Wednesday, May 23, 2007

Apparently someone thinks there is money to be made in Venezuela 

How many times have you heard the following – “There is no investment in Venezuela”? If you follow the reporting on Venezuela closely you’ve probably heard it many times. So many times in fact that most people probably accept it as being true without ever bothering to check its validity.

However, with the new Venezuelan Gross Domestic Product numbers coming out recently I decided to check it for myself. Now when looking at economic statistics there is almost never a line called “investment” – instead they call it Gross Capital Formation. And sure enough the Venezuelan central bank publishes those numbers right here.

Investment – or Gross Capital Formation – is almost always measured as a percentage of GDP. The reason for that is that it is widely assumed that in order to maintain a healthy rate of growth in your economy you need an investment rate of at least 25% of GDP. Some hyper-growth economies such as China have rates over 40% which helps explain their very high growth rates.

How doe Venezuela stack up when compared to this? Lets take a look:

First a note on these numbers. I compared the first quarter of each year – not entire years. I did this as obviously for 2007 the only number available is the first quarter. Quarterly comparisons are perfectly valid as long as you always compare the same quarters of the years, which is what I did. The only exception to this is 1997 which for some reason they didn’t give by quarter but only for the full year. So the comparison for that year may not be exact but hopefully it is close.

Jumping right into these numbers we see that Venezuela has actually not done so bad. In fact, in 1997 and 1998 before Chavez came into office Venezuela had an investment rate of 25%. Pretty good as that would be enough to sustain growth.

Then came the early years of the Chavez administration and investment did drop – maybe he did scare some investors after all. However, by 2001 and 2002 investment recovered again to healthy levels as maybe investors realized that Chavez wasn’t so bad for the economy after all.

Then comes the deluge. In 2003 investment dropped to less than 15%. And remember, given that these are percentages of GDP the total drop in investment would have been even more dramatic as GDP itself dropped significantly. But of course we all know what the precipitating factor was behind this – the 2002/2003 opposition led oil strike.

Since 2003 the Venezuelan economy has recovered and investment has recovered along with it – quite dramatically in fact. Note that so far this year investment is almost a 32% of GDP. Not Chinas levels yet – but certainly getting up there. This is a very impressive number. And this certainly gives lie to the bogus assertion that investment is low in Venezuela. The reality is high, and climbing, in Venezuela.

So as it turns out, lack of investment is another one of those imaginary problems that exists mainly in the heads of people who don’t bother to look up the actual statistics.

Now, I do want to make another couple of points regarding these numbers.

First, many newspaper articles, particularly ones written by people who oppose Chavez like to make a big deal out of supposedly diminished private investment. However, these numbers are only total investment – I have never seen BCV numbers that separate private from public investment. However, what counts is total investment and by that score this government is doing well.

Second, it would be nice to be able to determine exactly what kinds of investments these are. The reason is that some investments, such as infrastructure, don’t tend to lead as much to additional revenue and income as other types of investments, such as new factory equipment. Again, the BCV does not present distinct numbers for those types of investments as far as I know.

A reasonable guess would be that with the Chavez government a lot of this investment is in infrastructure such as subways, highways, homes, hospitals and stadiums. But it is also likely that a fair amount is going for new factories as a large section of Venezuelan industry is currently operating at full capacity and as we previously saw manufacturing has expanded by over 30% so far under Chavez. What is more, it is also likely that a lot of the 25% of GDP that was investment in 1997 and 1998 was in the oil industry which was not exactly helpful to Venezuela’s economy.

In any event, what we can and do know is investment, like so much else, is way up in Venezuela. And that is definitely a good thing.


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