Oil Wars

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

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

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

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

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




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

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

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

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

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

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

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

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



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

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

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

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

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

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

On the next page this sub-section continues:



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

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



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

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

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

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

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

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

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