably does have to do, you want to do it in non-critical and non wealth generating sectors.

In a poor country that is supposed to be trying to develop manufacturing should be a protected sector that gets preferential treatment.

Yet in Venezuela shopping centers get preferential treatment while the little industry the country has gets screwed.

Yet one more bit of evidence that the Venezuelan government has no well thought out plans to develop the country.

Latin America has a problem...

2009-11-21T18:23:00.000-08:00

This post isn't actually about Venezuela, or rather it is only about Venezuela in as much as Venezuela is part of Latin America.

It is about Latin America in general but also about what some have always held up as a model of Latin American "development" - Chile.

I've never understood why some have looked so favorably upon Chile - its GDP is still that of a third world country and the only things I know that it "makes" are things like copper, fish, and grapes. Not the stuff true development is made of.

And sure enough:

This is a list from an academic research paper showing how much the exports of many third world countries are made up of manufactured goods.

As you would expect, Venezuela is near the bottom. But, surprise, surprise, look who is right next to them - Chile!!!!!!

In plain english, just as Venezuela doesn't make anything Chile doesn't make anything either!!!!

It's back to the drawing board I guess.

Anyways, looking at this table you can get a sense of what pathetic shape Latin America is in.

Sugar highs are great, while they last.

2009-11-15T09:24:00.000-08:00

It is amazing how good you can make yourself feel if you just eat enough Snickers bars.

It is also interesting how good you can make things feel in with your economy if you just borrow and spend enough.

Case and point, the United States of America.

Last fiscal year it ended with a 1.4 trillion dollar deficit. Yes, you read that right, defiicits in the U.S. are now measured in trillions - billions are passe.

If you think this is just a one off, think again. In the fiscal year that began on October 1st they expect to run a deficit of another 1.4 trillion. In fact, if you annualized the October 2009 deficit they could be pushing 2 trillion dollars before it is over.

But living in the U.S. it is hard to see what they did with that $1.4 trillion. During the New Deal they at least got lots of new schools, massive electrification via the Tennessee Valley Authority, Hoover, and Grand Coule dams, and new parks and roadways all over the country.

$1.4 trillion later we have... what? I know Wall Street types are back to getting tens of billions of dollars in bonuses but was that the purpose of all this spending (sadly, it probably was). No joke, there is no visible evidence of what that money went for.

You can spend tonnes of time on the governments web-site and you still can't figure it out. More and more, it looks like they just literally pissed it away.

Well, I am being a little unfair. There are SOME results from all this spending. The stock market is over 10,000 again. Oil is back up to high levels. Gold is well over a thousand dollars an ounce. And every other commodity is spiking again.

So they may not have built anything worthwhile with all this spending, but that have at least created a new commodity bubble. Gee, just what we needed, a new bubbles!!

So bad are the new bubbles even the Chinese are starting to freak out. And the very few credible economists that there are see it too. Regardless, the lemmings keep running and the U.S. keeps pissing away money.

Of course, the U.S. is not the only place on a sugar high. Venezuela is there too. So messed up is their economy, lacking virtually any real or productive investment, that they are having to borrow record amounts to fund their waste even though oil prices are at quite high levels.

Recently Venezuela has sold more than $11 billion in bonds... to what end?

Are their massive new public works taking place? Any much needed power plants being built? (and btw, the fact the country has a electric sector that can't meet the country's needs shows that the fools that think the Chavez government has a plan are just that, fools.) Are new industries springing up across the country?

Nope. Just like as the U.S. pissed away almost unimaginably large sums of money got little more than "cash for clunkers" to show for it Venezuela is taking on large amounts of debt and looks to have little more than some cheap cell phones to show for it.

It's not going to be fun in the Western Hemisphere when the sugar high wears off.

21st century book burning

2009-10-22T09:23:00.000-07:00

People thirsty for power always chose to plactate to conservative voters against progressive ones, but it is maddening when it comes from supposed progressives, the same was when Hillary Clinton and Lieberman tried to censor violent video games, that said Chavez takes it a step further like always not only by having a symbolic pile burning

implica el comiso y destrucción de los videojuegos y juguetes bélicos”.

but also by treating it like if it were drug contraband, where purchasing, making and importing said games is punishable by 3 to 5 years in prison, just so much as promoting them leads to a hefty fine. Well here I am breaking the law before it is finished in stating that violent video games are FUN and in no way incite violence, the evidence is drastically inconclusive.

The ASA said that video games and other violent entertainment are being used as a "folk devil" and have no real impact on the behaviour of children.

Jonathan Freedman, of the Department of Psychology at Toronto University, reviewed every media-violence study published in English and concluded that "the majority of studies produced evidence that is inconsistent or even contradicts" the claim that exposure to media violence causes real violence.

According to the ASA article Do Video Games Kill? (PDF) such studies do not demonstrate that media violence causes aggressive behaviour, only that the two phenomena exist together.

"Excluding a host of other factors (such as the growing unrest during the civil rights and antiwar movements, and the disappearance of jobs in central cities) may make it seem that a direct link exists between the introduction of television and homicides. In all likelihood any connection is incidental," the article states.

But that is not all the crusade also extends to promoting marijuana use as evidenced by the attack on Family Guy using a law that regulates OTA to regulate cable is insane but that is their legal footing.

By banning speech that is progressive Chavez is laying the groundwork for the accusation that he is not only violating freedoms but also attacking allies, what is next? gays? abortion? who knows.

All I know is that I am in opposition to all conservative governments, so I probably will have to oppose this one. Family Guy was great before it wen off the air in 2000 but now it is crap, the same could be said for Chavez.

Cell phone nation

2009-10-20T14:23:00.000-07:00

With the economic slowdown finally impacting Venezuela the bright lights of the "revolution" came to the conclusion that part of the problem was that they weren't pissing away enough money by giving out cheap dollars to import consumer goods.

So a couple of weeks ago they pissed away $5 billion (actually, they went borrowed that amount) giving out cheap dollars so people could take money out of the country (ie, they facilitated the "capital flight" they have always complained about) and importers could start bringing in more consumer goods. Now PDVSA is about go into debt to the tune of another $3 billion to again facilitate capital flight and waste money subsidizing middle class consumers.

What can we say, the insanity continues....

But there is more.

First, we have Jessie Chacon talking about how next year they will give $4 billion in cheap dollars to the auto sector (read, General Motors, Ford, Toyota and even the trade unionist killers Mitsubishi) who will presumabely assemble more cars in Venezuela. Never mind the question of whether or not Venezuela should really be spending $4 billion more on subsidizing car purchases for middle and upper class Venezuelans.

The real question is why don't they use that $4 billion to actually build a true domestic producer of automobiles instead of just giving money to transnationals to continue assembling kits which in and of itself will never get Venezuela anywhere?

The answer of course is too obvious and too sad - Venezuela has no plan to actually build a real automobile manufacturing industry. They prefer to spend their money to temporarily boost consumption and temporarily boost Chavez's poll numbers.

When they did that in 2005 and 2006 this blogger naively thought it was a temporary and necessary expedient due to the important elections at that time. Now it is clear it is actually their permanent way of doing things as they have no strategy beyond buying enough support to keep winning the next election. In other words, they want power not because they have ideas on how to make the country more prosperous, they want power because they happen to like having power. But I digress....

Today the silliness got even sillier. It appears that in the governments view one of the most harmful aspects of the current slowdown is that.... cell phone prices have gone way up.

Chavez may not have any development plan, but he is smart enough to realize that one of the quickest ways for him to get his ass run out of Miraflores would be for Blackberrys to be out of the reach of middle class Venezuelans. If he has to choose between empty shelves in the local Mercal or empty shelves in Movistar he sure knows which one is more tolerable... and it aint Movistar.

Soooooo, the government has taken drastic measures to make sure that millions of cell phone are brought into the country - and just in time for Christmas.

But just getting the cell phones into Venezuela isn't enough. They have to be CHEAP cell phones. If come Christmas your average Venezuelan can't afford to make hallacas that is one thing, but if they can't get a cheap new cellphone with all the latest features all hell will break loose. So now Venezuelan Ministers are strong arming the cell phone companies and making it clear to them that if the government is going to piss away billions making sure they can import cell phones cheaply they expect the cell phone companies to lower their prices.

All the silliness pointed out in this post is to say: 20 or 30 years from now when people are trying to figure out why Venezuela is still a shitty little thirld world country in spite of it having gone through a huge oil boom they'll probably be wondering "What the hell did they spend all the money on".

And part of the answer will be... cell phones.

If nothing else, at least Venezuelan's know what their priorities are.

The bogeyman that keeps on giving...

2009-10-12T18:47:00.000-07:00

Both followers of the Venezuelan economic scene and habitual readers of this blog know there is one all purpose excuse for the Venezuelan government avoiding any economic measure it doesn't want to take - INFLATION.

That is, whenever a necessary and probably very helpful measure was suggested that the Venezuelan government found inconvenient (read - it would hurt Chavez's poll numbers) it was always said: "No, we can't do that, it would create inflation".

When it was pointed out that Venezuela already had high inflation without taking those measures the retort would be - "Yes, but doing that would lead to hyper inflation, we can't do that until inflation is under control".

And so on and so forth. The Venezuelan government and its sycophants found in inflation a great all purpose excuse for allowing all sorts of non-sensical and harmful distortions build up in the economy, inflation.

Funny thing is, no matter how much the Venezuelan government was careful to avoid carrying out any of the supposedly inflationary measure inflation in Venezuela just kept chugging along. It has consistently been the highest in Latin America for years now and with an annualized rate of 27% in August it doesn't show any sign of being tamed soon.

What is particularly interesting is how persist ant the inflation has been in SPITE of the fact that the biggest excuses the Venezuelan government and sycophants gave have disappeared.

For example, inflation was attributed to the economies high growth, "bottle necks" , and "overheating". Given that no one can accuse the Venezuelan economy of over heating these days inflation should be just a memory. Unfortunately, it is still a current reality.

Also, inflation was said to be "imported inflation" - that is that prices in Venezuela went up because world wide prices of key commodities increased so much, particularly the price of foodstuffs. Thing is, the price of global commodities crashed yet Venezuelan inflation persists. In fact, one of the highest rates of inflation in Venezuela is with food - this in spite of the price for food imports decreasing and food production supposedly increasing!!!

So by all rights, inflation should have decreased significantly in Venezuela. Yet it persists, causing further distortions and effectively robbing Venezuela workers of any real wage increase over the course of this huge oil boom.

Just as bizarrely Venezuelan inflation remains high even though the government did NOT do the things that were supposed to cause it.

For example, the Venezuelan government has steadfastly refused to devalue its overvalued currency even though not doing so brought growth in Venezuelan industry to a standstill. So clearly devaluation didn't cause inflation as Venezuela didn't devalue and inflation has just continued. Of course this is because it was a bogus excuse all along. Exchange rates go up an down all the time without feeding inflation. The U.S. has seen its currency lose lots of value and it has no inflation to speak of. Colombia last year saw its currency go from a high of 1,600 Pesos to a dollar to a low of 2,300 pesos to a dollar (a devaluation of almost 50%) and it too has no inflation to speak of. Obviously a bogus excuse is just that, a bogus excuse.

Another example is the price of gasoline which if it were adjusted to anything approaching a reasonable price would bring in billions of extra dollars which could be used to fund social programs and invest in industry. The government has steadfastly refused to change gasoline prices citing "inflation" and a need to educate the general population (notice that while they say the population has to be "educated" on the issue of fuel prices before anything can be done, which is probably true, the government never undertakes any such educational effort).

The funny thing here is that if you travel to Venezuela's western neighbor you will see that Colombia has ABOVE market rate gasoline prices (the government actually pegs the gas prices above market prices) and a) has no inflation and b) bus tickets are the same price they are in Venezuela. Colombians do though drive more fuel efficient automobiles. Imagine the horror - if the Venezuelan government raised gas prices the sales of gas guzzlers might go down!!!

In the end, one thing is obvious. All the hot air on inflation wasn't based on sound economic analysis. It was just non-sensical and silly excuse making for the myopic policies pursued by the Venezuelan government.

Sadly, while needed economic measures are forever being put on hold Venezuela's chief economic excuse will just keep chugging along.

A new non lethal weapon that should be banned

2009-09-26T15:34:00.001-07:00

Here is the first internet campaign against it.

Sound cannons are all the rage nowadays as the new rubber bullet. From Michelleti using it against Zelaya and Zelayistas to the recent G20 protests. Such weapons need to be banned because prolonged exposure causes permanent damage and is closer to torture than crowd dispersers.

By making it illegal internationally will make it more likely that the Americas will be rid of it.

You cannot be held responsible for people you do not control

2009-08-31T07:54:00.000-07:00

It seems the policy of political encroachment has hit another landmark recently that cannot be overlooked simply because it is so hypocritical. As of now calling for a demonstration (and having this turn violent) is a crime, the implications are disturbing for many reasons not least of which is the absurdity of the case against Governor Cesar Perez Vivas, the fact that people breaking windows is seen as noteworthy by Chavez, but not chavistas throwing items from rooftops.

If Chavez wants to punish people that become aggressive (which the spearhead no doubt is) then they better have evidence of agression, and even then only the spearhead should be punished, not the people that organized the event. Putting a Chavista firebrand like Lina Ron does not give Chavismo carte blanche to establish "order", because if the law is applied equally and blindly then Chavez should be impeached because he would then be responsible for HER actions.

PS To the opposition: control your shocktroops.

EDIT Chavez seemed to back down from his earlier threats, lets hope dissidence is not stifled as gleefully predicted. Violence from both sides should be punished, but only those responsible (hint not Oscar Perez without a shred of evidence of a conspiracy).

The opposition are a bunch of hacks

2009-08-26T08:58:00.000-07:00

Seriously, no matter how ugly the government seems, no matter how creeped out I am about its encroaching strategy, or its failure to develop Venezuela economically. Or practically put me in jail for selling violent video games (I read the draft law and it does not say this though, I am just being dramatic).

All I have to do is look at the alternative, see the bunch of hacks that run around the opposition, from the so called intelligentsia to the common brute. They really are pinochetistas in waiting.

So now CC is talking about their revisionism of April 11, a completely one sided piece of propaganda, I will not reply to every piece of nonsense but with what Wilpert already said.

Nelson says he did not mention Neustaldt's testimony (which was videotaped) because he was unable to personally interview him.

Well here is the testimony they utterly and completely refuse to accept, like christians refusing to believe in evolution. Chupense esta mandarina.

There you go Brian Nelson, an account uncorrupted by the "ripples of time".

EDIT Here is a follow interview of Neustaldt where he confirms the pertinent statements he made.

""Pregunta: Hay una parte en el vídeo que transmitieron que vimos, que usted dice que recibió una llamada el día 10 en la noche indicándole que iba a haber un vídeo, que iban a haber una declaración contra Chávez, y después volvemos a ver en el vídeo que transmitieron, que a las 11 de la mañana recibió otro llamada indicándole que no eran ya veinte sino menos, pero representativo y que iban a haber los muertos en los mismos contextos ¿cómo se explica eso?

Otto Neustald: No tengo que explicarlo, recibí la llamada es totalmente cierto. Así como la recibí yo, vimos que Jorge Olavarría dijo que a él también le habían dicho que se iba a romper el hilo constitucional y le llevaron una copia del decreto, mucha gente más también lo hizo. Yo fui a un medio de comunicación a avisarles de lo que me acaban de informar, yo lo notifiqué en ese momento yo trabajaba para CNN, yo lo notifiqué a mi Mesa de Asignaciones, el día 11 lo volví a notificar y traté de avisarle a todas las personas que podían a hacer algo en ese momento, no fui lógicamente además cuántas veces no recibimos montones de denuncias o de datos que nos dan que no podemos confirmar sino hasta que ocurren."

Hat tip Charly Birther

Little things that make you smile

2009-08-25T20:11:00.000-07:00

The main Caracas motorway plaza has been inopperable and neglected for decades, hopefully it stays this way after the renovation.

The problem with putting out fires is that sometimes something important gets burnt

2009-08-22T16:33:00.000-07:00

It is not surprising to any knowledegeable observer that that the economic strategy of this government is not so much communism, socialism, import substitution, liberalism (neo-), export, etc. But rather the continual counter-attacks whenever economic flashpoints arises, often time inadvertently creating new ones.

On the news that manufacturing shrunk 8.5% in the second trimester, the government realises that it must devalue the currency or else the fall would be catastrophic. Instead of creating a dual system like 80's Recadi wherin essential goods could remain at 2.15 Bs and the rest at a higher rate, they are studying whether to charge taxes on currency transactions for imports. Granted this IS better than the status quo, but I will explain the pro's and cons compared to a dual exchange system.

Pros
Lower political costs of increasing taxes as inflation still eats away at the currency. Lets say tomorrow the tax is 100% meaning 2.15 turns into 4.30 Bs per dollar, once inflation chips this away there is a much smaller political cost in anouncing a 200% tax to turn 2.15 into 6.45. Or ideally smaller increments that are more periodical.

Cons
Exports are still exposed and this system does nothing to alleviate this, unless they start resorting to the black market exports will inevitably reach 0 as inflation shows no sign of equalizing its rate with the rest of the world.

This is bad news if it does come to fruition, instead of adopting a sensible progressive policy the government will create an inferior solution simply because that is what the old government did.

That said if they do give "refunds" to exports at the same rate (100%, 200% etc) I will eat my words and actually clap that they found a sensible solution to a politically complicated problem. I doubt it though, but time will tell.

Only in Venezuela...

2009-08-09T11:25:00.000-07:00

...Can a left wing extremist accuse the government that she supports of political persecution, accuse the biggest govt propagandist of slander, attack the most high profile opposition media(A) in Venezuela, while getting a regular column on the newspaper (B) whose owner is a regular on A and under investigation for saying that Chavez is going to end up like Mussolini. Oh and get a column published while in prison.

The logical explanation is that she is a double agent, but you cannot fake this thing for 10 freaking years, it really is that nuts.

What is the deal with the tanks

2009-08-07T13:29:00.000-07:00

Disclamer: This post is not intended for the usual audience (all 4 of you) this is so that in case anyone wants to google this topic they will find a detailed synopsis of balance of power between Venezuela and Colombia.

Since the 20th century Venezuela and Colombia have shared a tenuous truce of sorts regarding the northernmost border, Colombia claims to own part of the state of Zulia and by extension part of the Gulf of Venezuela (which they call Gulf of Coquivacoa), Venezuela conversely states that they own all of the Guajira Peninsula. The key difference is that the Gulf of Venezuela is rich with hydrocarbon resources wheras the peninsula is devoid of economic value.

In 1941 Venezuela surrendered 100,000 Km2 to Colombia, since we had no real army they marched in and took it unopposed. After that it was decided that a standing army was necessary in order to maintain the territorial integrity of the nation. Since we could not match them man for man it was decided to maintain a qualitative edge. Second hand military equipment was purchased from US war surplus, but even this was state of the art for the region. Ever since we have new toys and Colombia has more men, and are always playing catchup. In 1987 war was averted because we had an edge, but the gap closed in the 90's.

Which leads us to today and Chavez once again saber rattling for who knows how long, the goal according to him is to double the armour fleet with state of the art equipment, but unlike the Su-30's purchasing the latest Russian tanks is a waste of money.

A)They are not as decisive as holding air superiority, planes are of utmost importance in grounding the Colombian helicopter fleet which is substantial, tanks don't really help here.

B)Colombia has no MBT, they recently wanted free hand-me-downs from Spain, but this was aborted by Chavez whining.

The models we are most likely to purchase (T-90 or upgraded t-72s) are both very good, and they would even be on par with Chile's Leopard 2s but they would be complete overkill against Colombia, or sitting ducks to US aircraft, neither scenario justifies their purchase.

So why buy them? Chavez was an old tank commander but I doubt this has sentimental value. Others claim it is a joke because of the jungle border (stupidly inaccurate). The opposition theory is that we are about to invade (they honestly wish). Last but not least is that this is a preemptive move so that we are still ahead even when they do purchase tanks.

There is only two plausible theories I can think of: Another chapter in the silly drama before Chavez and Uribe make up yet again, or the current MBT are falling apart.

A sigh of relief

2009-08-06T10:16:00.000-07:00

In what can only be described as good news, the National Assembly did not even discuss the new law that would have
banned free speech.

I have come to realize that all this talk of lack of separation of powers to be delusional. Even if you were to believe that Chavez controls the AN he certainly does not control the attorney general or vice versa. That said Luisa Ortega Diaz should resign for this.

The State of the Venezuelan Worker - 2008

2009-07-15T17:03:00.000-07:00

Proceeding with the information from the Venezuelan Central Bank's report on the Venezuelan economy for 2008 I would now like to review some data on Venezuela's workforce and how its workers faired last year.

This data is quite interesting and thought provoking. And as usual, some of it paints the accomplishments of Hugo Chavez is a flattering light and some of it paints him in not such a flattering light.

Before getting into the pages that specifically relate to the Venezuelan workforce it is important to give a key statistic which is found at the bottom of this page:

At the bottom of the page it notes that consumer spending in Venezuela went up by 7.1% last year. That is, Venezuelan households had 7.1% more money to spend last year, and spent it. In prior years this increase of spending had been upwards of 15%.

There is simply no overstating the significance of this - any country where peoples spending goes up by 7% in one year is going through an economic boom and 15% growth in consumer spending is almost beyond description. Want to see a true economic boom? - this is it.

And it is very obvious on the streets of Venezuela - all the new cars, the new shopping malls, the electronic gadgets everyone seems to have and on and on.

There is simply no disputing that the past number of years have been very good ones for the material well being of Venezuelans. However, what this means for your average Venezuelan worker is probably not what you would think and is an interesting subject that I'll get to later in the post.

On the next page we see some more important data on the Venezuelan work force.

What we see here is the commonly known fact that unemployment has gone way down ever since the oil strike ended. From a high of 19% it is now down to less than 7%. To find a similarly low unemployment rate you have to go all the way back to the early 90s.

This is certainly good news for Venezuelan workers and it also helps explain how household spending went up. If more people in each household have jobs then there will be more money to spend.

On the next page we get some more details on the jobs that were created.

Last year year 321,154 jobs were created in Venezuela. That is a quite impressive number and is enough, even in a country with a young population like Venezuela, to absorb the hundreds of thousands of youth entering the job market each year.

Looking more closely, we can see that 265,412 of those jobs were created in the formal sector while 55,742 were created in the "informal" sector (which is often thought of, though not completely accurately, as being street vendors). So it is also good news that formal sector creation is leading the way.

Of those formal sector jobs 182,931 were government jobs with "only" 82,481 being formal private sector jobs (still a pretty good number by the way). So the job creation is VERY heavily tilted toward the government sector, not normally seen as something sustainable. Keep in mind, some of this probably results from private companies being bought by the government and hence those jobs now being considered government sector jobs.

Further, whether a job is private sector or public sector doesn't mean very much in and of itself. A private sector banking job doesn't necessarily do much to develop a countries economy. By way of contrast, a engineer working in a government run factory could do a lot to help the country. But more on this in a minute.

First, lets notice one warning sign that did appear on that page and that is that 157,000 people who are of working age dropped out of the work force. While no detailed analysis of that number is given that is generally not a good thing and can result from people finding it hard to get jobs.

In the next page we find a nice graph that shows how the formal and informal sectors of the workforce have changed in recent years:

In the graph we see how in the mid 90s the informal sector of the workforce became almost as large, and sometimes larger, than the formal sector. This is not good because people in the informal sector generally do not have regular paychecks, are not paid as much, and are not entitled to benefits as people in the formal sector. Finally, in the oil boom of the past few years that negative trend was reversed with the formal sector growing and the informal sector shrinking. So that is another positive development.

Now, returning to the topic of all those jobs that have been created and whether or not they are productive we start to see numbers on the largest categories of jobs that were created. And they are...

Communal, personal, and social services: 134,075 jobs

Transport, communication and storage: 61,330 jobs

Commerce, restaurants, and hotels: 57,133 jobs

and

construction: 38,205 jobs

Well, we can clearly note what didn't make the list: manufacturing. In fact, neither did agriculture. Is a sustainable, robust, and healthy economy really built around teachers, cell phone sales people and hotel clerks, as important as those jobs may be? That is an important question that all Venezuelans should think about because unless those types of jobs truly are wealth creating Venezuela is in trouble.

Anyways, on the next page they give a nice graph showing job gains and losses by sector:

Note on the left hand side of the chart the two sectors with minimal job creating - agriculture and manufacturing.

So behind all the good job numbers, more jobs, more formal sector jobs, and higher family income, we already see one very ugly truth; most all of the job creation is in non-productive sectors of the economy which don't in and of themselves create much wealth. Looking at this it becomes pretty clear that most of the good news about the job market in Venezuela results from the oil boom and will only last as long as the oil boom does.

Now we come to the most interesting of the statistics regarding the Venezuelan workforce - wages. Of course, we all assume wages have gone way up. After all, the post started by pointing out that household spending was up by over 7% last year.

Further, we often see slides showing how things like the minimum wage have gone way up. Take these two slides for instance:

In this slide we can see that the minimum wage in Venezuela has gone way up, almost exponentially it would seem.

However, those who know what inflation is like will know this is not all it seems and want to see something that would show more what the true value of the minimum wage is.

Keeping that in mind we next see this:

This chart shows the Venezuelan minimum wage in dollar terms. The government particularly favors this chart as it makes it look like Venezuelan workers have more than doubled their income under Chavez - after all, they are earning more than twice as many dollars and that is generally taken as a consistent frame of reference.

But in reality that is just another trick. Venezuelans don't spend in dollars, they spend in Bolivares and Bolivares are worth less and less each year because of high inflation. But they do hold their value against one thing - the dollar. That is because of an exchange rate that is controlled by the government and has been fixed for many years.

So if you look at the purchasing power of the Venezuelan minimum wage in dollars, and this is quite ironic as Venezuelan minimum wage workers could never get their hands on dollars at the official exchange rate, it looks like their wages have gone way up. But in reality, this is an illusion created by a fixed and overvalued exchange rate.

So how can we see how minimum wage workers, and keep in mind many (most?) workers in Venezuela earn the minimum wage, have done during the oil boom? Easy. The economists at the Venezuelan Central Bank have created a graph that shows very nicely illustrates how they have done.

It is on this page:

On this chart we see plotted, from 2004 to the end of 2008, the minimum wage (the plain line) versus the "food basket" (the line of with xs) which is how much it costs to buy the food one needs to eat properly.

Lets look carefully. In 2004 the minimum was not quite enough to put food on the table as the minimum wage was slightly below the cost of the food basket. Fast forward 5 years through a huge oil boom and the minimum wage is... still not quite enough to put food on the table as it is still below the food basket. Wow. A big wow. A really, really big wow.

This is an absolutely stunning fact!! In spite what the propaganda slides that are for public consumption show the reality is minimum wage workers in Venezuela have not seen their earning power go up in the past five years in spite of the huge boom going on around them!!!!!

And it gets worse. Read the text below the graph and you will learn that the average wage in Venezuela fell by 4.8% (and you have to keep reminding yourself this was in a year when oil hit an all time high!) in real terms with public sector wages down by 2.6% and private sector wages down by 5.9%.

To sum this up, anyone in Venezuela who actually works for a living and depends solely on their wages already started seeing their standard of living drop significantly in 2008. No wonder there have been so many strikes in Venezuela!!

To conclude, we need to think about one thing. We've seen two seemingly very contradictory statistics here. The first is that household spending has gone up 7.1%. The second is that real wages are dropping significantly. How can this be? Unfortunately, the authors of the report don't really attempt to explain it.

Here is my best estimation of what explains it:

1) More Venezuelans have jobs so that even if wages from every individual job has gone down overall family income has gone up due to more people in an average family having jobs.

2) Some Venezuelans make their living from owning their own businesses. And if their profits have gone way up then they could be earning and spending more. While this would be a small group the money they earn could be enough to skew the statistics

3) Finally, and I think the most probable explanation, is that the government has increasingly given people non-wage income. University scholarships, grants for homemakers, Mission stipends, etc, etc have proliferated under Chavez and probably put a very significant amount of money in many people's pockets. Further, pensions have been greatly expanded and their amounts increased too.

Taking into account those points the seeming contradiction can easily be understood - Venezuelans have a lot more money to spend while at the same time they actually earn less from working.

The big question is - is this a good thing and is this the way a society trying to develop and become self-reliant should really be doing things?

Something to think about as you look at the state of Venezuelan workers in 2008.

The state of Venezuelan manufacturing - 2008

2009-07-13T19:14:00.000-07:00

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.

Is the oil boom over?

2009-07-11T12:02:00.000-07:00

Well, it is mid year and despite all the dire predictions of collapse from some quarters Venezuela is still there. And no, its economy is not tanking.

However, it is certainly not doing very well either. After years of boom and ever increasing consumption Venezuelans are now starting to see their standard of living drop. Just a few tid bits:

Consumption at supermarkets is down 10% so far this year. Consumption of regulated staples such as rice and sugar is down 2%.

Overall consumer purchasing power is down about 3%.

Of course, this is not unexpected. Remember workers such as those at PDVSA and Pequiven got no raises at all this year. So their purchasing power has fallen by 10% in just the first half the year.

Inflation through the first half of the year was 10.8%. Workers earning the minimum wage only received an increase of 10% in the first half of the year so their purchasing power is also declining.

Unemployment has also started rising and the percentage of workers in the informal sector, as opposed to those having regular jobs, has increased. So jobs are now getting harder to find.

Given the above and given the .3% GDP growth in the first quarter it is fair to say that the Venezuelan economy has stalled.

Of course, it has stalled at what for Venezuela is a high level - Venezuelans have a much higher standard of living than they did ten years ago. Nevertheless, the standard of living of Venezuelans has stopped increasing even though they are very far from having a standard of living at all comparable to those who live in developed countries.

Further, with oil prices lower than in prior years it is no more obvious how Venezuela is going to get its economy growing again than how the U.S. will get its economy growing.

The oil bonanza has ended and so too has Venezuela's growth.

Why can't Venezuela seem to grow without increasing oil prices? The answer may be found here.

The tyranny of the institutions

2009-07-05T19:56:00.001-07:00

Buzzwords and talking points is pretty much all I hear nowadays from the regional right, what is comical is seeing them shift from the echo chamber that they deem most pressing, it is not that they really believe in the things they claim, just that they naively believe that if they repeat it long enough and more often than not they will actually convince a single impartial soul.

In the 80's the buzzword was democracy, the left claimed that even though democracy was a positive ideal, the right was coercing democracy to install and cement their ideology. Knowing full well that whenever democracy overstayed its welcome they would change their priorities, the right no longer cares about democracy, Francisco, Daniel, Miguel they care about "institutions".

The new threat to the right is not armed resistance, but the charismatic populist, that is why term limits exist in every rightwing constitution. So in order to defeat the individual they seek groups of people that can be more easily coerced, therefore the institution is the cause celebre of today. Screw the will of the people, screw human rights,

The army is an institution (unless it is controlled by a populist) ergo it can shoot people at point blank in an airport.

The judiciary is an institution (unless it was selected by a congress elected with the aid of a populist) ergo it can depose the president without an excuse

The electoral body is an institution (unless they use machines, or in the case of Iran paper ballots) ergo it can negate the will of the people by not recounting the mexican election.

Now this is to educate them once and for all, institutions are no more or no less democratic than a populist, it is power hungry like a populist, it is biased like an ideologue, and it is as evil as any human being.

The people are the only institution that matters, because either you believe in the people or you do not. They are not perfect, but that is the true nature of democracy, not 9 fat cats in robes.

Coup in Honduras

2009-06-28T09:50:00.000-07:00

It is funny to see this government talk about foreign policy, it is quite clearly hypocritical in that it backs allies unconditionally (Iran), while crying sovereignty when opponents do the same. That said I do wish (but don't demand) that the opposition would unite their voice against the current coup in Honduras, I know you all claim that your only regret about the 11th of April was the carmonazo, not the coup itself. However there is something to be said about an event that draws every single country in the world to condemn it.

Democracy is the most important thing to maintain, above ideology.

PS yes I know it has been a while since the last site update, no need to rub it in.

It's sad, just sad...

2009-05-14T17:01:00.000-07:00

There really isn't too much I can say about this. I simply find it really depressing. I certainly share the people at Venezuelanalysis's desire for social justice and a greater and more widely shared economic prosperity but I really had hoped that they also had enough of a commitment to freedom of speech and democratic values to call the Venezuelan government on it when it clearly transgresses.

Sadly, as today's article shows they don't seem to:

Mérida, May 13th 2009 (Venezuelanalysis.com) - Venezuela's National Telecommunications Commission (CONATEL) began inspections of all radio and television stations in the country on Tuesday, two days after President Hugo Chávez vowed to put an end to the irresponsible behavior of one of the largest television stations, Globovision.

"This is going to stop. We are no longer going to tolerate this crazy man with a cannon firing at the whole world! Enough!" said Chávez on his weekly presidential talk show on Sunday, in reference to the director of Globovision, Alberto Ravell. "One thing is criticism, and another thing is conspiracy," he said.

Shortly after a brief earthquake near Caracas last Monday, Ravell reported unofficial information before authorities had made informed declarations about the situation, and used the occasion to bash the government for not responding quickly enough. The National Assembly subsequently requested that CONATEL punish Globovision for the incident.

The government and civil society organizations have strongly criticized Globovision for its distortion of events surrounding the April 2002 coup d'etat against Chávez which favored the coup plotters, its virulently anti-Chávez spin on the news, sympathy for violent anti-government protestors, and its biased coverage of last November's regional and local elections.

I wonder if the folks at Venezuelanalysis would think it right that the FCC investigate CNN for having unflattering coverage of the U.S. governments handling of the Hurricane Katrina aftermath, consistently implying that the U.S. government was inept and incompetent, and often disseminating information which the U.S. government itself had not made public?

I don't have a crystal ball. I don't know where this is all ultimately going. But I wonder if the Venezuelan government does wind up going down the path of that famous island south of Key West will Venezuelanalysis gladly walk down that path with them?

Very depressingly, it sure is starting to look that way.

The CEPR starts to get sloppy, both with the facts and its analysis.

2009-05-05T21:03:00.000-07:00

The Center For Economic and Policy Research is a first rate think tank focusing on economic issues from a liberal/left point of view. Hardly a day goes by without Dean Baker's insightful analysis making its way into mainstream media conversation or being acknowledged by other prominent economists such as Paul Krugman.

The CEPR's other half, Mark Weisbrot, has long focused on Venezuela's economy and has written a number of worth while papers on it. Although he doesn't hide his biases, he is clearly supportive of the current Venezuelan government, his work has generally been well documented and thought out.

Recently the CEPR published a paper by another of their staff economists, David Rosnick. The main thrust of the paper is to criticize the IMFs economic projections with respect to a number of countries in the Americas and singles out the IMF's predictions for Venezuela for particular criticism. Unfortunately, in doing so the CEPR uncharacteristically engages in some flawed analysis and blatant factual errors.

Let me start out by saying that I haven't read the IMF report whose projections are criticized nor do I really care much what their projections are. I wouldn't put much stock in either the IMF's predictions or their policy recommendations - both of which are likely to be highly flawed in my view.

Rather, what concerns me is that economists from a highly regarded think tank that is quite sympathetic to the Venezuelan government, and which probably advise that government from time to time, carried out such a superficial and flawed analysis of what the future likely holds for Venezuela's economy.

So without further preamble lets see what they said.

They cut to the chase quite early when on page 2 they publish a chart showing the actual average growth rate between 2002 and 2008 and the projected growth rate from the IMF for 2008 to 2014. What upsets the CEPR is that while Venezuela has had average annual growth of 7.1% over the past period it is projected to have average negative growth of .1% through 2014.

Further, on page three they compare it to Mexico and act astonished that Mexico could have a rosier growth projection than Venezuela going forward. They find this odd because because as they point out Mexico is heavily tied to the U.S. via trade and therefore should suffer significantly with the current slow down. They therefore see no reason why Mexico should outperform Venezuela over time.

However, they ignore some key points. For example, it is true that Mexico is very dependent on trade. But so too is Venezuela. In fact using the economic statistics on the CIA World Factbook Mexico's exports come up to 26.7% of GDP while Venezuela's are somewhat higher at 28.3%. But there is a key difference that could explain the differences in their economic prognosis - Venezuela's exports are almost entirely oil whereas Mexico's are mainly manufactured goods. So as long as the volume of goods and services consumed by the U.S. economy starts to grow again Mexico's exports to that country, and in turn its economy, will likely grow.

However, in the case of Venezuela the fate of their exports is dependent almost entirely on one thing - the price of oil. And with the price of oil projected to be below last years average of $88 per barrel (for Venezuelan oil) for as far as the eye can see it is hard to see where export growth will come from for them. And as we shall see, without growth in exports Venezuela's economy is likely to remain stagnant, at best.

They then go on to repeat some rather rosy projections by others that have Venezuela's trade balance becoming highly favorable in the years up through 2014. Certainly that is possible, but it is completely dependent on oil prices getting up in the $100 range again - something that this blogger thinks is only remotely possible.

It is at this point that wheels come of the facts part of this paper. On page three Rosnick says:

Venezuela has recently concluded a $12 billion investment agreement with China, in which China is putting up two-thirds of the funds, and has other multi billion dollar investment agreements with Russia and Iran.

I won't comment on the Russian and Iranian investments as I don't know their details, though I believe they are both in the oil industry in which case they are likely to provide little if any benefit to Venezuela.

However, the Chinese "investment agreement" with China is a complete misnomer. Had Rosnick followed the news on this closely he would know that it isn't investment but rather a loan - China gave the Venezuela investment bank BANDES $8 billion and in return over the several years Venezuela will send China free oil to pay off the loan. Hence, this isn't an investment agreement at all, it is simply a loan and the fact that it is paid off in-kind instead of with cash money does nothing to change that. Therefore, rather than Venezuela getting more investment it is simply taking on more debt - hardly the positive that Rosnick inaccurately tries to portray it as.

And speaking of debt those numbers are wrong too:

Venezuela's total public debt is a relatively low 14.3 percent of GDP, with foreign debt amounting to only 9.8 percent of GDP.

Now if we take Venezuela's GDP as being a little over $300 billion and if its foreign debt is about $28 billion and its domestic debt about $16 billion those calculations turn out to be about right.

However, there is only one little problem - that is hardly all of Venezuela's public debt. The state oil company PDVSA has $16 billion in debt (this is not counting accounts payables - I am only counting actual loans taken out or bonds sold) at last count. Given that PDVSA is fully state owned and that any dollar it spends paying down its debt is one dollar less it can give to the government that should be fully counted as public debt. Then we have the $8 billion in in-kind debt to China mentioned above. Further there is the additional $16 billion in domestic debt that the government has announced it will take on this year and the $2.5 billion in debt PDVSA will take on by selling bonds. Add all that up and and instead of having debt at 14% of GDP it is more like 28% of GDP and climbing. That is still not an unduly burdensome debt level but neither is it as trivial as this paper tries to present it.

[It should be noted that the debt level could turn out to be significantly higher still. I have not counted the money that the government still owes for nationalizing the Sidor steel mill, various cement factories, a large bank, and Exxon Mobil's share of a joint venture. Those could easily add up to many billions more in liabilities. However, Venezuela is also OWED some money by others such as the Caribbean countries that got oil that they could pay over many years. I have considered those things to be a wash simply because I have no way to get precise numbers for either the ultimate costs of the nationalizations nor the amount owed Venezuela under Petro Caribe. But assuming they cancel out is probably an assumption very favorable to Venezuela].

A little further on we find this in reference to the IMF overestimating Venezuela's growth for 2008:

Though the IMF's prediction for 2008 (made in October 2007) proved optimistic, this is due to the failure to anticipate the current recession, rather than a rosier view of the country.

Attributing the sharp drop in growth last year to the world wide recession completely wrong. However, it is a serious piece of revisionist history that I was actually expecting to hear - just not from reputable economists such as those at CEPR.

Lets think this through. Yes Venezuela is very much connected to the world economy. It exports a lot and it imports a lot.

But how precisely would a recession have been transmitted to Venezuela? Not by the crisis affecting Venezuela's financial system. Venezuela's financial system was, except for one small Ponzi scheme, not involved in all the financial shenanigans.

The other way for it to be impacted would have been for its exports to precipitously drop last year as they did for many other countries. The thing is though that Venezuela almost exclusively exports oil and oil was going through the roof up through the third quarter of last year. It averaged almost $87 per barrel for all of last year, a very significant increase of the $65 per barrel for 2007. Further, the peak for oil prices came in the third quarter of the year when they averaged $110.

So if what was the determining factor in Venezuela's economic performance was the rest of the world economy then Venezuela should have boomed last year with a very high rate of growth given that its connection to the world economy, oil, went through the roof.

Yet when we look at Venezuela's GDP numbers what do we see? We see growth falling significantly from prior years from 8.4% to 4.8%. Worse still, if we look at some important segments of Venezuela's economy we see very disturbing numbers.

For example, manufacturing GDP didn't grow at all and even shrank slightly (yes, I mean -0.1% growth) in both the third and fourth quarters. Think about that - Venezuela's manufacturing sector flat lined at the same time (the third quarter) that the country had all time record oil revenues. Clearly it was something other than the world economy that was causing Venezuela's growth to drop off. And that something is almost certainly the Venezuelan governments own policies - sometimes possibly necessary, sometimes possibly misguided.

The two policies that probably had the biggest impact on slowing growth were the Venezuelan government slowing down its spending and trying to limit growth of the money supply to tamp down inflation and its maintaining a fixed and highly overvalued exchange rate. The first policy may or may not have been wise or necessary, I am not knowledgeable enough to say. The second policy is almost certainly completely self defeating, stops in its tracks any efforts to diversify the economy (as the CEPR itself has noted on numerous occasions), and is almost certainly the main cause of Venezuela's declining industrial output.

Hence, it would seem fairly clear that Venezuela having even lower growth than what the IMF predicted in 2008 resulted from the Venezuelan government's own policies and had next to nothing to do with what was happening in the world economy as Rosnick asserts. If Rosnick wishes to assert otherwise then he really should explain what the exact transmission mechanism was whereby the 2008 recession in other countries impacted Venezuela's growth rates for that year.

Thus, what we have in this paper by the CEPR are some sloppiness on the facts and some revisionist history. Certainly those are not good, even in and of themselves.

However, in a certain way what is more bothersome is what I see as a conceptual flaw. The C.E.P.R. wrote this brief paper because it views the IMFs prediction of no growth in Venezuela over the next half dozen years as wildly implausible.

But why?

While I myself probably wouldn't predict that there would be no net growth over that period neither would I say it is implausible. It is an open secret that as oil goes so goes the Venezuelan economy (although as seen above Venezuela lately has managed to have only mediocre results even while oil is booming). So isn't it possible that all the IMF is really saying is that oil may have a greatly reduced value over that same period? And if it does that Venezuela could go into a fairly deep recession that even by 2014 it wouldn't have recovered from?

Rosnick brings up Venezuela's impressive growth over the past 4 or 5 years and the fact that they out performed IMF predictions as evidence of something significant and that we should extrapolate into thinking Venezuela will grow significantly gong forward. But isn't it really just evidence that there was a huge boom in oil prices?

In some previous papers the CEPR has also tried to argue, unconvincingly, that what Venezuela has experienced recently is something other than an oil boom. There main argument is that the non-oil and private sectors of the economy have grown faster than the oil industry and government. Unfortunately for them, that a meaningless argument.

Sure, the private sector may have grown quite rapidly (and it has, just look at all the new cars and new shopping malls). But is this anything more than petro dollars spent by the government or given out in higher wages, public works, and social programs working their way through the economy and winding up in the private sector? I think clearly it is. Oil is without a doubt the prime mover of the Venezuelan economy and if the CEPR thinks something else is causing the boom (industry, agriculture, high levels of investment, etc.) then once again it needs to state what that something else is and present evidence that it, and not oil revenues, is what caused Venezuela's high growth rate.

Unless the CEPR can show that something other than oil is the prime mover in Venezuela and unless it can fix some of its own sloppy mistakes and analysis and show that it is paying more than superficial attention to what is happening in Venezuela it really isn't in much a position to criticize the IMF's predictions regardless of whatever weaknesses they may have. Frankly, the CEPR is letting itself down. It is a far better organization than this paper would lead one to believe. Hopefully this is simply an aberration which will soon be corrected and we will be able to once again look forward to C.E.P.R.s insightful analysis of the Venezuelan economy.

You know money is tight when...

2009-04-25T10:21:00.000-07:00

they start telling workers in the country's most important industry they won't get any raises this year.

That is just what PDVSA president Rafael Ramirez just did - he told all 75,000 PDVSA employees there will be no increases for them this year.

Now, that might not be such a big deal if it were a country with inflation of just a few percent. But Venezuela had inflation of over 30% last year and will likely have it be at least between 20% and 30% this year. Nice consumer goods (TVs, cell phones, cars, appliances, etc) are likely to go up in price way more than that and indeed some already have. So while oil workers in Venezuela are well paid, and in fact probably way over paid, they are definitely going to be taking a pretty big hair cut this year.

Given that most people in the oil industry inclined to oppose Chavez left in 2003 it is unlikely that this will lead to any seditious action.

Still, Chavez would probably do well to shut up about how Venezuela is "blindado" against the world wide recession. It is no such thing.

MANPADS to the people

2009-04-23T09:08:00.001-07:00

Little mentioned during the summit lovefest and the daily grind of news headlines, Venezuela acquired (it appears some time ago) a hundred or so IGLA-S. MANPADS are the greatest fear of an occupying power, but they are literally a weapon of last resort in a conventional war. (air defense should be handled by having air superiority, or at the very least SAM's of various ranges, if you are using MANPADS something went wrong).

The US under Bush made it their mission to have these weapons destroyed, they claimed it was because they feared terrorists would get their hands on them, but this is always their lame excuse.

GDP per sector and how countries meassure up

2009-04-15T17:59:00.000-07:00

Generally I find the whole division of GDP into agriculture, industry and services to be woefully obsolete, but when you look at just who worldwide dominates each sector, one can see a pattern.

It was to be expected that agriculture is reasonably distributed worldwide, less so for industry, but it is services that is completely dominated by the developed countries, for a sector that generally dominates even within individual countries themselves it is startling how little the developing world contributes.

Clearly there needs to be better differentiation within this subgroup in order to reach more adequate conclusions. A case in point is Iceland, which grew exponentially due to financial services but crashed recently because of it, clearly those types of sub-sectors are misleading as they measure fake wealth. However exports in culture are different in that they are the most solid representation of wealth IMHO, Hollywood is the US's #1 export industry (which in turn is defined a service) Japan produces anime etc. And so on. Intellectual property is what really adds value nowadays, even if that value is hidden in manufacturing. It simply is a nobrainer.

By popular demand.

2009-04-01T16:05:00.000-07:00

Generally weird statistics are always a head scratcher, you would never think that this government is business friendly, we hear horror stories of bureocracy run amok, threats of nationalizations, and worker invulnerability.

Basically what it means is that one in five Venezuelans (of the age group 18-64) is an entrepreneur of a nascent business, so when I first saw this statistic 3 years ago we were leading the pack and I thought that maybe it was an outlier, but evidently it is a trend. The left is not against entrepreneurs, we are just against purely financially driven and inegalitarian enterprise. Co-ops for example would be a positive development. (Chavez's version of socialism might as well be branded anti-consumerism since he now claims coops are capitalistic, but that is for another day).

Of course things are not entirely rosy either as they note in the pdf, the most important obstacle in Venezuela is lack of highly qualified employees, rather than the government. Also most new TEA's are created based on necessity rather than opportunity, the former are lower quality than the latter, and shows the real difference between developed countries and the rest.

Siragon, from assembly plant to "producing" parts.

2009-03-29T14:58:00.000-07:00

Siragon is the local computer (and electronics) brand, like Dell and HP their job has been to assemble the parts it imports but they updated their industrial capacity to hopefully make 1.5 million computers a year, they also entered the field of SMT's which goes to show how protectionism can nurture and expand local high tech industries, the next step would be making the actual chips eventually leading to R&D.

Link

Like all things in Venezuela you need to shop around for good prices, Siragon's greatest flaw is the freedom its distributors have in gouging the customers.

Here are more details

Fonden, TARP, what's the difference?

2009-03-27T18:22:00.000-07:00

Recently some people have been having an apoplectic fit because they don't know down to the last Bolivar how much money is in Venezuela's National Development Fund. Of course, if they paid any attention at all, even to the very media sources that absolutely detest Chavez, they would know that at year end 2008 there was about $6 billion dollars in it and that another $12 billion was deposited to it in January. So it has roughly $18 billion dollars less what has been spent in the past couple of months.

Unfortunately, that just isn't good enough for some very demanding types who insist that because they don't have audited financial reports delivered to their doorsteps on it every week it must be some big Madoff like ponzi scheme where the money simply doesn't exits.

And of course, even if it probably does exist this not knowing up to the minute balances on it is very opaque and, well, banana republicish.

That may be true and in fact only serves to feed my suspicion that the United States is rapidly moving into banana republic territory. I mean, its one thing to lose track of a fund with a few tens of billions in it but losing track of a fund that has $700 billion in it?!?!? It takes the expertise of the U.S. government to do that:

WASHINGTON -- The Treasury has tried to revamp its $700 billion financial-rescue program, promising "a new era of accountability, transparency and conditions." But the Treasury isn't answering a key question: How much is left in the rescue fund?

Based on Dow Jones Newswires' reporting and calculations, it appears that Treasury has, at most, $52.6 billion left in its rescue fund. That would mean about 92% is already committed. That assumes the Treasury spends $100 billion in TARP funds to rid bank balance sheets of toxic assets.

The Treasury has yet to provide an official accounting.

On Wednesday, Treasury Secretary Timothy Geithner twice was asked to specify how much remains in the Troubled Asset Relief Program. The question arose amid the series of new programs the Obama administration has announced in the past several weeks to boost ailing financial markets. In both instances, the secretary avoided a direct answer.

The first time came after Mr. Geithner delivered remarks to the Council on Foreign Relations Wednesday morning. The moderator asked the basic question: How much is left in TARP? Mr. Geithner's reply: "Very, very reasonable amounts of money -- significant enough money."

Mr. Geithner gave a similar response a couple of hours later in a CNBC television interview.

Then again, maybe we are all just angsting too much. I mean do we really need to know if it is $2 billion or $200 billion left in any of these funds as long as we know its a "very reasonable" amount? After all, as long as it is "significant enough" what else matters?

Here is another way not to go about trying to develop.

2009-03-25T19:39:00.000-07:00

Over the past several years it has become clear to me that the Chavez administration in not pursuing a successful development strategy.

However, as much as I think the Chavez government has been stupid, incompetent, and indifferent to really developing the country it must also be remembered taking what is presently an underdeveloped country and moving it to developed status isn't easy. Further, there is more than one way to fail at it.

Take the case of Mexico. While Venezuela could be the poster child for the "resource curse" or "Dutch Disease" Mexico is the poster child for the failure of neo-liberal policies or the "Washington Consensus".

Lets take a look at some of Mexico's problems as described by the New York Times:

Mexico’s former president, Carlos Salinas, used to promise that free trade and foreign investment would jump-start this country’s development, empowering a richer and more prosperous Mexico “to export goods, not people.”

Fifteen years after the North American Free Trade Agreement took effect, only the first part of that promise has been realized.

Mexico’s exports have exploded under Nafta, quintupling to $292 billion last year, but Mexico is still exporting people too, almost half a million each year, seeking opportunities in the United States that they do not have at home.

Secretary of State Hillary Rodham Clinton will arrive in Mexico on Wednesday and President Obama will visit next month. Both are expected to emphasize the successes of American-Mexican economic cooperation, but it will be hard to ignore how much in Mexico has not changed under Nafta.

Economists here say much of the blame lies with Mexican leaders, unable or unwilling to take on oligarchs and unions controlling key sectors of the economy like energy and telecommunications. But they say some blame goes to the unintended consequences of Nafta.

In some cases, Nafta produced results that were exactly the opposite of what was promised.

For instance, domestic industries were dismantled as multinationals imported parts from their own suppliers.

Local farmers were priced out of the market by food imported tariff-free. Many Mexican farmers simply abandoned their land and headed north.

Although one-quarter of Mexicans live in the countryside, they account for 44 percent of the migrants to the United States. The contradictions of Nafta are apparent in Guadalajara and the rich farmland around it.

On the road from the airport to the city, Mexico’s second-largest, a well-worn sign welcomes visitors to Mexico’s Silicon Valley. After Nafta went into effect, the comparison seemed ambitious but not out of reach.

Global giants spent billions of dollars turning Guadalajara into a manufacturing hub for the information technology industry. The industry boomed, spurred by cheap labor and the sense that Nafta guaranteed investor-friendly policies. Today the city is ringed with low-slung factories that churn out everything from BlackBerrys to digital tape storage libraries for Sun Microsystems.

But investors came because the city was already a center of technology. I.B.M, Hewlett-Packard and others had come in the 1960s and 1970s when Mexico’s market was closed.

After Nafta, the new factories imported parts from their global suppliers, wiping out local companies that had sold printed circuit boards or assembled computers under tariff protection, said Kevin P. Gallagher, a Boston University professor who has written about the Guadalajara information technology industry.

Here is aptly described the results of Mexico's number one problem. It thought it could develop through free trade - open your borders, open your markets, welcome foreign investors, and development will automatically follow, or so goes the thinking of some.

In reality nothing of the sort happens. As happened in the case of Mexico foreign companies come looking for a new market and to exploit cheap labor. They have no interest in truly helping the host country develop, they transfer no technology, they very much remain foreign companies to the host company, and they wipe out already existing local industries.

Sure, there are plenty of car factories and semi-conductor foundries in Mexico. But there is no Mexican ability to design either cars or semi-conductors much less to build their own car or semi-conductor factories. Being nothing more than a cheap labor workshop for foreign companies only gets you so far - just as limiting itself to selling only oil only gets Venezuela so far.

Developing your own local industry is absolutely key to true development. And it is absolutely critical that that local industry be assisted by the government and protected from outside competition during its initial phases of development.

Sure that makes local consumers somewhat worse off initially but lets remember that before you can be a consumer you have to be a producer and fostering companies that will provide gainful and high wage employment is what will ultimately make a nation of happy consumers.

Things grew worse when the tech bubble burst, the American economy cooled and the companies moved to China, where they could pay even lower wages. Once China entered the World Trade Organization, Mexico lost much of the edge in exporting to the United States that Nafta had given it. Employment in Guadalajara’s I.T. factories dropped 37 percent in 2001 and continued to slide for two years.

That is the problem with trying to compete solely based on low wages. Once you develop even a little bit and your wages rise slightly your un-rooted foreign industry moves elsewhere.

“The agreement could have brought investment with more value here,” including research, testing and design, said Jesús Palomino, the general manager at Intel’s design center in Guadalajara. “But we did not know how to define or negotiate or take advantage of it.”

Mr. Palomino argues that attracting multinational manufacturers was too limited a focus. He oversees about 300 young engineers who test future Intel products and carry out research and development. The sophisticated Intel design center is an exception to the city’s assembly plants. Those factories mostly hire low-wage labor.

“A new phenomenon has grown up under Nafta — high-productivity poverty,” said Harley Shaiken, chairman of the Center for Latin American Studies at the University of California, Berkeley.

Low wages means low purchasing power. “It is not a successful strategy for globalization,” Mr. Shaiken said.

Again, Mexico thought others would develop it when in fact they would do no such thing. If you want to develop you have to do it yourself - with your own capital, your own educated workforce, and by fighting hard to obtain new technologies.

Even Nafta’s greatest success — exports — has become a liability, as Mexico feels the full brunt of declining consumption in the United States. The auto industry, for example, which has flourished under Nafta, has ground to a virtual standstill. Over all, Mexican auto exports fell more than 50 percent in the first two months of this year compared with 2008, and production dropped almost 45 percent.

The central bank forecasts that as many as 340,000 people could lose their jobs this year, and some investment banks predict the economy could contract as much as 5 percent.

That weakness has driven down the peso, which has lost about a quarter of its value in the last six months. Foreign direct investment fell last year to $18.6 billion from $27.2 billion in 2007.

Still, economists here say much of the responsibility for the lack of development in the last decade and a half lies largely with Mexican leaders and their unwillingness or inability to enact real reforms. “We have an economy that has atrophied because of the lack of reform,” said Gerardo Esquivel, an economist at the Colegio de México.

Other developing countries benefited from globalization, particularly in Asia. But in Mexico, economic growth has averaged about 3 percent a year since Nafta took effect, far below what is needed to create jobs for the million young people who enter the work force each year and the millions more who barely scrape by.

Here the Times mistakenly fails to see the link between problems. They point out that Mexico's economy is now in decline because of its dependence on exports to the U.S. Fair enough.

But there are other countries that depended even more on exports to the United States and yet are still growing. The prime example is China. Why is China doing better than Mexico?

Simple, by fostering domestic industry, protecting its own market, mastering technologies, and having very high rates of investment it has had a growth rate MUCH higher than Mexico's (10% versus 3%) and has built up huge cash reserves which it can now use to invest and maintain its economy even through this recession.

Mexico's problem isn't the current recession. It is its failed development strategy that led to a paltry 3% annual growth over the past 15 years.

Summarizing we can clearly see that the path followed by Mexico (and note this is the path advocated by most of the Venezuelan opposition) fails for the following reasons:

1) Emphasizing foreign investment rather than investing in yourself. This leaves the country's industrial base at a very primitive assembly plant level with technology and high value added processes dominated by others. Instead of following this route countries must insist on building up their own local companies which will over time control all facets of design and production.

2) Your own domestic market must be protected if you don't want to see your own local industries and agriculture wiped out by vastly more efficient competitors before they have a chance to become more efficient themselves. What we saw above with Mexico very clearly illustrates the importance of this. Yes, many people may not initially like buying inferior locally produced products but that is a price that must be paid at least initially if you want the long term gains that come only from true development.

3) You must work very hard at improving the educational level of your population and in particular building up a highly trained workforce capable of mastering and developing new technologies. Doing points 1 and 2 will be impossible without this.

4) You must have very high rates of investment. The 3% annual growth Mexico has had over the past 15 years is obviously inadequate. You must have higher rates of growth and getting that requires very high rates of investment.

Just as there is more than one way to skin a cat there is more than one way to screw up a country's development. We've been watching the slow motion self-destruction of Venezuela's economy on this blog for some time. Today we glimpsed Mexico's different path but similar failings. Although they have very different circumstances and are taking different paths they are almost certain to wind up in the same place - perpetual underdevelopment.

Time to stick a fork in it.

2009-03-24T19:16:00.000-07:00

It is often said that the last thing to die is hope. Well, my hope for the government of Hugo Chavez to change course and take Venezuela on a path out of dependence on oil and to full development just died.

Things started looking really bad in 2007 as urgently needed economic reforms that should have taken place right after Chavez's re-election in December 2006 never happened. But there was still hope, at least a little.

That hope spent pretty much all of 2008 on life support as again needed reforms never happened and the imbalances grew worse and worse. And lets be clear - things getting bad in Venezuela had nothing to do with the world recession as Venezuela had record oil income right up through the third quarter of that year. Venezuela's problems really came from a very bad case of the Dutch Disease where booming oil revenues prop up a radically overvalued currency which in turn causes tradeable sectors of the economy to go into decline.

And sure enough, starting in the third quarter of 2008 manufacturing growth slowed to zero.

However, hope still was hanging in there, at least by a thread. That thread was Ali Rodriguez who became Finance Minister and who is a trusted confident of Chavez (i.e. a person who rather than just being completely dominated by Chavez as most people probably are can actually argue his case and maybe even win sometimes). Further, he is a competent and capable leader who was instrumental in reviving OPEC in the late 90s and in getting PDVSA through the oil strike/sabotage of 2002/2003.

So hope hung on in the form of nothing more and nothing less than Ali Rodriguez being able to understand the economic problems facing Venezuela and being able to prevail upon President Chavez to make the reforms needed to fix them.

Sadly, after Mr. Rodriguez's interview today with the international press we can forget him riding to the rescue of the Venezuelan economy. He said a number of things which were silly but let me cut to the chase on the worst of the non-sense.

When asked about a possible devaluation he replied:

No, a devaluation would not be good for the national economy. The risks to it greatly out number what would be fixed. Further, it isn't necessary. If it was, we would make adjustment.

So there you have it, they won't devalue because they don't have to. They apparently prefer to wait until the money literally runs out and the issue is forced - you know, do it like Russia did in 1998 or a previous Venezuelan government did in 1983.

Sadly, the worst of his remarks was yet to come:

We are an importing country. Basically we only export oil. A devaluation at this time will automatically make imports more expensive at a time when we have to take care of every last dollar due to the fall in oil prices.

Well, he sure has the "we only export oil part right". He is also right in saying that devaluing the currency will make imports more expensive, but it was all down hill from there. Here is the catch - he implies that it makes them more expensive in DOLLAR TERMS and that would be bad because Venezuela has to be very careful with the now fewer dollars it has.

Earth to Rodriguez - A DEVALUATION MAKES IMPORTS MORE EXPENSIVE IN TERMS OF BOLIVARS, NOT DOLLARS!!!!

If a pair of blue jeans from the United States cost $20 now it will cost $20 even after a devaluation. What changes is that if the exchange rate changes from 2 BsF to 4 BsF per dollar the price of those jeans (which again stays exactly the same in dollars) increases from 40 BsF to 80 BsF.

And guess what that means Mr Rodriguez?? It means that Venezuelans will buy fewer blue jeans from the United States because their price just doubled in Bolivares. And if people switch to buying Venezuelan blue jeans because imported ones are now so much more expensive guess what ???? - Venezuela will be spending less dollars buying imported items and hence it will save those precious dollars which it can't afford to waste.

Thus, reality is exactly the opposite of what the Finance Minister said - Venezuela needs to devalue PRECISELY SO IT CAN SAVE DOLLARS AND STOP WASTING THEM. This is economics 101 and that Ali Rodriguez said something that is the exact opposite of what anyone who knows a modicum of economics knows means either A) he is totally clueless about economics in which case he shouldn't be Finance Minister or B) he is a liar who is intentionally saying this non-sense because he doesn't want to give the real reasons for not devaluing. And really, does it matter if it is A or B? I don't think so.

Further, not only does he obviously not understand what a devaluation is and what it accomplishes he also apparently has no clue that one of the major reasons that Venezuela exports practically nothing besides oil is precisely because of this screwed up exchange rate.

So there you have it. What was in my view the last hope turned out to either be a clueless empty suit or a lying little lap dog for Chavez. Either way the ultimate collapse of all this is foretold.

Stupidity and cowardice are a fatal combination

2009-03-21T20:28:00.000-07:00

Last Thursday Chavez announced that he would come out with his economic plan to face the abrupt drop in oil prices. I was pleasantly surprised by that announcement because I didn't really expect the government to make any changes this soon in the year given the large savings that they have (or claim to have).

Unfortunately, what was said tonight by Chavez leaves almost no room for optimism that things will turn out well.

Going into today's announcement I thought the most realistic changes were:

1) raising the value added tax (VAT or IVA in spanish)
2) reinstating the financial transaction tax
3) raising the price of gasoline
4) going to a dual exchange rate and at least devaluing for everything besides food and capital goods

The first three I was pretty sure would happen. After all, on Thursday he made comments critical of the cheap price of gasoline so it seemed reasonable to think he would take this opportunity to do something about it.

The devaluation I was much less optimistic about though I thought there was at least a chance of going to a dual rate.

Unfortunately for Venezuela what they got was much worse.

Just to outline what did happen:

1) the value added tax was raised by three percentage points from 9% to 12%.
2) all unnecessary or "luxury" spending is to be cut back on.
3) the government will take on about $10 billion more dollars in debt (it is domestic debt in Bolivares).
4) the price of gasoline is left unchanged.
5) the currency is still pegged at 2.15 BsF to the dollar.

Lets go point by point.

1) Increasing the VAT was expected and necessary. Sure its somewhat regressive but they didn't have a lot of options and even the best of economic packages would have had to include this. Unfortunately, they raised the VAT even though it does have evasion problems whereas they didn't reinstate the financial transaction tax even though it is much easier to collect. That is a mistake.

2) Cutting the salaries of high officials and unnecessary spending is all well and good, but how much can that possibly save them? Not much. These cuts are much more for symbolic reasons than true budget fixers. Chavez wants to show the public that the government fat cats will be the first to feel the pain. Will they, and will the public buy it? That remains to be seen but clearly this is a public relations act, not something that solves their problem.

3) The biggest single budget fixer they announced was taking on $10 billion more in debt. While not a huge amount neither is it a trivial amount. Further, while Venezuela's debt position is good (ie, they don't have a lot of debt) it isn't as good as some make it seem. They leave out PDVSA debt (which is in reality government debt given that it is a state company) of $16 billion and the debt to China (presumably because it is paid with oil rather than cash) of $8 billion. Further, PDVSA appears to be taking on a few billion dollars more in debt so just through March they have this $10 billion, $4 billion more to China, and PDVSA of about $3 billion in additional debt - that is $17 billion in new debt. On top of that they have nationalizations which they have yet to pay for (Exxon-Mobil, the cement factories, SIDOR, and Banco Venezuela) which are in effect debt and are not a small amount.

In sum debt is not YET a problem with YET being the operative word. If things keep up at this rate it will be a problem in a year or two.

4) The price of gasoline being left unchanged is simply insane. Its already a huge subsidy for the well off and a huge loss of revenue for the government. Now things will get still worse as inflation will be at least 20% meaning the price of gasoline will be 20% less this year in real terms.

To do what Chavez did yet again today - say that gasoline is absurdly cheap and a drain on the government but then do nothing about it is... very Chavez like. I guess the thinking is "why fix today what you can put off until tomorrow".

Just to add stupidity on top of insanity he also implored people stop being so wasteful with gasoline. Again, typical Chavez - imploring people to act in a certain way while giving them strong economic incentives to act the opposite way.

My guess on this is that it is nothing more than cowardice on Chavez's part but more on that in a minute.

5) As if letting the currency getting even more overvalued weren't bad enough (Venezuelan industry might as well drop the pants, bend over, and kiss its ass good-bye) Chavez made that overvaluation a bragging point. In saying the Bolivar would not be devalued he stated that "this government protects the value of the currency". That was a just plain stupid comment that shows his ignorance of these matters.

The government hasn't "protected" the value of the Bolivar. Given the inflation rate it has been losing about 25% or 30% of its value each year. That is what inflation means - the currency is losing value. Apparently his economic advisers have never pointed this out to him or they are clueless also.

In any event, the refusal to devalue the Bolivar only protects its value against one thing - the U.S. dollar. But unless you are lucky enough to get CADIVI dollars to make Internet purchases with or take vacations to Miami (which most Venezuelans aren't) it doesn't do you much good.

Now some may say I am being overly harsh on Chavez for calling him stupid and Chavez is only saying this to save having a long conversation explaining the real reason for not devaluing - not wanting to increase inflation or whatever. Sorry, but I am not giving him a free pass on this any more. If he had a more sophisticated reason for not wanting to devalue he should have said it so people could hear it, be educated maybe and have a deeper understanding of why the government is doing what it is doing. Instead he chose to just BS which will only serve to confuse people and make them angrier when things don't turn out well in the future.

There really isn't much of anything that you can feel good about in this announcement. The government is reducing its spending quite significantly and raising taxes which make negative growth (ie a recession) pretty much a certainty for this year.

Further, they are already resorting to increasing debt which is making me nervous that maybe they don't have as much money saved up as they've been saying.

And they did nothing, NOTHING, to reduce what by far are the biggest sources of waste in the government - a radically overvalued currency that both drains the treasury and throttles domestic industry and a hugely wasteful give away of gasoline.

Oh, and did I mention that all this only helps them with the government budget but does NOTHING to solve what looks to be at least a $30 billion hole in their balance of payments for this year?

There is just one final observation I can't resist making. Normally I don't like to get into psychology and trying to figure out what peoples motives are. After all, I am not in Chavez's head so there is no way I can really know what he thinks and why he does what he does. Still there is something very funny about how this happened.

First it was announced on Thursday that economic reforms would be made on Saturday. Ok, sounds big. Yet all the actual changes were quite small and hardly merited being made on national TV. You don't need a cadena to take on more debt or raise the IVA a bit.

Further, everything seemed very improvised and undecided right up to the last minute. First, we heard that they didn't put the finishing touches on this until last night. That sure is cutting it close. But then it got worse, as they postponed the announcement today by a few hours because they were still not completely ready. Lastly, please recall that last Thursday Chavez sure seemed to be laying the ground work for increasing the price of gasoline.

Soooooo, if I were to guess I would say that Chavez was indeed very strongly considering increasing the price of gasoline and probably decided at the last minute NOT to do that. That is, he chickened out.

So again, we really seem to be looking at a combination of stupidity and cowardice here. That combination is not likely to lead to a happy ending barring a miraculous rebound in oil prices.

The government is going into debt and increasing the VAT

2009-03-21T15:48:00.000-07:00

But will not touch the exchange rate and the price of gas? The percentage of foreign debt per GDP will also rise even without new debt as the nominal GDP inevitably will shrink due to the price of oil collapsing.

The way he is talking we might never devalue the currency under Chavez.

Minimum wage going up 10% in May and 10% in September, obviously a drop in real terms of more than 10%, but of course he will still claim victory because the dollar is pegged.

If only they'd been efficient when they had the chance...

2009-03-14T16:18:00.000-07:00

Previously we saw that the "socialist" factories in Venezuela were not that many, not that big, and not that productive. Certainly any new industry is good. But clearly this industry, which is on such a small scale, is not in a position to contribute much to Venezuela's well being and make up for the oil price collapse it is now facing.

However, those are not the only factories that Venezuela has built or is building. They have worked on corn processing plants, milk processors, and auto parts factories we are told.

And indeed, in another part of the annual report of the President we find this detailing precisely those projects:

The table above details each project and gives how much the infrastructure cost, how much the equipment cost, the total investment, the percent completed the project is, the number of jobs created, and the indirect number of jobs created.

Examining this table in detail we see the same thing we saw with the "socialist" factories, that the projects are very modest in size. In fact, that is probably being overly polite about it.

For example, the corn processing plants have investments between $5 million and $7 million dollars each. Given such tiny investments it is not surprising that not a single one of them employees more than 100 people. Taking all the projects together, and note they are not yet completed, they won't even employ 3,000 people either directly or indirectly.

The milk plants are if anything even smaller.

Then we have the plastic parts factories that together are only about a $15 million investment and will employ less than a couple hundred people.

Finally we get to what is by far the biggest project, the auto parts factories. These represent an investment of $150 million dollars which is huge compared to the other investments but still quite small by the standards of most industrial projects. These factories will employ over 10,000 people which is certainly a respectable amount. But there is a catch - the projects are only on average about 18% complete!!!!! That is, five years into what should be a full scale industrialization program their auto parts factory is no wheres near ready to come on line.

Of course, these investments, just like any industrial investments, are good and to be applauded. But the point is they seem to be few and far between and VERY small relative to what Venezuela needs. All told, the factories listed above won't be even a blip on Venezuela's economic statistics when they are completed - they are just too few and too small.

When this problem of these investments being too few and too small was pointed out previously some argued that given the governments other investment priorities - such as health care, infrastructure, and education, there simply were not enough resources to have done more.

That is simply not true. As was pointed out in a series of posts over a year ago (here and here) the Venezuelan government has wasted many billions of dollars in various ways. Just to review one we can look at this chart from the Venezuelan entity that controls foreign currency disbursements, CADIVI:

The items circled above represent some (but by no means all) of the waste the Venezuelan government has had over the past few years. The credit card expenditures of $4.2 billion, money sent abroad to relatives of $579 million and the cash for overseas trips of $186 million represent about $5 billion dollars given out to upper class Venezuelans for them to waste abroad or on purchases made abroad. And remember, these are dollars being given out at highly favorable exchange rate (ie, very cheaply).

This chart was from 2007 but the chart from 2008 would show similar waste.

Now here is the rub - it is NOT as if the Venezuelan government couldn't have cut down on this waste. In point of fact they have done just that. Last year they cut down on the amount allowed for Internet purchases. At the beginning of this year they halved the amount given to people for travel abroad.

And guess what - even with these cuts the sky didn't fall. In fact, Chavez just won a big vote on February 15th AFTER these cuts were made. This proves the point I made a year and a half ago (for those who don't remember it is here) that these expenditures were not politically necessary, after all most of the beneficiaries never voted for Chavez in the first place, but rather it was money stupidly wasted because, well, they were rich and thought they had the money to waste. Finance Minister Ali Rodriguez just admitted as much.

Now lets just see how this quantity of money wasted compares to the industrial developments outlined above. Assuming they can save half of the $5 billion outlined as being wasted that would come to $2.5 billion per year. Combining the amounts for 2007 and 2008 you get a total of $5 billion dollars in money that could easily have been saved from the above waste and used for industrial development.

Now, note that all the industrial development projects listed above total about $250 million dollars we can see just with cutting down on this one type of waste they could have had 20 times (that is right, TWENTY TIMES) the amount projects built as they have above. Instead of creating a the 10,000 direct jobs they are creating they could have created 200,000!! Now, that actually WOULD be big enough to show up in Venezuela's economic statistics.

In sum, we can clearly see that Venezuela could have done much, much better in its industrialization efforts. It simply didn't have the right priorities nor a sense of urgency.

Sadly, given that the funds they have set aside for development project are now being rapidly consumed just keeping the Venezuelan economy afloat it is probably too late to do anything about this. It is simply one more HUGE missed opportunity in a country whose history is littered with missed opportunities.

The Aluminum Sector is in Crisis

2009-03-10T12:04:00.001-07:00

What happens when you have a an industry that is barely in the red during high prices? it becomes an catastrophe when prices fall by 60%. That is the case with Alcasa and Venalum, both produce Aluminum at 3500$ per ton, yet the current price is 1200-1500$ per ton.

The disaster only gets worse when you figure out what is the cost of getting out of it, by one person's account it means 6 billion dollars, a figure way too inflated for me to believe BTW. The problem preceded Chavez, but he gets one hell of the blame for letting the problem fester for so long, and it really really makes me worry that the same will happen to Sidor again under re-nationalization.

Too much labor and too little technology, that is the problem with Alcasa and Venalum, is the cost of fixing them so they can fall back down worth it? It is, but there better be accountability from now on, which I doubt.

Change for the sake of change doesn't necessarily get you where you want to go.

2009-03-02T14:40:00.000-08:00

Now that I am more or less officially in the Ni-Ni camp (that is I support neither Chavez nor his opponents) I think its important that people know why I support neither side. Of course, from recent posts people should be able to clearly see why I feel disillusioned with Chavez and think he is leading himself, his movement, and his country to almost certain disaster. And of course, I will say more on this in future posts.

Sadly though, those who oppose Chavez have never really given any good reason as to why anyone should support them - save for being fellow ABCs - Anyone But Chavez. The ABCs have no program, have never stood for anything other than what their name implies, insanely deny the real achievements of the Chavez government, and thoughtlessly seek to overturn everything Chavez has done, even that which is clearly good and which has worked.

Sorry, there may be many people who are perfectly happy being ABCs but I am not joining that group. Change for the sake of change, and not even caring what type of change it is, rarely works. In fact, it often leads to complete disaster. Just take a look at the Ukraine:

Ukraine Teeters as Citizens Blame Banks and Government

By CLIFFORD J. LEVY

KIEV, Ukraine — Steel and chemical factories, once the muscle of Ukraine’s economy, are dismissing thousands of workers. Cities have had days without heat or water because they cannot pay their bills, and Kiev’s subway service is being threatened. Lines are sprouting at banks, the currency is wilting and even a government default seems possible.

Ukraine, once considered a worldwide symbol of an emerging, free-market democracy that had cast off authoritarianism, is teetering. And its predicament poses a real threat for other European economies and former Soviet republics.

The sudden, violent protests that have erupted elsewhere in Eastern Europe seem imminent here now, too. Across Kiev last week, people spoke of rising anger about the crisis and resentment toward a government that they said was more preoccupied with squabbling than with rallying the country.

The sign held by Vasily Kirilyuk, an unemployed plumber camped out with other antigovernment demonstrators here in the past week, summed up the pervasive frustration: “Get rid of them all,” it said.

Mr. Kirilyuk did not hesitate to take that further. “There will be a revolt,” he said. “And people will come because they are just fed up.”

Mr. Kirilyuk, 29, was standing in the same central square where throngs in 2004 carried out the Orange Revolution, a seminal event that brought to power a pro-Western government in Ukraine. He said he was a fervent supporter then of the protesters, but now he and a few dozen others who have set up tents here are demanding that the heroes of that revolution step down.

It is not hard to understand why world leaders are increasingly worried about the discontent and the financial crisis in Ukraine, which has 46 million people and a highly strategic location. A small country like Latvia or Iceland is one thing, but a collapse in Ukraine could wreck what little investor confidence is left in Eastern Europe, whose formerly robust economies are being badly strained.

It could also cause neighboring Russia, which has close ethnic and linguistic ties to eastern and southern Ukraine, to try to inject itself into the country’s affairs. What is more, the Kremlin would be able to hold up Ukraine as an example of what happens when former Soviet republics follow a Western model of free-market democracy.

“Ukraine is a linchpin for stability in Europe,” said Olexiy Haran, a professor of comparative politics at Kiev Mohyla University. “It is a key player between the expanding European Union and Russia. To use an alarmist scenario, you could imagine a situation in Ukraine that Russia tried to exploit in order to dominate Ukraine. That would make for a very explosive situation on the border of the European Union.”

That Ukraine can cause problems for Europe was highlighted in January when Ukraine engaged in a dispute with Russia over how much it would pay Russia for natural gas, as well as over gas transport to the rest of Europe. The Kremlin shut off the gas for several days, and some European countries went without heat. The Kremlin also shut off gas to Ukraine in 2006 in a pricing dispute.

While Ukraine’s economy is dependent on exports of steel and chemicals, which have plummeted, the crisis has cut deeply because people are disillusioned with the government.

President Viktor A. Yushchenko, a leader of the Orange Revolution, who garnered attention around the world in 2004 when his face was scarred in a poisoning episode, is so widely scorned that a recent poll found that 57 percent of people wanted him to resign.

His rivals have also lost popularity, as the public has become exasperated by years of political bickering. In February, the International Monetary Fund refused to release the next installment of a $16.4 billion rescue loan to Ukraine because the government would not adhere to an earlier agreement to pare its budget.

Around the same time, Ukraine’s finance minister resigned, saying that the job had been “hostage to politics.”

On Friday, the monetary fund projected that Ukraine’s economy would shrink by 6 percent this year, and said that it was continuing to work with the government to find a way to disburse the rest of the rescue loan.

A presidential election is coming, probably to be held next January, and this prospect is making politicians, especially Prime Minister Yulia V. Tymoshenko, reluctant to adopt an austerity program that might alienate voters.

Mr. Yushchenko and Ms. Tymoshenko were pro-Western allies during the Orange Revolution, but have bitterly feuded since then, and he fired her once. A third rival, Viktor F. Yanukovich, a former prime minister who heads an opposition party that favors closer ties with Russia, also wants to be president.

On Friday, Mr. Yushchenko and Ms. Tymoshenko held a public meeting in an effort to demonstrate that they were working together. Mr. Yushchenko said he wanted “to show the readiness of all sides to take political responsibility for decisions which today are not easy.”

Even so, the two did not announce further anticrisis measures.

All over Kiev have been signs that tensions are building.

On the city’s outskirts, more than 200 tractor-trailer rigs were parked Thursday, their drivers threatening to block roads if the government did not help them with their debts, which they said were caused in part by the drop in the value of Ukraine’s currency, the hryvnia.

The truckers dispersed Friday, only after the government said it would try to address their demands, but they said they would be back soon if they were ignored.

“The government is to blame for all this,” said a trucker, Viktor V. Zarichnyuk, 26, who had been at the protest for 12 days. “We want the government and the national bank to agree that the money allocated by the International Monetary Fund, at least part of it, should go to regular people.”

At a branch of the Rodovid Bank across town, a tense crowd gathered Friday morning. The bank, close to failing, was allowing withdrawals of only $35 a day. And so people, some of them pensioners fearful for their life savings, have been trooping each day, ever more aggravated, to try to get what they can.

“Every day we come here — it’s insulting — in the cold and line up,” said Alevtina A. Antonyuk, 58, an engineer. “They are nothing at this bank but a bunch of thieves.”

Who is to blame, she was asked. Before she could answer, Dmitri I. Havrilkiv, 78, a retired crane operator, interrupted.

“The government has to be replaced,” he shouted. “They just can’t handle it!”

Back in the heady days of the "Orange Revolution" some of these people probably didn't give any thought to what came after that "revolution". It was probably taken as a given that what ever it was it had to be better than what existed at the time.

Sadly, for Ukrainians, it turned out to be much worse.

Wondering where your next meal is coming from and spending cold winter nights with no heat can't be much fun. And rest assured, the CIA and NED handlers who funded and cheered on the "Orange Revolution" are nowhere to be found.

Of course, the Venezuelan ABCs are a varied lot. Some of them are certainly honest citizens who want the best for Venezuela, even if their ideas on what that means are very vague.

But just as certainly there are some who are salivating at the idea of getting their positions of power back - of having control over an extremely rich oil company, $27 billion in cash reserves, and untold billions in other savings accounts.

If there is a change in Venezuela someday (hopefully peacefully through elections) who is to say it won't be the latter who would end up back in power? Given their money, their control over the private media, and their close links to the U.S. government I wouldn't bet against them. And if they do get back into power what will THEY do? I can only guess, but I think it is probably a good guess that they do won't make most Venezuelans better off.

Those who seek change in Venezuela thinking that Anyone But Chavez would be better should really think about that.

Starting to pay a debt with Venezuela's environment

2009-03-01T11:59:00.000-08:00

Aproximately, a year and a half ago I wrote a very detailed post on an environmental catastrophe taking place in north central Venezuela around the Lago de Valencia (Lake Valencia). Those not already familiar with the problems surrounding that lake should read that post.

There were two fundamental problems with Lake Valencia. The first was that the water in it was extremely polluted, so much so that humans should never even enter the lake, much less drink its water. The same goes for animals and even plants. The lake is therefore a dead lake.

The second problem is that because it is in a saucer like region with no natural outlet water only leaves the lake through evaporation. Due to water being piped into the area to supply the ever growing populations of Maracay and Valencia the natural balance of the lake has been disrupted and the lake levels are rapidly rising. These rising water levels are already flooding parts of Maracay and, if unchecked, threatened to flood virtually the entire city. As parts of Maracay were already being destroyed this was rapidly becoming a New Orleans type problem, only in slow motion.

It now appears the government has at least partially solved this problem. Today President Chavez inaugurated a water project that will remove at least some of the water that naturally flows into Valencia Lake, pipe to another area where it can be used for irrigatioin, and have it empty into another drainage basin. In fact, where I pointed out in my original post that the were piping 11,500 liters per second into the Valencia Basin this project will remove 7,500 liters per second from that basin and should therefore reduce the rise in the lake if not stop it all together.

To be sure, this is a big accomplishment and not a moment too soon. The lake was visibly rising and simply from driving by it a few times each year I could clearly see it was flooding more and more land. Stopping the rising waters was imperative and explains why they worked 24 hours a day seven days a week to complete this project.

Here are some videos explaining the project:

Haz click en cualquier video para verlo
Puedes ver otros en radiomundial.com.ve

The video with the engineer was particularly interesting as he expained some of the significant technical difficulties they ran into with the unusual geography of the area in addition to what a key role community liasons played in ensuring project/community collaboration and worker/management collaboration which helped the project proceeed smoothly and without interruptions.

He also made interesting points about how when past projects were built they weren't built to be scalable where as this one was. That is, things like tunnels were built signifacantly bigger than they needed to be right now so that if in the future they need to put additional piping through them they can without having to expand them or build new tunnels.

The project cost aproximately $100 million but this was clearly money well spent solving a problem that was truly urgent.

Of course, Valencia Lake is still highly contaminated and that in and of itself is a major problem that this project doesn't fix. Fixing that problem will probably be much more expensive. Still this is a HUGE and CRITICAL first step. President Chavez, the Environment Ministry and all the workers on this project deserve to be congratulated for the work they've done on this.

The spreadsheet I always wanted

2009-02-27T09:03:00.000-08:00

GDP figures are out for 2008, while the details have been hotly debated already, I decided to concentrate on something I had long been looking for: gross numbers per sector based on fixed prices, the quarter output is icing on the cake.

I finally found it from the BCV website (be sure to check all tabs)

This is how our current GDP looks like in 1997 prices.

And this is how it would look like if in 1997 the price of oil was $40 a barrel instead of $19.

As you can see, manufacturing is a sizable chunk of the economy, while dwarfed by the oil industry most of the time it still represents roughly 60% of it with current prices. I do miss it growing in double digits though, big time.

Another thing to note is how different QI is to QIV, the latter being 20% bigger on certain sectors every year.

The well hung cellphone

2009-02-26T10:05:00.000-08:00

Chavez and Berlusconi are the only leaders that I know of that go out of their way to sound colloquially vulgar, not that I personally care much, but it is interesting that he decided to brand a cellphone with a word whose etymology is a mammal's penis, to be launched on mother's day gift shopping season. The word "verga" is extremely common in the Zulia region, leading to it (and its derivatives) as used universally as noun, verb, adjective, adverb and whatnot. Very similar (but not as taboo) as the word Fuck.

Now to what really matters, for us to begin to develop an electronics industry we need to start from scratch. The steps to take are: assembly, parts manufacturing, and last but not least R&D. This plant in Paraguana is supposed to assemble 1 million ZTE cellphones (600,000 this year, lets see how their prediction holds), a second plant with Huawai in Cua is supposed to make another million. Movistar is also building an assembly plant with who knows what production will be. Tariffs on cellphones will increase and local assembly should account for roughly 28% of the 7 million cellphones imported yearly.

The cellphone itself is not bad, aside from being CDMA, with features that will make it competitive with other models that are much more expensive (roughly 25$ MSRP) slider, camera, java games, radio, "mp4" etc.

Socialism to the rescue...

2009-02-23T14:51:00.000-08:00

...well maybe not.

Below, from the Economic Statistical Annex to the 2008 Venezuelan Presidential report, we see see this:

The above spreadsheet shows the 2008 results for all the "socialist" factories in Venezuela. It gives the number of people employed, what they produced and the number of units produced, and the value of total sales.

Note there are three "socialist" factories listed here that everyone should have heard of: the bicycle factory which actually had Chavez show up to inaugurate it and the Venirauto car factory and the computer factory that has been running for a while.

The bicycle factor made a total of 3,027 bicycles. At this rate in 8,000 years they can make a bicycle for all of Venezueala's 28 million citizens. Of course, in 8,000 years there will probably be a lot more than 28 million Venezuelans. I wonder if they've considered the fact that new Venezuelans seem to be made much faster than new bicycles. But at least this factory gave gainful employment to 52 Venezuelans.

Then we have the car "factory". To the best of my knowledge the most this factory does is assemble some cars from Iranian supplied parts. Further, having seen it from driving by on the highway this factory looks quite small. Seeing it I wondered how they could possibly even assemble cars there. Now I know - they make damn few of them. 2,282 last year to be precise.

At least we can't claim the factory is feather bedded - it only has 271 employees. The other curious thing is it only had about 5 million bolivares in sales or about $2.5 million dollars. Either it is selling cars for $1,000 a pop or it is giving most of its production away for free.

Finally, we get to the computer factory. This was really a computer assembly plant set up by the Chinese, much like the recently inaugurated cell phone "factory". It had maybe the best results making over 8,000 computers (I'll leave it to the reader to calculate how many centuries the average Venezuelan will have to wait to get one of them) with 177 employees.

Oh, and if you have to ask, you can't afford it. Divide the sales by the units produced and you get about $4,800 per computer. Looks like I'll just have to stick with my crappy Dell.

So, stripping away all the fancy lighting, makeup, hoopla, and bravado surrounding this factories when they are inaugurated by Chavez on "Alo Presidente" lets see what we have in sum total:

In sum total all the "socialist" factories have a total of 1,168 employees and sales of around $75 million dollars. Splitting that output among Venezuela's 28 million citizens yields something less than three dollars per person per year. Let's hope people don't rashly spend it all at once.

I've recently heard Chavez says that Venezuela is protected from the current economic crisis because it has implemented "socialist" policies. But looking at these numbers I can't help but think Venezuelans better pray that capitalism pulls out of its death spiral and the price of oil starts going back up because if they actually had to live on the output of these "socialist" factories they would truly be sunk.

Ok, I realize this post is excessively snarky and sarcastic. But I hope people can very clearly see the larger point. The point is that while the inauguration of these "factories" might sound impressive when reading about it in a newspaper when you look at the actual numbers you can see they are essentially nothings. Just one aluminum factory built by CAP blows all these factories away by a factor of 10.

Venezuela can't sit around forever praying for high oil prices - they have to invest and develop other sources of income and wealth. Looking at this they sure seem to be doing WAY too little.

And of course, looking at these numbers we can see that the notion that Venezuela is somehow well on its way to being socialist, Bolivarian or otherwise, is pure poppycock.

Education is the most important topic

2009-02-23T07:22:00.000-08:00

And the one least debated.

When Germany recovered from WWII a lot of people claim it was because of the Marshal plan, others claim it was capitalism, but the answer is neither, Germany recovered in a few decades from complete devastation because it had a highly educated population, just as that highly educated population recovered Germany from WWI when it was under the reverse Marshal plan (Treaty of Versailles).

So unless the Venezuelan govt educates the population there can be no progress, only illusionary growth. The missiones tackle adult education but not to sound discriminatory they can only learn so much at an advanced age, leaving them with knowledge of basic manufacturing or industry enough for a job as a social/capitalist entrepreneur but not much else. In order to make the leap to developed status we need technological manufacturing, and this can only be achieved with a technologically educated workforce (from cradle to grave). As a side note another way to motivate students to follow hard sciences in higher education is by creating jobs for them as well, even if unsustainable in the short run.

So if you agree with the above, the next question is: do we have the right plan? are we getting there?

The plan is more or less laid out in this interview with the education minister (it is not a research paper but we at least get a few nuggets). In short the government has tackled quantitative access to education so much so that UNESCO audited statistics do give us a high increase in matriculation, with primary education reaching 97% of children. Now granted the same must be done for secondary and tertiary education but they are also moving in that direction.

Next comes the qualitative angle which is harder if not impossible to measure due to its subjective nature, but one metric they use is students per classroom. (which makes it quantitative, not qualitative but whatever) and in so they are asking UNESCO for a new set of statistics. In reality, the only way to increase the qualitative levels of education is through better teachers and easier access to learning tools. This is not explained well however, they talk about critical thinking and how they froze the ideological curriculum, they also talk about modifying the Pedagogy. We just won't know until the end, and despite what some may think international tests will not really give answers to quality, only what some perceive to be quality.

A thought experiment

2009-02-18T18:17:00.000-08:00

Kepler (and the opposition) keeps pointing out how a parliamentarian system would have been ideal to Venezuela, well here is your chance to try to prove it.

Pretend Hugo Chavez is PM, and pretend that the AN is parliament, now tell me just how history would have played out differently, no experimental theories, only clear institutional checks on power.

I will start it off by negating the head of state/government argument, in Venezuela the president is not all powerful there are other people like the attorney general that is an independent power, but since he is elected by the AN the opposition cries foul. So under this same thought experiment the head of state is elected by the people or the AN (meaning he is a Chavista too).

I have a theory that it is just contrarianism, that if he paints something red they want green, electronic voting then they support paper ballots. I know plenty of Brits that bemoan their system as un-democratic (monarchs, house of lords, unelected PM, first to the post) are they being contrarians or simply have better arguments?

How I learned to stop worrying and love the undefined

2009-02-16T10:36:00.000-08:00

Generally speaking, people that lose worry too much on what they perceive to be unfair, every single futbol/soccer match that Venezuela wins (we qualified for the sub-20 world cup for the first time ever, major props!) other CONMEBOL fans claim that we won because Chavez bought the referees with oil, like clockwork. It is not easy to lose but blaming the referee is always counterproductive since you do not see your own flaws in order to feel good, or not as bad.

Whatever advantage Chavez may have had, whether you think it was legal or not, does not change the fact that 6-5 voted for what Chavez sold, and that was no term limits. However the more philosophical question at hand is whether term limits really are an advantage. The answer is yes and no, in the US it is true incumbents rarely get challenged, and never get challenged by their own party (Lieberman-CT is a rare exception and it means there is hope for them yet) but I happen to believe that here in Venezuela we are far more informed, and far more willing to punish lousy leadership.

The reason why Chavez made an about face on regional re-election is precisely due to the result in the previous regional election, wherein the PSUV base not only punished in primaries who they perceived to be incompetent incumbents, but proceeded to completely eliminate them from contention in the real election. Chavez saw first hand the power of the people and I did as well. That is why I want Chavez to be defeated (if he is worthy of being defeated) by the people not by arbitrary limits.

Election day post

2009-02-15T07:47:00.001-08:00

Well there just had to be one, I will try to keep updated, walked through downtown Caracas this morning and saw ok turnout.I will be sitting this election out for no other reason than that I am split (unlike last time that I voted No), well that and my voting center is on the other side of town.

Some numbers that would make Tosh smile

2009-02-07T20:17:00.000-08:00

There has been a running debate on this blog for over a year between a reader named Tosh and myself regarding Venezuela's economic policies. While it has covered many different aspects of economic policies it boils down to my concern that Venezuela is not investing enough and production is stagnating. Tosh things they are investing a lot and that in due time production will increase.

Up until now I think the proponderance of data has supported my position. However, today a snippet of data came out which was both good for Venezuela and supportive of Tosh's beliefs.

I am referring to Venezuela's automobile sales for January 2009. First, they are down compared to 2008 by 43%. That in itself is neither good nor bad. Given the economic realities the country is facing it is probably to be expected and cutting down on excessive consumption is probably necessary.

However, it is the break down of that number that is interesting. Namely, sales of imports vehicles declined 65% while sales of domestically manufactured vehicles went up 33%. That is, the overall market declined but the domestic output still increased as domestic production substituted imports - exactly as it needs to do if Venezuela is to industrialize.

Of course this is only one number for one month. Further, we don't know how much progress they are making in terms of having more locally produced content for those vehicles.

BUT, this is undeniably a good number and if we start to see this sort of development not just with automobiles but with other products as well Venezuela could make substantial progress even in the face of a recession, exactly as I said it could. I still believe they are not investing enough nor following other policies that would favor industrialization. But data like this bears watching.

Fair and balanced (for real this time)

2009-02-06T15:53:00.000-08:00

Bias studies tend to be a bit wonky, mainly because they use subjective definitions of what lack of objectivity is. But I will close my eyes and pretend for a second that this study reflects reality.

Yup Televen has always been a channel I consider to be impartial, but nothing like the stats to prove it, 39% favored Si, 39% favored No, 21% neutral.

The opposition has whined the past two years that the entire media is against them, attacking Venevision and Televen as sellouts, reality being quite different as always.

PS Yes TVes is deplorable.

The B.S. comes full circle

2009-02-05T16:39:00.000-08:00

During the first years of the Chavez government most of the fighting between the Chavez government and its opponents revolved around one thing - control of the state oil company PDVSA. Things finally came to a head in 2002/2003 when the management of PDVSA launched a "strike" aimed at toppling the Chavez government. Fortunately it failed.

But there is some recent news that makes me think back to that time. Back then there were many debates about the oil company - was it a black box? was it an efficient meritocracy or a bloated and mismanaged enterprise? should it be looking to expand or work with OPEC to boost oil prices? etc.

However, there was one particular fact that wasn't much disputed - that it was over staffed, and in particular that it had too many managers and executives. That is, not only did the Chavez government accuse it of that but many friends of the old PDVSA management conceded that point.

Of course, they gave a reason for it, in this case that two formerly seperate divisions of PDVSA had merged thereby doubling the number of people in administrative positions and making the organization top heavy. But they explained this away saying that as PDVSA grew it would grow into the size management it had and so the over staffing was temporary.

Of course, the Chavez government took this as a load of BS, as did I, and pointed out there was no excuse for this sort of inefficiency in a organization that is supposed to be working for all Venezuelans, not just the lucky few fortunate enough to have jobs there.

Sadly, the BS has now come full cirlce. The now Chavez led PDVSA recently agreed to make very significant cutbacks in oil production in line with the cuts in their OPEC quota. Makes perfect sense and they are absolutely right to do it.

Thing is, they also told all the workers, managers, and contractors: "Don't worry, we aren't going to lay any of you off".

Think about what this means. Venezuela will be producing at least 15% less oil but it will have the exact same number of oil workers and managers (all of whom are paid VERY well by Venezuelan standards). They have idled drilling rigs but the workers who ran those rigs are still getting paid... to do what? Play cards? If so maybe they can play them with all the toll collectors paid to not collect tolls (remember that one?).

Anyways, it is sort of ironic that the Chavistas complained for so long about PDVSA being run like a private club for the benefit of those who worked there only to turn around and run it in a very similar way once they came to be in charge.

Maybe some day a real revolution will come to Venezuela and change that.

Understanding the Venezuelan Armed Forces (or whatever Chavez has renamed them)

2009-02-02T14:16:00.000-08:00

A major topic of disagreement between me and ow relates to defense expenditures. I will try to more or less explain why it is important for Venezuela to re arm itself during the upwards oil cycle.

Link

This graph is slightly misleading in that it does not account for extra-budget purchases in 2008, but nevertheless is accurate for what is the normal budget for the armed forces.

In other words our armed forces are qualitative, our regional rival Colombia has a quantitative armed forces, they have to purchase cheap, old, used jets while we get Su-30, they don't have MBT while we have, they don't have SAM but we do etc. Yet what they pay for defense is astronomical year in and year out, while we only have to truly devote 1% of GDP towards defense and yet have a better prepared armed forces.

That said the only way to maintain the qualitative edge is through periodical purchases (every 20 years at the very least) or more precisely when the price of oil spikes. For if we don't we might end up paying more in the long run, while being less protected.

Who'd have thought being proven wrong could be so sweet

2009-01-29T18:51:00.000-08:00

Most readers probably know I've been quite cynical towards Barack Obama. Viewing him as an African-American version of Bill Clinton, and not without reason as he did things during the campeign such as telling Canadian officials that criticisms of NAFTA were just election posturing, I have held little hope of him doing much of anything positive for average Americans.

Well, even though we are very, very early in the game there sure do seem to be some positive developments.

First, in the recently passed stimulus bill there is a provision mandating that all workers who lose their jobs automatically qualify for Medicaid coverage. No, that doesn't constitute universal medical coverage which is what the U.S. really needs. Still it is a HUGE step in the right direction and far more than I expected of him.

Then today he signed key equal pay legislation giving workers (and particularly women) the right to sue employers when they discover they have been paid less for doing the exact same job as co-workers. This has been a LONG time coming and suffice it to say its good that Obama did this in little more than one week (while Bill didn't manage it in 8 long years!!).

So while we would all be wise to still be very cautious with respect to Obama I also think that we may also allow ourselves at least a little optomism.

And to Obama; just keep proving my cynicism wrong. I like it. In fact I REALLY like it!!

U.S. Taxpayers to Ricardo Hausmann: Bug off

2009-01-28T14:45:00.000-08:00

Anyone remember Ricardo Hausmann? You know, Sumate's favorite academic hack who helped them further bogus fraud claims after the 2004 recall referendum only to have them smacked down by about a half hours worth of thinking?

Ok, well he has been lying pretty low lately. Can't blame him. If I'd been embarressed that badly I'd probably lie low for a decade or so myself.

But in reading some blogging on the N.Y.Times web-site I could barely believe my eyes when there he was, popping up at the Davos Economic Forum. And there is bad news, especially if you're a gringo. Instead of coming up with whacky but harmless fraud theories he now thinks the United States should spend $700 billion bailing out a bunch of dumb fucks in the third world:

Ricardo Hausmann of Harvard’s John F. Kennedy School of Government said the United States Treasury, now ironically the only “superborrower” in the world as other countries lose access to financial markets, should spend $700 billion (”That seems to be the unit of account these days,” he quipped) to buy up a diversified portfolio of emerging-market assets to help reflate the rest of the world and not just the United States economy.

In short, Dr. Hausmann wants the U.S. taxpayer to bail out Chilean real estate developers, Peruvian miners, Mexican bankers, and probably the whole fucking Colombian government in the same way that they bailed out Citibank and the U.S. auto industry.

HAHAHAHAHAHAHAHA

Actually, I don't know why I am laughing. This isn't funny.

And anyways, since when is it my problem that stupid governments, and their cheerleaders, thought a simple commodity boom was some sort of permenent transformation? I'm sorry but even James Petras saw right through that bullshit so they should have too and its not the U.S. taxpayers problem that they didn't.

Seriously Dr. Hausmann, I liked you better when you were coming up with bogus fraud theories.

So I have a deal for Dr. Hasumann. In Venezuela they will be having a little vote in a few weeks time. So why don't you go black swan hunting in the election results and come up with some very sophisticated sounding (even if completely bogus) theory on how the opposition was robbed? As long as you keep your paws the hell out of my pockets I won't say a thing and won't so much as lift my pinkie to debunk your silly cliams.

Deal?

Fonden

2009-01-23T04:39:00.000-08:00

From Chavez's state of the union and up to November.

37.9 billion is the amount deposited
23.6 billion has been assigned
15.1 billion has been used up.

So we have 37.9 + 12 - 23.6 = 26.3 billion still unassigned

Fuzzy Mathematics Francisco style

2009-01-15T07:55:00.000-08:00

Generally when you read Francisco Toro's economic reporting one can rarely get away with the impression that the world is not
ending.

Lets proceed to deconstruct just where does he cherry pick his stats, most of them come from Miguel Octavio, but I don't really care if he is the one screwing up or Francisco, a real reporter must look for the truth.

"Even OPEC, an organization Venezuela founded and Chávez sees as a cornerstone of our foreign policy, isn't buying them."

This is wrong OPEC says no such thing, what OPEC does is simply report from second hand sources, they admit no responsibility in the verification of said numbers.

Internal production, not only do they not have a source for their numbers, but their guesstimates are flawed since they naively assume that car sales == cars driven, in Venezuela purchasing an automobile is an investment, immediately after the purchase its value goes up. They are not meant to be driven, and if they are the old car stays at home. It is not the poor that are buying the new cars.

Last but not least is oil diplomacy, if you assume that whatever is traded gives 0 value to the country, you also fall into the trap in forgetting that 50% of the sales has to be made with hard cash, AND that whatever it is that we donated last year, is much much less today (i.e. subsidizing 50% of a dollar is a lot less than subsidizing 50% of 100$).

PS his predictions tend to be bunk anyhow, I have lost track of how many times he has predicted hyperinflation, the search function only goes back 7 years.

In fact, the inflationary effects of printing money and the effects of inflation on economic performance and on the poor are so well understood it’s just plain embarrassing that Venezuela is having to rehash this discussion well into the 21st century. The outcome of the policy the Chávez government is hawking was fully clear by the 1920s, when the German economy imploded in a flood unbacked marks, paving the way for the rise of the Nazis who eventually took R.A. Radford prisoner. They’ve been confirmed again and again by generations of Latin American populists, from Juan Perón to Alan García. The rest of Latin America has been clear on the disastrous effects of monetizing deficits for at least 20 years now, consigning these policies to the dustbin of history. Only Venezuela, it seems, continues to be determined to reinvent the hyperinflationary wheel.

There is a world of difference in predicting inflation at 11% and ending up at 30%, and predicting inflation at a million and ending up with 15-20-30%.

How should Venezuela face the coming recession?

2009-01-06T20:11:00.000-08:00

Presently much of the industrialized world is in a severe economic recession. The United States, Europe, and Japan are definitely in one and other important countries such as China are close to being in one.

So far most South American countries have not entered into a recession. The primary reason for that is that most of them export commodities - Venezuela and Ecuador oil, Chile copper, Argentina and Brazil food - and commodity prices were actually booming until quite recently. That is, whereas what put the U.S. economy into a recession was the collapse of the housing bubble which occurred in 2007 and pushed the U.S. into recession at the beginning of 2008 South American countries didn’t see commodity prices decline until this past fall. Hence the recessionary pressures are only just now beginning for most Latin American countries. But while the recession may be late coming to South America rest assured it is coming.

The question then becomes what should be done about it? Should countries hunker down by cutting spending in an attempt to keep their budgets balanced and not deplete their foreign reserves? Or should they follow an expansionary policy, ie increase government spending in an attempt to keep their economies growing?

One economist, Mark Weisbrot, has given his views on this in an article entitled "South America, Recession Can Be Avoided".

In this article Dr. Weisbrot argues that South America is well positioned to ride out the recession first because it isn't as tied to countries like the United States as it used to be, second because it didn't get caught up in the U.S. financial shenanigans, and third because it has socked away a lot of savings that it can now draw on. But in terms of what exact policies they should follow in the face of a potential recession Dr. Weisbrot says the following:

So there is no reason to expect South America to face the kinds of economic troubles that currently plague the United States. However, South America is still linked to the world economy through trade and investment, and will be affected by the world slowdown. It will therefore need to pursue expansionary monetary and especially fiscal policies – just as the rich countries are doing – in order to maintain healthy economic growth. [emphasis mine - O.W.]

China did this during the Asian economic crisis ten years ago, and maintained solid growth while its neighbors – Indonesia, South Korea, Thailand and others – suffered serious losses of output and employment and watched tens of millions sink into poverty. The Chinese temporarily changed their economic strategy and invested hundreds of billions of dollars in public works and infrastructure. They are responding similarly to the current crisis, deciding this week to increase spending on infrastructure, transportation, and social welfare programs over the next two years by $587 billion.

Dr. Weisbrot then goes on to explain some of the constraints to following such a policy South American governments may face and how they can overcome them. However, those details are unimportant to me as I disagree with his initial premise - that South America should pursue an expansionary fiscal policy just like rich countries are doing. The rest of this post will be dedicated to explaining why I don't think they (or better stated Venezuela) should pursue such a policy, what alternative policy I think they should pursue, and how we will be able to tell if their policies are effective.

There is one additional point of clarification. In this post I will only deal with Venezuela in part because this blog focuses on Venezuela and in part because I don't know enough about other South American economies to comment intelligently on them.

In order to see why I don't think Venezuela should resort to expansionary fiscal polices (or Keynesian or counter-cyclical policies as they are sometimes called) I first have to tackle something more basic - what Venezuela's economic situation is in general and what should be done to promote its long term development.

Venezuela of course is underdeveloped and while certainly it isn't among the poorest of countries it is poor relative to the U.S., Europe, Japan and other developed countries. To get to what most people would consider an adequate level of economic development it will have to have rapid growth for several decades. Therefore, in judging what policies should be followed now it is as important or even more important to consider how they effect Venezuela's long term growth prospects as what they would do this year or next. That is, in my view there are more important issues facing Venezuelan policy makers than whether Venezuela goes into a recession right now, namely laying the foundations for longer term sustained growth. Given that Venezuela is in effect in a permanent state of depression its focus has to be getting out of THAT depression, not worrying about a recession this or next year.

How should Venezuela achieve long term growth? Interestingly, I've never seen Dr. Weisbrot write an article laying out what Venezuela should be doing to promote its long term development. But because different conceptions of how that development will take place is probably responsible for our differences let me at least summarize my general ideas on how that development would take place:

First, Venezuela would need very high levels of investment both in physical plant and equipment and education. For normal growth most economies need 25% of GDP to be invested. But third world countries that have industrialized generally have investment rates of between 40% and 50% of GDP. Thus for Venezuela to have sustained rapid growth it will need to promote investment over consumption in order to ensure high rates of investment needed to provide that growth.

Second, it is unlikely that this investment will come from the private sector. This is for several reasons. Private capital prefers investments where it can get quicker and safer returns such as real estate and commerce. Also, particularly in a country like Venezuela, there just aren't that many private people or organizations with the large pools of capital needed for long term industrial projects (ie, you don't start up an auto industry or even an home appliance industry with chump change). Finally a very large portion of private capital flees to places like the United States that are considered safer places to invest.

This leads to a very key point - that Venezuela needs lots of investment and it is the Venezuelan government that will need to do the investing. Plain and simple, no one else will do it.

Note also, that although a large debate has raged on this blog between using exporting to promote development or whether import substitution should be used for purposes of this discussion it doesn't matter which you use, all of the above still holds. Namely, you need high rates of investment and it is the government that will have to do the investing.

What does all this have to do with how Venezuela should deal with a potential recession? Well, it should be fairly obvious.

Because it is government investment in industry, agriculture and education that will lead the way to long term development the government has to be VERY careful about how it spends its money. To the extent it spends its money on the aforementioned investments it can potentially grow faster over time whereas to the extent it spends its money supporting consumption (which ranges from social program expenditures, to paying the government payroll, to giving out CADIVI dollars for travel and the importation of consumer goods) it will be sacrificing investment and hence future growth.

Getting down to the nitty gritty this means the following: Venezuela presently has lots of money saved up. A large part of that money is in something called the National Development Fund or FONDEN. Another large portion is in its foreign reserves held by the Central Bank. In line with what I have said above Venezuela should spend those dollars on development projects - building factories, importing machinery, constructing irrigation systems, creating needed infrastructure, etc. WHAT IT SHOULD AVOID USING THOSE FUNDS FOR is to cover for declining oil revenue by using them to meet the governments payroll, or by giving the money to CADIVI to cover the costs of imported consumer goods and the like.

Of course, it may be unavoidable that some monies be used make up for budget shortfalls and fund current consumption. For example basic social programs need to be maintained and people need to be kept out of poverty. Critical imports such food and medicines may need to be funded out of savings as well. But given that using the tens of billions of dollars that Venezuela has saved to pay for those types of things represents sacrificing the future to pay for the present it is critical that they be kept to a minimum. In sum therefore we see that the Venezuelan government should NOT be doing what the rich countries are doing - trying to pump as much money into the economy in any and every way possible - but rather should seek to reduce waste, cut back on unnecessary expenditures, and to the absolute greatest extent possible maintain all investment projects.

Viewed from this perspective the governments move to restrict dollars given out for travel is exactly right and indeed a very good sign that the government is taking at least some of the appropriate measures.

Now the obvious question is why if Dr. Wiesbrot is a very capable economist who is well versed in the Venezuelan economy is he seemingly recommending the exact opposite?? This is a good question indeed. If we were really lucky maybe he would show up and tell us.

Barring that I can only guess at the following and that is that he seems to attribute, almost, the status of a developed country to Venezuela. That is, the United States government doesn't need to conserve money for investment because the government isn't who does most of the investing - private individuals and companies do. Further, the U.S. is already developed so it doesn't need high rates of investment. With moderate rates of investment and moderate rates of growth the U.S. can maintain its standard of living. So the government can and does simply concentrate on providing services and social programs and maintaining macro-economic stability by spending when needed. Of course, the U.S.'s profligacy may well catch up to it and begin to sink its economic status but the point is the U.S. government doesn't have to actually devote large sums of its money to investments in industry and agriculture the way Venezuela.

Of course, I am sure Dr. Weisbrot on an intellectual level understands that distinction. But given his lack of an articulated development program he at least SEEMS to just fall back on aping the economic strategy of the developed countries - pumping money into the economy to keep it growing. That may work in the developed world where once a economic recovery gets legs private industry will start making significant investments but it will never work in Venezuela where private industry barely exists and will certainly never make the investments necessary for Venezuela to develop.

A question naturally arises from my assertion that Venezuela should not use its savings just to maintain current growth and that is what will happen to Venezuela if it goes into a recession now and what good is investing in industry and agriculture if practically the whole world is in a recession (ie where will they sell their goods)?

The first answer is that without either an immediate and sharp rebound in oil prices or massive spending from accumulated savings Venezuela will almost certainly go into a recession, most likely in the second half of this year. Right now they can't even fund their current budget yet even that budget represents a significant reduction over the total amount they spent in 2008. I doubt oil prices will rebound much if at all this year so barring Chavez being willing to spend out of savings at the rate of $2 billion per month the country will go into a recession.

Of course, this will create hardship. Some people will lose their jobs. Some people who keep their jobs will see their purchasing power decline. There will be less consumption and that will be felt.

Yet none of that is disastrous. Even with a drop in employment and consumption Venezuelans would still be better off than they were even a few years ago. Further, if the government maintains key social programs like Mercal, Barrio Adentro and some of the other Missions they can keep poverty rates from going up and ensure that peoples basic needs are met while still conserving most of their money for investment.

The second answer is that making new large scale even in the midst of a recession still makes sense and in fact is necessary. First, it needs to be noted the recession is not likely to last forever - the whole worlds economy is not going to permanently collapse (well, so I hope). Second, investments take time to come to fruition. For example, any new factories being constructed now most likely won't begin producing for a couple of years and by that time the world economy should be improving.

Further, Venezuela can also follow and import substitution policy - that is attempting to produce some of the things it currently produces. Venezuela currently imports about $45 billion worth of goods per year and beginning to produce locally even a portion of those goods would give its industry and agriculture significant room for growth. This holds true even if imports are declining and consumption as a whole is declining in Venezuela because as long as Venezuela starts to produce what it formerly imported it can grow.

[to show how this works lets take an example of widgets with Venezuela consuming 100,000 widgets annually and importing all of them. Say it builds a factory a to produce 50,000 widgets per year. That factory will be productively employed and will represent growth when it goes on line and starts making those 50,000 widgets and there will be a market for those widgets even if overall widget consumption drops to 70,000 per year due to the recession because it will simply displace imports which would have still been 70,000 if no factory had been built. Following this example you can see a country can still grow its domestic industry quickly with import substitution policies even in the face of a recession]

I will now summarize my conclusions in two parts - one laying out what specific policies I believe Venezuela should follow right now and then I will outline how we can tell if those policies are working or not working.

The policies I believe Venezuela should follow are:

1) reduce all non-essential expenditures. By this I mean cut back on CADIVI outlays of money, trim the bloated government payroll, cut wasteful subsidies (such as subsidizing middle class housing purchases), limit salary increases and bonuses for government workers, and stop buying fancy military equipment (these are just examples, there are many other things that could be cut).

2) Re-instate or increase taxes that were cut during the oil boom - specifically the IVA and financial transactions tax.

3) Either devalue completely or at the very least create a dual exchange rate to stop wasting money on subsidized travel and fancy consumer goods.

4) Ensure that critical safety net social missions remain fully funded and possibly even increase funding for them as during a recession more people may need their services.

5) Above all DO NOT CUT BACK ON ANY INDUSTRIAL OR AGRICULTURAL PROJECTS. Those must continue to go forward and in fact if possible the amount of resources put to this use should be increased.

6) Expenditures on education, which is a form of investment and a critical component of any serious development program, should be increased but better focused on critical needs (ie, more for engineering less for "social communications", whatever that is).

I believe that by following the above polices Venezuela will enter a moderately a sever recession which will inflict pain but that it can stay on track with a real development program that can increase standards of livings in 5 or 10 years in a noticeable and sustained way.

Finally, how can we as observers of Venezuela tell if their development program is working even through a recession?

This is relatively simple if we follow the correct statistics. The statistics that need to be monitored are the performance of manufacturing and agricultural GDP relative to overall GDP or non-oil GDP. By measuring the relative performance of those statistics we can determine if the country is truly developing.

For instance up until now overall GDP and non-oil GDP have both grown much faster than manufacturing and agricultural GDP. For example, in the year that just ended total GDP growth was 4.6%. Yet manufacturing growth was only 1.6% and agricultural growth was 2.3%. That is, clearly something besides manufacturing growth was propelling the Venezuelan economy and in fact we know what that was - oil financed government spending. That manufacturing output grew slower than the overall economy shows that it was not invested in enough to help drive the economy forward but rather was tagging along after the rest of the economy. This means that either there is not enough investment or the new investments haven't started to come on line yet in significant numbers.

But going forward if manufacturing and agricultural GDP grow faster, or in the worst case, shrink slower, than overall GDP or non-oil GDP this means that Venezuela is still developing even during a recession. Referring back to the widget example we see that in fact manufacturing and agriculture can easily outperform the rest of the economy (in that example using widgets as a proxy for the overall economy we saw that while overall economic activity shrank local production or manufacturing GDP could still increase by having local production substitute imports). The increase in manufacturing and agriculture will represent true and sustainable growth and while its benefits may not be much noted during a recession it most definitely will allow for higher standards of living over time.

Knowing this it will be easy to evaluate Venezuela's success in 2009. If the overall economy grows 1% but manufacturing grows 5% that means their development program is working - the recession is slowing the overall economy but due to heavy investment manufacturing is growing faster. On the other hand if the economy shrinks say 3% but manufacturing GDP shrinks 8% or if the economy grows 2% but manufacturing only 1% then it can be said there development program is NOT working because manufacturing is underperforming the economy as a whole.

Of course, being passive observers with no ability to influence Venezuelan policy all we can do is note whether their policies seem to be working or not working and we clearly do have a way of telling that. Lets hope that even through the few difficult years to come Venezuelan policy makers opt to do what will most help the country over the next 10 to 20 years, not the next 10 to 20 months.

It will take more than a slight of hand to fix this.

2008-12-30T19:45:00.000-08:00

Recently I reviewed an economic report by Mark Weisbrot on how the recent fall in oil prices might impact Venezuela. Despite some differences our conclusions were generally similar.

However, Dr. Weisbrot's article focused exclusively on Venezuela's ability to earn enough dollars to pay for its imports and other dollar denominated expenses. He did this because he viewed being able to cover expenses in dollars as a potential problem while expenses in Bolivares (ie, the governments own budget) could presumably be covered without an major problem. Quoting Dr. Weisbrot:

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 current account5 – not the central government budget, which can be covered in local currency [emphasis mine] – is the most important and binding constraint on developing countries such as Venezuela in the present situation.

Unfortunately, I have to disagree with the short shrift being given to this problem by Dr. Weisbrot. I think the Venezuelan government faces a very significant problem with its budget in the form of a enormous deficit if oil prices continue at anything approaching current levels, and this problem has no simple or painless solutions.

The Venezuelan government's budget counts on 155 billion Bolivares in revenue of which almost 78 billion comes directly from oil revenues. Getting that amount of oil revenue was dependent on the country producing 3.6 million barrels per day of oil and that oil selling for $60 per barrel. At this time neither of those numbers seems likely to be met. My calculations of how much of a hole the Venezuelan budget might have can be found here (note things have become appreciably worse since that post was written).

Now, the first question is how is a budget in Bolivares effected by oil revenue that is in dollars. Simple. The oil revenues that Venezuela receives and that are paid in dollars are converted into Bolivares by the Venezuelan central bank at 2.15 Bolivares per dollar which is the official exchange rate. It is the Bolivares that result from that exchange of oil dollars for Bolivares that fund the 78 billion Bolivares in oil revenues that the government is counting on for 2009.

Weisbrot implies that because those 78 billion Bolivares are just pieces of paper printed by the Venezuelan government itself this doesn't present a major problem itself. [completely off topic for this blog but gringo economists referring to the U.S. economy have made similar points recently - much to the discredit of economists in general].

However, in looking over the situation I am not so sure. Lets go one by one and look at the ways the government could cover a large deficit in its Bolivar dominated deficit.

First, as pointing out that Bolivares are nothing more than pieces of paper printed by the Venezuelan government implies, they could just print more Bolivares to cover the deficit. Of course, just printing more money without having some concomitant increase in goods and services for those Bolivares to chase is the very definition of what creates inflation. So while they could inflate their way out of this deficit I assume the government, especially one that uses the reason of fighting inflation to justify half of what it does, won't do that.

Second, they could raise other tax revenue by doing things such as increasing the IVA or reinstating the financial transactions tax. However, this is hardly a painless measure as these taxes will be felt by a large number of Venezuelans. Moreover, the deficit that Venezuela is facing is so large it would seem unlikely that it could be made whole by these taxes increases, especially when one considers that if the Venezuelan economy enters a recession tax revenues as a whole are likely to drop (and I won't even get into the fact that raising taxes is known as a pro-cyclical action which is considered a no - no by some economists, Weisbrot included). So taxes don't seem to constitute anything more than a part of the possible solution and they are definitely not painless.

Third, they can just cut expenses and try to balance the budget that way. However, Venezuela, of all countries, will have real problems trying to do that. The reason is that in Venezuela government spending has been more than just something that provides services to the general population - government spending is widely accepted as having been the motor pulling propelling the Venezuelan economy forward.

This is an important point so lets review it for minute. Venezuela really only has one important wealth generating industry - the oil industry. That brings in well over 90% of the countries foreign currency and its spending underwrites most other economic activity either directly or indirectly. Investment, social spending, consumer spending, are all to a large degree funded by government spending. Given that there is not much of any independent wealth generating segment in the economy - not manufacturing, not agriculture, not services, not even speculative real estate bubbles - if the government spending that is funded by oil revenues drops so too will the Venezuelan economy.

Worse still, the Venezuelan economy needs more than just a stable amount of government spending - it needs that spending to being increasing in order to create growth. But that will be a tall order for 2009. The reason is that government spending this year was actually HIGHER than what next years budget is - it was 189 billion Bolivares versus the 167 billion in expenses budgeted for 2009. The reason is that in prior years the budgets were later added to as additional oil revenues that were higher than the budgeted amount came in. Given that next year they are facing a deficit on their base budget how likely is that kind of supplemental spending?? The answer is it is not likely at all.

That means that they are likely stuck with the budget that they have which itself represents a decrease in spending and would therefore likely bring about a dramatic slowing of economic growth. If they now cut that budget even more in an attempt to balance it... I think you can imagine the result.

So clearly budget cuts will not be painless and will have a very significant impact on the economy as a whole.

Fourth, they can start cashing in their rainy day savings to fund the budget. That is they have dollar denominated savings such as their foreign currency reserves and the national development fund, FONDEN, which they could convert to Bolivares as needed to cover the deficit.

In certain respects this is the least painless of all the options so it will be tempting to do it. However, there are a few downsides to this too. First, with the size of the deficit they are facing they will burn through that money pretty fast. They may be good for 2009, but then what about 2010? Moreover, they actually owe a fair amount of those dollars to other people for various nationalizations that they have made but not yet paid off. Those in and of themselves could eat up between $5 and $10 billion dollars. Also, if they dip into the foreign reserves they are spending money meant to cover imports and by doing so they may jeopardize their ability to finance future imports. And last but not least, funds like FONDEN were meant to finance the development projects a country like Venezuela needs if it is to progress NOT cover a deficit in a regular government budget. So spending them this way would represent a major blow to Venezuela's development plans (more on this in a future post).

Fifth, they could try to borrow money either internally or externally. This will be tough for reasons not the least of which are the worlds financial crisis and Venezuela's declining credit worthiness. Honestly, I really don't know if Venezuela could raise money at all this way given the current circumstances. At the least it would prove VERY expensive and would certainly hurt future budgets.

Sixth, the final option I can think of, is to devalue the currency. What this means is that instead of paying themselves 2.15 Bolivares for every dollar they would now pay themselves 3 or 4 Bolivares per dollar. Depending on how much they devalue this could conceivably solve the entire budget problem. Also, it could also solve their balance of trade problems which means it would be killing two birds with one stone. However, it also involves pain. There would be a temporary spike in inflation with imported goods now more expensive. Also, Venezuelans would be able to consume fewer imported goods so they, particularly the middle class, would feel much poorer. A devaluation may be salutary and necessary but it is certainly not painless.

Those are the six options that I can think of for them to solve this problem. As you can see it is a very real problem with no easy nor painless solutions and certainly a problem that is much more serious than Dr. Weisbrot's passing mention of it would imply.

What do I think the Venezuelan government will do in order to respond to this problem? I imagine early in the year they will mainly spend down savings to buy time and see what happens with the price of oil (ie, see how bad the problem will be). Then they will probably implement some combination of tax increases, spending cuts, and devaluation (even if it only take the form of selling oil revenues on the black market) to try to cover the breach.

What would I recommend they do? That will be the subject of the next post.

Not to be left behind in the race to the bottom.

2008-12-28T19:15:00.000-08:00

No sooner do we finish debating some of what I perceive as the craziness of the Chavez administration than one of Chavez's most prominent opponents goes out of his way to show he can be every bit as crazy and ill informed as anyone else in Venezuela.

The person I am referring to is Julio Borges who is one of the leaders of the opposition party Primero Justicia. I'll admit, even I, and I am no fan of the Venezuelan opposition, have long viewed Primero Justicia as being the "rational" opposition and those who most likely have something to offer Venezuelans besides pure unadultered hatred of Chavez.

Apparently I was mistaken in thinking them rational.

Today Julio Borges made some remarks on the Venezuelan economy and the potential problems it faces that when not outright false were highly misleading. Lets have a look.

First we get this little gem:

"El único gasto que sube es el militar, todos los demás gastos están bajando, somos el noveno país del mundo en gasto militar", dijo Borges.

Now what makes this remark truly breathtaking is that anyone who spends one minute thinking about it should surely be able to realize that there is absolutely no way that Venezuela can be the ninth largest spender on the military in the world. Think about it, just start ticking off the countries that MUST spend more on their militaries than Venezuela - the U.S., Britian, Russia, China, Japan, France, India, Germany, Israel... I think you get the idea. Seriously, there is just no way Venezuela can be the ninth largest military spender, not even close. For those who are too lazy to try to think of all the countries that surely have it beat here is the list.

And this man was educated at Oxford?!?!?! Just goes to show, you can send someone to a good university, but you can't make him think.

As I said in Chavez's case though, everyone is entitled to a brain fart once in a while. Problem is, what he said after that was worse:

"Es necesario que el pueblo tomé conciencia de que esta crisis ya llegó, de que esta crisis hay que enfrentarla con liderazgo y con madurez y que al presidente hay que exigirle que el gobierno sea el que se apriete el cinturón y no venga el pueblo que es el que paga los platos rotos, a pagar con devaluación, con impuestos, con inflación, una crisis que se dio porque el gobierno malgastó el dinero cuando lo había en vez de ponerlo en resguardo para todos los venezolanos", enfatizó.

There is so much screwed up in this statement it is hard to know where to begin. Let me start with the most trivial. He states that Venezuela faces a crisis because the government didn't save money. This is wrong on two counts. First, Venezuela faces a crisis not because it didn't save up money but because it has an economy dependent on on product and the price for that product is tanking. Secondly, unless just about every major economic statistic in Venezuela is falsified, it did save money. Arguably it could have saved more money - but that would only effect the timing of when the crisis hit. Venezuela never could have saved its way out of this.

But the larger point he makes in that paragraph is what is more problematic. What he tries to say is that it is the "government" that should "tighten its belt" and make cuts and that the Venezuelan people shouldn't have to feel the impact of the crisis. Sorry, but that isn't even remotely possible and in fact feeds a huge myth Venezuelans suffer from.

What Borges is in fact implying above is that the Venezuelan government has been spending a very large portion of its money on something other than the Venezuelan people. That is, it spends its money on the aquisition of arms, or gives it to other countries, or simply steals it. To be sure, Venezuela does buy arms, it does give money to other countries, and it does have corruption. But to pretend that that is anywhere near what most of their money has been spent on is a huge lie. And I mean a really huge lie.

In reality, the VAST majority of the oil wealth that has poured into Venezuela gets spent by and for VENEZUELANS. Don't believe me? Then just look at CADIVI where you can see that the overwhelming amount of money they gave out got spent on importing cars, food, and consumer goods and that huge sums were also spent on credit cards and travel. Then go look at the governments budget for 2009 (you can download it from here). You will note that while the government spends about 8 billion bolivares on the military it spends WAY more that that on general education, higher education, on the Ministry of Finance, on health, etc. In fact, out of a budget of 167 billion bolivares only about 5% is spent on the military.

The result of this is that the government and the Venezuelan people can't be seperated as Borges implies. If the Venezuelan has to cut back on spending, as it may have to do, then the Venezuelan people will have to receive less services and consume less because it is on THEM, THE VENEZUELAN PEOPLE, that the government spends the overwhelming amount of resources on.

Sadly by trying to demagogue this issue Borges is just perputuating a huge and long standing myth in Venezuela - they they are rich, or would be rich if someone (the government, foreigners, corrupt officials, etc) would stop stealing all their money. However, in the main the money isn't being stolen by anyone, it is simply being spent and if there is going to be less money coming in in the future then Venezuelans, the government and the people alike, will simply have to spend less. That is the reality, no matter how much Borges tries to BS for political reasons. That was the reality in the 1970s, in the 1980s, and now, no matter how much Borges tries to distort it.

And of course, that larger picture non-sense leads to the other non-sense in that paragraph such as a devaulation and tax increases are not needed. Seriously Julio - you really think Venezuela can keep going on and prosper with its currency the way it is?????? And please, Julio, feel free to go through the budget and tell us what YOU would cut!! (BTW, in a post to be done shortly I will propose what I would do if I were the Venezuelan government)

The opposition to Chavez has very little presence in the national government due to brilliant decisions such as boycotting elections. Still, the opposition COULD play a very valuable role. It could, in an honest way, point out things that the Chavez administration is doing wrong. It could put together a coherent plan of how it thinks things could be done better and how the country could be developed. Most importantly, it could seek to elevate the level of discourse on politics and public policy in Venezuela - that is explain things like economics in a thorough, coherent, and honest way that allows the general public to gain a greater understanding of those subjects and why the things that are happening are in fact happening.

Sadly, instead of doing that we see one of the most educated, rational and level headed members of the opposition put out lies, misinformation and distortions that obfuscate and mislead rather than illuminate.

As a pretty strong Ni-Ni when I look at some of the Chavista insanity and then I look at this insanity coming from Borges I can only think one thing - Venezuela is screwed.

Despite all of the improvisation there is still a ray of hope - maybe.

2008-12-23T18:13:00.000-08:00

Three events have dominated the news in Venezuela recently. The first is the proposed constitutional amendment which I have already given my opinion on and don't plan to further discuss. The second were some very sensible comments by the finance minister Ali Rodriguez which I definitely will discuss. And the third was a brain fart by Chavez last Sunday. I'll begin with the brain fart.

Last Sunday President Chavez apparently discovered, much to his horror, that a big new shopping mall belonging to the Sambil chain of malls, is being built in downtown Caracas. Never mind that the mall has been in the works for years. Never mind that you can see here from mid 2007 the mall was already taking shape. Never mind that it was widely reported on in papers such as Ultimas Noticias. President Hugo Chavez told the country on television that this mall didn't have community input, was in an already too congested area of Caracas, and that it fostered undesirable consumerism. So he instructed the local mayor to stop the project and take over the building.

Now the fate of some mall in Caracas is hardly earth shattering news. And Venezuela has had so many malls sprout up recently that one less will hardly be noticed.

Nevertheless this announcement is worth paying attention to precisely because it shows how dysfunctional Chavismo, or more precisely Chavez's management style, is.

Think about it. Years have gone by and surely millions of dollars have been invested in this project - and just NOW the government (read - Chavez) decides it wasn't properly thought out?!?!?!? Virtually no major infrastructure or construction projects that I am aware of have ever been subject to community review - yet now we are to believe that it is VITAL that THIS particular project be subject to such a review?!?!?!? Why, because it strikes Chavez's fancy? Then we are told that this structure in fact might be well suited to be a hospital or a university. Now I know the local pro-Chavez governments are often so inept they can't build hospitals but thinking that a building designed to be a shopping mall can readily be converted into any sort of decent hospital is - what is the word? - amateurish.

Now it would be one thing if this sort of off the cuff decision making were atypical. Anyone is bound to do some crazy things once in a while. Sadly, though, this seems to be Chavez's management style, just making things up as you go along.

The instance that immediately came to mind was the televised decision to get rid of the tolls on virtually all Venezuelan highways. Hey, if you spend billions subsidizing the gasoline for upper class Venezuelans cars what is a little more to subsidize their roads. But at least the government was considerate and decided to let all the toll collectors keep their jobs so that Venezuela likely has many thousands of toll collectors who get paid not to collect tolls.

And never was it mentioned how much revenue would be lost, where new monies to maintain roads would come from, or anything of the sort. It was all just decided right there, on the spot, on live TV.

Then there was the televised decision to send ten tank battalions to the Colombian border, followed within the week by a big hug for Uribe at a meeting in the Dominican Republic, and later the FARC getting publicly told by Chavez that their armed struggle was obsolete and they should give it up (those reversals were so fast, even by Chavez standards, that I felt sort of dizzy and nauseous after listening to them).

And of course, those are the least of what is improvised by the Venezuelan government. A good chunk of its economic policy is certainly unplanned, such as its practically suicidal exchange rate policy, its giving away of billions for luxury goods for the wealthy, and its curious policy of getting rid of taxes on rich such as the financial transaction tax.

Of course there are times when improvisation is a good thing, in fact even something vital. The original Missions of Mercal and Barrio Adentro are an example of sublime improvisation. They were a reaction to the seditious actions of Chavez's opponents and they helped the country get through some very difficult times.

But when improvisation becomes standard operating procedure, as it certainly seems to have become for much of the Venezuelan government, things aren't likely to turn out well in the long run. That may not have been so apparent when oil revenues were ever growing. But now when they are in rapid decline and a premium is therefore attached to efficiency such poor management and leadership technique will take a heavy toll.

Before leaving Chavez's remarks of last Sunday there is one further point I'd like to comment on. That is his assertion that "consumerism" is out of control in Venezuela.

Now, that very well may be true among some segments of Venezuelan society (most Venezuelans are too poor to partake in much "consumerism").

Thing is, the driving force behind the heavy consumption of some Venezuelans is nothing more and nothing less than the policies of the Venezuelan government. When you given billions and billions of heavily subsidized dollars for wealthy Venezuelans to spend on credit card purchases abroad guess what? They spend it - on trips to Disney World, designer clothes, and the latest electronic gadgets. Don't want them engaging in these "consumerist" habits? Then stop giving them the money!!

Wonder why middle and upper class Venezuelans pack all the new shopping malls and buy new cars like they were going out of style?? Because they are all in effect being subsidized by the government via cheap dollars. Want them to stop buying those things? Then stop giving them subsidized dollars. And while he is at it he could raise the IVA on consumer goods instead of constantly cutting it. And if it he got really, really desperate to cut down on people buying flat screen TVs he could raise the import duties on them.

But does he do that? No. He simply berates them once in a while on TV while still giving them every incentive (AND THE MONEY!!!!) to go on their spending sprees.

The point is, if Chavez is serious about wanting to change the habits of Venezuelan consumers then the first thing he should do is change the policies of his own government which ENCOURAGE the very behaviour he claims to be appalled by. Until he does that all his self-righteous lectures are just wasted hot air.

Fortunately, despite all this negativity there still is at least some hope for Venezuela's government - it comes in the form of Finance Minister Ali Rodriguez. But first a little background.

It will be recalled that almost exactly a year ago I wrote a series of posts on how the Venezuelan "revolution" had become flabby - that is, very wasteful. This waste was manifested through an out of whack exchange rate that favors imported consumer goods, the handing out of billions of heavily subsidized dollars for overseas travel, and other pointless expenditures that largely benefited the upper classes.

This waste infuriated me because even though the country was experiencing an oil windfall this was money that could have been much better utilized investing in new industries to help wean Venezuela off of its dependence on oil. But despite how obviously outrageous this policy was for a supposedly leftist government this policy continued - at least up until now.

Yet just last week Ali Rodriguez announced that the government will be reducing the amount of dollars given out for travel abroad.

Currently people are allotted up to $5,000 per person per year. This is a huge windfall for the rich who have credit cards and can travel abroad and all sorts of perverse schemes have been invented to make a huge profit with these subsidized dollars and that is precisely why I singled it out last year as something that should be cut.

How much it will be reduced has yet to be announced. Most seem to be guessing it will be reduced to $3,000 or $2,500. Personally I think $1,500 would be a much better number.

Nevertheless, this is a positive development and was quite surprising to me. The reason for my surprise is I didn't think they would take this type of action right before a big election such as the proposed constitutional amendment.

However, maybe they finally realized what I tried to point out last year in one of my posts - that these very expensive give aways go almost exclusively to Chavez's upper class opponents and they could be done away with at almost no political cost to Chavez given that the recipients almost never vote for Chavez anyways. As I wrote last year:

In the first post it was pointed out half a billion dollars were being sent overseas to family members, another half a billion was spent on airlines, and a whopping $4.2 billion was spent for dollar transactions on credit cards. I stated that it would be wise for the government to either eliminate or curtail these expenditures. From an economic point of view it would make a lot of sense as it could save the country billions of dollars that could be better spent other items or simply saved.

But would restricting these expenses be politically viable? Well the dollars spent on airlines and sent overseas to relatives would clearly only effect the heavy consumers - they are the only ones who travel abroad. Further, restricting the use of credit cards for dollar purchases would only effect the upper classes also. Remember, 38% of classes A,B and C- and 27% of class C- have credit cards while only 9% of social class D have them and a minuscule 3% of social class E have them.

From this is should be very clear, that reducing the dollars allowed for overseas travel and dollar purchases with credit cards should NOT present a political problem for Chavez as those measure will almost exclusively impact those who don't support him in the first place.

So from a economic AND political viewpoint it would seem a no-brainer to go ahead with these measures.

I quote those old posts not because I think I had any great insight. I think those observations were really rather obvious and I am sure lots of other people had them too. Rather, I repeat what I said because finally the Venezuelan government itself has clearly seen these things and even more importantly acted on them. Moreover, by doing this they are clearly acknowledging the most important part of what I said - that they won't pay much of a political price for this as it largely effects their opponents anyways. If that wasn't the case they certainly wouldn't be doing this right before an important vote.

I can only wish they had taken these actions a little earlier so that they wouldn't have pissed away another almost $5 billion on this non-sense this year.

Further, it probably is the case that these actions were taken only because Venezuelan oil is now selling for $27 per barrel when the measures would have been just as worthwhile if oil was selling for $200 per barrel. Venezuela is a poor country facing the very, very difficult task of trying to industrialize and as such it needs to use all its resources wisely. I can only hope this is the first of many similar decisions to come which should help eliminate the waste and address some of the imbalances that have built up in the Venezuelan economy.

Finally, I want to focus on the person who announced this decision - Ali Rodriguez. I have never met him or communicated with him in any way. Yet I have always been very impressed with him, to say the least. His leftist credentials are unimpeachable as he has gone from a guerrilla fighter to someone who fought political battles against an entrenched elite in the Venezuela congress. Given this he has Chavez's respect and, more importantly, Chavez's ear. Ali Rodriguez can probably do something an economic adviser such as El Troudi could never have done - tell Chavez things he doesn't want to hear and still get a fair hearing from Chavez.

Just as important Ali Rodriguez seems to be one of those rare leftists who realizes that competence is an important quality and that you are unlikely to accomplish anything worthy without a well thought out plan. I don't think it is any accident that Rodriguez was smack dab in the middle of what are arguably two of this governments biggest victories - helping revitalize OPEC in 1999/2000 and defeating the seditious oil strike of 2002/2003. Of course, Chavez himself was instrumental in those victories. Without his tenacity and sheer determination those battle may well have been lost.

Still, it has become very apparent to me that overseeing the day to day affairs of government is not Chavez's forte - no matter how many hours he works. Yet that is something that Ali Rodriguez seems to excel at. With some tough economic times ahead Rodriguez may well be the right man, in the right place, at the right time.

I certainly which him good health and a long tenure at his current position. With him taking the reigns of the economy (has anyone even seen El Troudi in the past couple of months?) even I will allow myself a little optimism that some of the many wrongs can be righted and that the Venezuelan government finally might more fully live up to its potential.

I am not a fan of agriculture

2008-12-13T18:24:00.000-08:00

I do not consider it that vital a strategy for development, even if we did become a breadbasket the world is littered with third world food exporters. That said moving away from agriculture was probably the worst thing this country ever did. The shanty towns are the direct result of rural migration to population centers resulting in poverty, crime, and dispair. Could a return to the field at the very least reduce the afromentioned woes? I doubt it, you can take the country out of the rural boy but you can never take the city out of an urbanite. People will not return in droves to a life of hardship and difficulty, lacking so many services they are already accostumed to.

That said the government disagrees, and on the one thing I am most cynical about it is the one thing they have actually delivered to date (in terms of raw economic production). Vegetable production is up 52% compared to 10 years ago.

Milk production is also not far behind with what could very well be the golden yardstick of 2 billion liters this year (a digital cookie for those that figure out why) or roughly 6 million liters a day, compared to 1,44 billion liters 10 years ago..

Beef production is up a modest 23%.

Production of cereals like rice and white corn (our bread staple and not to be confused with regular corn) have increased 72% and 150% respectively

Not everything is perfect however, there is a noticeable decline in production of plantains and bananas (oh the irony), almost half what it was 10 years ago.

Dato's new social strata survey is out

2008-12-12T08:07:00.000-08:00

Not the PDF per se but here is a press clipping.

Sector E nominal growth 40%
Sector D nominal growth 24%
Sector C nominal growth 19.5%
Sector A/B/C+ who cares.

Evidently inflation has to be factored in. From Jan to November the Central Bank has inflation at about 27.5%, might reach 30% at the end of the year.

Projecting the impact of oil price declines on Venezuela's trade balance

2008-12-07T18:41:00.000-08:00

Over the past several months the price of oil has fallen precipitously. This has prompted a lot of speculation as to what the impact will be on Venezuela's export revenues and its economy.

Unfortunately, most of it has been the typical uninformed non-sense that surrounds Venezuela and as usual most of it emanates from from Chavez's opponents both in Venezuela and in the international media. With silly made up numbers they come to absurd conclusions - such as Venezuela supposedly exporting about 1.3 million barrels of oil per day for revenue - which can easily be debunked just by looking at numbers put out by decidedly non-Chavista organizations such as the U.S. Energy Information Agency.

Fortunately, Mark Weisbrot has tossed his had into the ring and done the best and most serious analysis to date of what the likely impact on declining revenues will be. The end result is that even with prices of down to $50 per barrel (which was a price not yet reached when he wrote his analysis) Venezuela would still likely run a trade surplus. That, along with the huge savings Venezuela has, would mean that Venezuela should be able to whether the current oil price decline without too much difficulty.

While I agree with the overall conclusion of his report I noted he did make some mistakes in his analysis which when corrected make the prognosis for the Venezuelan economy somewhat less optimistic. I'll therefore go over those mistakes, fix them, and present my own analysis of what oil price Venezuela needs to keep its "head above water".

First, Weisbrot wisely uses PDVSA's audited financial statements as his source for information. This is the correct thing to do given that these numbers are audited by the U.S. auditing firm KPMG and have been corroborated by other sources such as those given by the U.S. Energy Information Agency. In fact, while I pointed out some months ago that PDVSA's export numbers, which are broken down by country, matched exactly what the U.S. government says its imports are from Venezuela Weisbrot took it a couple steps further and matched PDVSA's numbers to the import numbers for all the OECD countries (all developed countries) as well as China's. If that doesn't put to rest the fact that PDVSA's numbers are accurate (and knowing all the moonbats out there it probably won't) I don't know what will !!

From the now confirmed PDVSA financial statements Weisbrot gets an export number of 2.89 million barrels per day which he then uses for his calculations. Unfortunately, in using that number he makes two mistakes.

The first is that he apparently doesn't realize that that export number is a gross number. That is while Venezuela does export that amount of oil and refined products it also imports oil and refined products (what it really mainly does is export some oil to be refined and then import the refined products). Given this, the 2.89 million barrels number is a gross number and shouldn't be used to try calculate net export earnings.

The correct way to do it is to take total Venezuelan oil production and then subtract out internal consumption. Looking at PDVSA's financial statement from June 2008 we see their total production of oil was 3.244 per day (page 6) and their domestic consumption was 490,000 barrels per day (page 11). This gives net exports of 2.75 MBPD which is 140,000 barrels per day less than Weisbrot's number.

He then commits an even more bizarre error. He doesn't make any attempt to account for production cuts that Venezuela will be making along with the rest of OPEC in an attempt to stabilize prices. Last month Venezuela was to have cuts 129,000 barrels per day of output. On December 17th OPEC is scheduled to meet again and it is all but certain that they will cut production - probably between 1 and 2 million barrels which would likely mean that Venezuela would have to cut another 129,000 barrels. As an approximation we can assume that total OPEC related cuts for Venezuela will be 260,000 barrels per day.

Subtracting the OPEC cuts from 2.75 million barrels per day brings Venezuelan exports down to 2.49 million barrels per day - a full 400,000 less than Weisbrot's number.

Weisbrot then notes that of the 540,000 barrels that Venezuela exports to the Caribbean countries doesn't get paid immediately for at least half of it. So that is then another 270,000 barrels that should be subtracted from the 2.49 million and gives a final export for revenue number of 2.22 million barrels per day.

It is this 2.22 MBPD number that we will use to calculate revenues.

For example if Venezuelan oil were to average $50 per barrel (which Weisbrot took as a worst case scenario but now looks more like a "best case" scenario) would bring in $40.5 billion in oil revenues. Add in $6.5 billion for non-oil exports and total export earnings would be $47 billion if oil averages $50.

Take oil down to the current Venezuelan price of $34 per barrel and we get $27.5 billion in oil exports which when added to the $6.5 billion in non-oil exports gives $34 billion in revenue.

Next we turn to what Venezuela has to spend in dollars to pay for imports and other dollar denominated expenses such as travel by Venezuelans and debt service. From CADIVI, which is responsible for handing out all dollars in Venezuela, we see that dollars handed out through November of this year total $42.3 billion. Pro-rating for 12 months we get $46 billion. To this we should try to account for imports that PDVSA does for their own needs directly without going through CADIVI and debt service. Venezuelan debt service for the next two years is supposed to be minimal but PDVSA does import a lot of equipment for its own investments and may be importing food for its own food distribution network without going through CADIVI.

Therefore barring more exact numbers the best estimate that can be made is that they will probably need $50 billion in dollars to meet their ongoing expenses.

Referring back to our previously calculated numbers this means they would have a $3 billion deficit with Venezuelan oil at $50 per barrel while they would have a $16 billion deficit with Venezuelan oil at its current price of $34 per barrel.

The latter is a significant deficit but as we shall see shortly it is not unmanageable for Venezuela.

It is also interesting and easy to calculate what the "break even" price is for Venezuela. Knowing that Venezuela needs $43.5 billion from oil exports ($50 billion in expenses minus $6.5 billion in non-oil exports) and dividing that by 2.22 MBPD and 365 days we get $54 per barrel. Oil prices quoted in the news are generally $10 above what Venezuelan oil fetches so if you see oil prices at $64 per barrel Venezuela is breaking even and anything less it is losing money.

Now that we have quantified the situation the question is how much of a bind does a $3 billion or $16 billion deficit put Venezuela in. To answer that we need to have some idea of how much Venezuela has saved in up in dollars. According to the Venezuelan Central Bank Venezuela has about $118 billion in assets abroad.

Of that $120 billion about $23 billion are receivables for the oil they've given to other countries in return for future payment. Obviously that is not money they can get right now. Another $20 billion are fixed assets held abroad such as Citgo and other refineries that PDVSA owns. That is also not easily accessible. Another $39 billion is held in the Central Banks reserves which could be spent in a pinch but really shouldn't be. Subtracting all of the above from $120 billion leaves about $36 billion in money that they can spend to support imports or any other dollar denominated expenses they may have.

With just that $36 billion they could theoretically remain solvent at $50 oil for a decade while even with $34 oil they could hold out for two years.

Clearly Weisbrot's overall conclusion that Venezuela isn't going bust anytime soon is accurate even if the situation isn't quite as rosy as he paints it.

Finally there are some other points that should be noted but because they are hard or impossible to quantify have not been included in this analysis:

1) These numbers do not include any money given to other nations such as Bolivia, Ecuador or Nicaragua. If Chavez wants to give those countries monetary assistance with current oil prices he is going to have to dip into his savings.

2) The discounts given out to the Petro Caribe members will be reduced as prices drop. Because I don't know the exact discount scale for various prices I didn't include it here. But assuming that Venezuela is giving out 270k barrels of oil per day and not getting paid for it is probably no longer true. If Venezuela cancelled the program altogether and got full payment it would bring in another $3.3 billion in revenue at $34 per barrel and $5 billion at $50 per barrel.

3) The same economic crisis which is helping drive down oil prices will also help reduce the cost of Venezuela's imports. For example, food prices have been dropping dramatically as have other "commodity" items such as steel. This could easily shave a few billion dollars off of Venezuela's import bill. Further, the dollar has been appreciating during the current crisis (amazing but true) meaning that even though Venezuela's oil brings in fewer dollars those dollars are actually worth more.

In any event Venezuela does not face an immediate crisis. As I have posted before though it does face stagnation and difficulties in promoting long term development. Those facts will be the subject of the next post.

Has Venezuela already devalued?

2008-12-05T19:31:00.000-08:00

For years now the Venezuelan currency, the Bolivar (or now the "strong Bolivar") has been overvalued. Worse, as it has a fixed exchange rate with the U.S. dollar and Venezuela has higher inflation than the U.S. it has become more and more overvalued.

I have over and over again criticized this and asserted that the Venezuelan government should do something about it as in many ways it hurts the Venezuelan economy.

Well, maybe they have - sort of.

While Venezuela has a fixed legal exchange rate it also has an extensive black market on which the Bolivar has a much lower value. The black market exchange rate can be seen here. Looking at the black market exchange rate a funny thing seems to be happening.

Whereas last year the black market rate skyrocketed until the Venezuelan government sold bonds to try to bring it down (which it did) now it has remained flat. This in SPITE of the fact that a) Venezuela isn't selling bonds to bring it down anymore b) oil prices and with it dollar revenue have dropped which should put pressure on the black market rate and c) the dollar has actually been appreciating against other currencies which should also make it worth more Bolivares on the Venezuelan black market.

So why is the black market rate stuck at about 5 BsF to one U.S. dollar?

What has been pointed out in various Venezuelan press reports is that the Venezuelan state oil company, PDVSA, is selling its dollars on the black market. This assertion is made, among other places, here.

Although I of course cannot corroborate this I think there is a very high probability that it is what is happening, given the aforementioned points.

If this is happening what are the implications?

First, it does help the government with one very big problem. With an overvalued exchange rate the biggest loser, by far, in Venezuela is the government itself. The reason is that in Venezuela essentially all exporting is done by the government and when the dollars earned from those exports are changed to Bolivars at a very low rate it is obvious who loses - the Venezuelan government.

Yet if the Venezuelan government sells money on the black market instead of getting just 2.15BsF it would get 5 BsF - clearly that is a huge gain for the government and would make the resources that it has to fulfill its budget and spending needs much larger. For example, while recently I posted on how the government is currently facing a big deficit due to it formulating its budget on the assumption of $60 oil if it gets a lot more Bolivares for its dollars it could balance its budget even with much lower oil prices.

So in fact there are probably valid reasons for the Venezuelan government to do this and it would definitely get some major benefits.

In spite of that, however, it is hard to get too excited about this because there seem to be too many drawbacks to doing things this way as opposed to setting up a formal dual exchange rate.

First, looking at the CADIVI web-site it appears that they are going to exchange about $45 billion dollars at the official exchange rate. So whatever they are doing on the parallel market it is small compared to what they are doing officially.

Second, they are still selling very cheap official dollars for such frivolous purposes as overseas travel, credit card purchases, and importation of luxury consumer goods. If they really wanted to get the full advantage of having a dual exchange rate they would stop giving out official dollars for those purposes.

Third, this would be illegal. Venezuela passed a law not all that long ago making the exchanging of money on the black market illegal. The government probably shouldn't be breaking its own laws.

Fourth, anyone else who exports doesn't have the ability to sell onto the black market (unless the government is going to let them break the law too which I doubt) and so exports are still thwarted by an overvalued exchange rate. For the same reason, imports are still getting a huge and unfair advantage of domestic production via the overvalued exchange rate [btw - the recent Frontline show on Venezuela was quite bad but it did show two clothing production co-ops which are virtually out of business. They can't get any business other than selling to the government. Think that has anything to do with the exchange rate?? I have no doubt it does]

Fifth, by doing this under the table so to speak there is essentially no oversight of this and it raises the issue of corruption. After all, how do they decide WHO they are selling these dollars to and at what exchange rate?

And last but not least they are hiding what they are doing from the general public. It has always been very problematic for me that they don't lay out their economic plans in detail and explain what and why they are doing to the general public. To me, it is very important for the public to be educated on their plans. There is often great ignorance and confusion with regard to economics and the government should be seeking to elevate peoples understanding, not further confuse them by providing incomplete or even false information. Inevitably, even with the best of plans, there will be failures and setbacks. The general public will be much more understanding of those failures if they know what you are trying to do and why. So having these sorts of unannounced policies is very far from ideal.

In sum, it looks like Venezuela already does have a dual exchange rate - if only to a limited extent and unofficially. Still the way it is being done probably makes its potential benefits overwhelmed by negative consequences.

Still a one man show?

2008-12-04T06:23:00.001-08:00

No sooner than the regional elections were over than Chavez announced he would like to look into again trying to have term limits removed so that he could seek another term. In fact, though details aren't clear, it appears he would like this possibly voted on early next year.

As most probably know, I don't have a strong opinion about terms limits one way or the other. I do sometimes favor them, mainly for legislative offices, but don't view them as necessary. Most people know whether they like a president or not and if they like him/her what is the harm of allowing them to vote for them again?

The fact that the constitutional reform of a year ago, which included removing term limits, got voted down probably had as much to do with the fact that it also made terms longer and recall referendums more difficult as it did with the repeal term limits.

However, if I were Venezuelan and had a say in the current effort to change the term limits, which I don't, what would I do? I think I'd vote against changing them for several reasons, none having to do with term limits per say.

Let me give my reasons in no particular order:

1) Venezuela has had one big election each year for the past god knows how many years. This has created electoral fatigue and, in my view, distracted the government from governing. Worse, it has created a short time horizon for government policies (no pain allowed before elections) and has therefore prevented them from taking actions that might be painful in the short term but quite beneficial over the medium and long term. Having yet another vote simply continues this problem. Venezuela could really use a break from these elections for a year or two.

2) Why do term limits need to be focused on now when President Chavez's term isn't even up for another FOUR years? Couldn't he just govern over those next four years and if things are going well and it is deemed necessary for him to have another term THEN propose reforming the Constitution? It would seem to me that he could (unless of course he is pessimistic about Venezuela's future). At the very least why can't this proposal wait and be voted on at the same time another election HAS to be held, such as the Legislative elections which are coming in 2010?

3) After 10 years why is there no leadership within the movement that Chavez leads besides Chavez???? In any truly participatory and democratic movement there should be plenty of potential leaders - and surely in a movement as large as the one Chavez leads that has millions of adherents. So where are they, why aren't they being developed and given more power, and why won't THEY be ready to take the reigns in what will be 14 years after this movement first took power??? I hate to say it but its hard for me to believe that in 14 years new leadership can't be developed unless the movement is not actively trying to develop it or even worse it possibly is even thwarting it.

One could go further - can a movement that depends on one person in perpetuity truly be considered revolutionary?? Can it be truly considered democratic?? I am not certain of the answers to either of those questions but I lean towards saying NO.

It is one of the great ironies of the Left, not just in Venezuela but throughout the whole world, that it almost always has political parties based on single personalities. This is particularly ironic in light of the fact that most Leftists think of themselves as independent thinkers. And of course, this makes those movements extremely fragile and vulnerable both to outside subversion AND to that one leader not making good decisions and/or falling in love with power.

Given all this I think Venezuelans telling Chavez to concentrate on governing AND developing new leadership by voting NO on any new proposal to eliminate term limits would be a good idea. If Chavez wants the political movement he leads to survive then let him start doing what he should be doing anyways - developing new leadership that can take the reigns in the not too distant future.

Why $40 isn't worth as much on the way down as it was on the way up

2008-11-25T17:50:00.000-08:00

There is one question I've seen posed by a number of people, both on this blog and on others, and by pro-Chavez as well as as anti-Chavez people. It goes something like this:

Why would an oil price of $40 or $50 per barrel now be a problem when that was the price only a few short years ago and the country was booming with that price? Why would $50 now be a bad before when so recently it was a good price?

This is a fair question but one that does have at least two very clear answers. The first is somewhat more subtle but the second is quite clear.

The first is that the driving force behind Venezuela's rapid economic growth in recent years is quite obvious. Up to now it has been increased government spending paid for by increasing oil revenues. That is, increased salaries for government employees, new social programs, new public works, new scholarships for students, etc, have all served to increase peoples purchasing power, spur consumption, local production and hence create that rapid growth we have seen.

That is all well and good but it all depends on one thing - ever increasing oil revenues to pay for ever increased government spending. Once those revenues stagnate, much less decline, the spending stops growing and so would the growth.

The only way stagnant oil prices wouldn't stop growth in its tracts is if other productive sectors of the economy, namely manufacturing, got legs of their own and could generate enough wealth to replace the declining oil wealth. Has that happened? We'll probably find out soon enough.

The second reason $50 oil is problematic now while it was a boon before is even more fundamental and it has to do with one of my main complaints against the government - the overvalued exchange rate. Or more specifically, the fact that the exchange rate has been fixed for four years now makes $50 oil worth a LOT less than it used to be.

Let me explain.

Lets say a government worker was paid 10,000 bolivares in 2005. If oil sold for $50 barrel and with an exchange rate of $2.15 Bsf to the dollar each barrel brought the government 107BsF. It therefore took 93 barrels of oil to pay this employees salary. Ok that was 2005 and things were fine.

Now fast forward to 2008. What changed? Well lets assume the price of oil is $50 per barrel which it now is. That is the same as it was before. Also, the exchange rate remains the same: one dollar converts to 2.15 BsF now just as it did in 2005.

However, in the interim there has been large scale inflation. It has been around 25% per year so for sake of simplicity lets assume total inflation between then and now has been 75%. Accordingly government expenses have gone up by 75%. Almost certainly that government employee who earned 10,000 BsF in 2005 now earns 17,500 BsF (in reality it is likely more given that salaries have gone up in real terms).

Now remember, a barrel of oil brings in the same number of bolivares - after all the price of oil is $50, as it was, and it exchanges at 2.15BsF per dollar because the exchange rate is still the same. So each barrel of oil still brings in only 107 BsF in 2008 just as it would have in 2005.

So how many barrels of oil do they now need to pay for that employees salary? They now need 163 barrels of oil.

That is, because the government has kept the exchange rate fixed $50 oil now brings in the exact number of Bolivares that $50 oil brought in in 2005. But that is woefully inadequate because all of the governments expenses in Bolivares have gone up tremendously due to inflation.

This shows the government has a fundamental problem created by its fixed exchange rate and high inflation. As its expenses go up in line with inflation it won't have enough money to cover those expenses unless the price of oil, in dollars, also goes way up each year. Fortunately for the government it has done just that over the past 4 years. It appears likely not only that that will not happen in 2009 but that it will actually drop. And as we have seen $50 oil doesn't bring the government as much money as it did in 2005.

Of course, oil isn't the only source of revenue for the government. It does collect regular taxes and those presumably would keep up with inflation. But at least half of government revenues do come from oil and with a fixed exchange rate that oil just isn't bringing the government as much money as it used to and as much as it needs.

This is why $50 oil is now very insufficient for the government while not that long ago it was a boon. Sooner or later something will have to give.

It is not Urban vs Rural but wealth vs poverty

2008-11-24T12:01:00.000-08:00

How can a country be 90% Urban and still have the rural party win almost everything? obviously if you live in lalaland you can divert the issue away from poverty but that is a losing strategy. It is still and will always be rich vs poor in Venezuela.

Here is a map of PPP GDP per capita per state.

Source
Source of the Source

See the pattern? The richer the state the more likely they voted for the opposition. The only outliers are Monagas (oil wealth) and DC which is as urban as they come, but with not too many rich neighborhoods.

Electoral Results

2008-11-23T23:02:00.000-08:00

Detailed results from first bulletin 95%+ counted

The opposition won the Major Mayor of Caracas, Miranda, Nueva Esparta, Zulia.

Carabobo and Tachira are still undefined.

What is clear from all of this is that Chavez lost Caracas if he lost Mun. Sucre, and even though the opposition looks at it as if it were Petare only (naive since it ignores a lot of high class neighborhoods) it still is symbolic..

EDIT The opposition won in Carabobo 47 vs 44 Link

If you look really, really, really, really hard you can just make it out...

2008-11-14T19:34:00.000-08:00

The Venezuelan Central Bank came out with its third quarter GDP numbers yesterday. Sadly, they are nothing to cheer about. Overall growth was a decidedly mediocre 4.6%.

What is so bad about 4.6% when the rest of the world seems to be in an outright meltdown these days you ask?

To see what is so bad about it lets back up a bit. The prime mover of the Venezuelan economy is oil. And this year Venezuelan oil has averaged about $95 per barrel versus $66 last year - this in spite of the recent dramatic drop in prices. That means the prime mover of the Venezuelan economy has jumped by a spectacular 50%.

Given that, the Venezuelan economy should be really cooking. Growth rates of around 9 or 10 percent would be what I would expect to see.

Why isn't that happening? Part of it is intentional policy on the part of the Venezuelan government. Recall that earlier this year the Venezuelan government got it in its head that inflation was public enemy number one. This led them to adopt a number of policies such as slowing government spending, raising interest rates, and raising banks capital requirements (boy don't some other governments now wish they had done this!!) among other things. They knew this would slow growth but thought it would also tamp down inflation.

As it turns out they were right about the former but horribly off the mark on the latter. Inflation continues unabated. But they did get the economy's growth rate to drop quite a bit!! Given what dimwits the people in charge of Venezuela's economy are they probably view this as a success.

However, the worst is yet to come. Sadly the BCV seems to have allowed its presentations to have become politicized with the intent of hiding information. We therefore note that in their press release they give growth rates for various economic sectors such as commerce, communications and construction. But they don't give the overall growth rate for manufacturing. Instead they give it for sub-segments of manufacturing some of which do have higher growth rates.

This led me to guess they were trying to hide something as the the growth rate of manufacturing, which for obvious reasons is a key number, had always been given before. Sadly, when I looked at the detailed numbers on the BCV site I saw that manufacturing growth was a paltry/pathetic/abysmal .3%. No wonder they wanted to hide it.

And be sure to read carefully, there is a decimal point there. It is not 3%; it is .3%.

That is, there was growth in manufacturing but such slow growth it was barely perceptible. So small is it that it is well below the population growth rate and there is simply no way Venezuela is going to develop this way.

Why is Venezuelan manufacturing flat lining?

There are almost certainly two reasons for this:

a) a highly distorted exchange rate makes manufacturing uncompetative with imports.

and

b) under investment in manufacturing.

Of course, we don't have exact numbers on all of the above. Venezuela for some reason doesn't see fit to publish investment numbers (in and of itself that is a bad sign). But under investment and a distorted exchange rate will lead to declining growth rates. And in fact that is what we are seeing - WELL BEFORE THE DECLINE IN OIL PRICES.

As the saying goes, the proof of the pudding is in the eating. Anyone who is willing to take an honest look at this should be able to see what the eating is like in this case.

Florida real estate isn't the only thing under water.

2008-11-12T14:35:00.000-08:00

The new year is only a month and a half away and unless something changes really soon Venezuela's budget for next year is already in big trouble.

The main reason being tanking oil prices and OPEC production cuts.

Venezuela's budget for next year assumed Venezuelan oil production would be 3.7 million barrels per day and the price would be $60 per barrel. As of today, neither one of those assumptions is holding up.

First off, while the budget called for 3.7 MBPD of production Venezuela currently only produces about 3.1 MBPD which is in line with OPEC quotas. Why they made a budget that assumes MORE oil production than OPEC quotas even come close to allowing them to produce is completely beyond me. It has to make you wonder if the whole government isn't starting to lose their collective marbles.

Anyways, they are at least 600k short on daily production of what the budget calls for AND OPEC is already talking about another round of cuts. So I think it is a safe assumption that they will be underproducing relative to the budget by 600,000 barrels per day.

Doing the math (600,000 barrels x $60 per barrel x 365 days) gives a shorfall of over $13.1 billion dollars! No small change there.

That however is only one piece of the puzzle. The next part is that Venezuelan oil is now selling for $50 per barrel while the bdugeted price is $60 - or in other words if we assume the price neither goes up or down next year (probably the fairest assumption we can make though I think it is more likely to continue going down than to go back up) they are losing $10 on every barrel.

Given that they have net exports of about 2.4 million barrels per day when we do the math (2.4 million x $10 x 365)we get another $8.7 billion dollar shortfall.

Add them together and we can say that using the most realistic assumptions the Venezuelan budget for next year already has an almost $22 BILLION dollar whole in it. That is, if nothing else changes, they will have a $22 billion deficit next year.

Of course, they are probably good for the money, given what they have saved up. Still, covering this out of savings means that things that were originally meant for investments in infrastructure or industry would now be used just to support ongoing government expenditures. There is no way that is good.

Further, this is just one years deficit. What will 2010 be like? Maybe, assuming the worlds economy recovers, prices may go up a bit. But it is very doubtfull given what OPEC quotas are likely to be that Venezuela will be able to produce anywheres near the 3.7 MBPD the budget calls for, even in 2010. So their budget for that year will likely have a big hole in it too.

Any prudent government would already be starting to toss a lot of unnecessary expenditures overboard and take other steps such as instituting a dual exchange rate for items deamed non essential. But so far this government isn't. And unless they do it soon after the elections (say by January at the latest) it can be assumed they are sticking with the policy of letting the imbalances grow until everything blows up. Given that I spent all of 2007 waiting for them to take sensible pro-active measure which they never did I am not going to be holding my breath this time.

On a final note, just to rub salt into a wound, another oil exporting country was clever enough to hedge all their oil prices for next year. That is, Mexico spent $1.5 billion dollars on hedges guarenteeing them the price of $70 per barrel no matter what the actual price is. And they did this for ALL their oil!!

If prices stay as low as they are now some poor sucker is going to wind up losing a lot of money paying Mexico for the price difference while Mexico won't have a gaping hole in its budget like Venezuela does.

Obviously Chavez isn't nearly as clever as he likes to think he is. If he was, he could have hedged Venezuela's oil exports, his budget would be just fine (well, except for the absurd production number) and he would actually be kicking the capitalists in New York while they were down by making them lose tonns of money subsidizing Venezuela's oil.

Do the right thing!

2008-11-04T06:45:00.001-08:00