Oil Wars

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.
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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.
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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?
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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!!!
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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.
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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.
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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.
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