Tuesday, May 05, 2009

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

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.


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