The Venezuelan Economical Paradox: an economy that grows without growing

That is right, even if Venezuela is showing impressive signs of growth for the last couple of years, the real effect of the growth on the population and its effect long term is not very convincing. Trying to be as brief as possible I will try to shed some light on this paradox.

Before going into the details let’s state a few obvious factors that the casual observer might not get easily.

1) Should the Venezuelan economy grow? The answer is yes, the Venezuelan economy CANNOT not grow, if you forgive me the double negative. With now three years of record oil prices there is enough income for the government that this one by just spending the excess income has to create an economic boom, EVEN if the non governmental sector were not to participate deliberately in the boom.

2) Where is the economic growth? The extensive social programs and grant distribution has created a consumption oriented economy where the lower classes have a stake at. That is, large sectors that could barely afford food in 2001 can now afford more than food even if they do not hold a regular job. Such type of economical redistribution favors of course massive importations (Look at the Venezuelan food program through Mercal, importing even sugar now). Thus the sectors that grow are those that provide the goods for these people that were shut off the consumption circuit: retail, distribution, import, commodities.

3) How is the money distributed? Besides the social programs already mentioned which started for merely electoral reasons in 2002 after Chavez was already in office for 3 full years, the incoming 2006 presidential election has stimulated the continuation and acceleration of major public works that were started even before Chavez reached office. Thus through contracts to pro Chavez groups, this public work scheme has helped stimulate some sectors and reactive employment, to some extent. This started in 2004 and the effect are only now starting to be felt. It is not idle to observe that the government is limiting itself to complete what was started and there is no strong evidence of a general infrastructure plan for the country under study for when this big projects rech completion.

4) Are the reported economic numbers reliable? The answer is unfortunately no. By this, one does not want to convey the impression that there is deliberate cheating in the reporting of the economical Venezuelan performance. But the fact is that since 2002-2003 the Central Bank and the statistics institutes are directed by people faithful to Chavez line. The very least we can expect is that if these numbers are not altogether fudged, they are at least presented in a way that reflects as positively as possible on the government policies. In other words the advice is to look at trends and not to focus on the actual numbers. Assuming that even trends can be trusted.

5) Does this economic growth show? Yes and no. Yes in that there is renewal of building construction, and there are more cars than ever in the streets. Heck, I even saw a Hummer in San Felipe where half the streets are too narrow for such a vehicle. But no because it does not matter what car you drive: you still see more beggars at street corners than ever, and more guys willing to “look after your car” when you park it in the streets on the way to some errand. Grinding poverty after two years of near 10% growth is everywhere to see and remains unabated. The trebling of crime rate is a witness of this.

This being said we can now look at some recent numbers, in particular the spectacular economic growth but the stubborn unemployment figure. It should become clear as you read that whatever economic growth is taking place in Venezuela, this one has short wings.

The Central Bank reports for 2004 an increase of 17.9% of the GDP (PIB) from 2003. Normal considering that 2003 was a catastrophic year after the general strike. Good news kept coming from 2004 to 2005 when the increase was still a spectacular 9.3%. However per capita numbers were not still at the 1998 level. So far this year it seems that we will get yet another 8-9% growth. The first semester reported a 9.6% GDP growth.

All should be fine and dandy. Or is it?


This figure drawn from the numbers of National Institute of Statistics, INE, reports the unemployment as remaining stubbornly around 9%. What? We get a 9% GDP growth in a semester, right after a year at 9% and our unemployment does not go down even by 1%? What gives? Since nobody within the Chavez administration is volunteering to explain this paradox this blogger will not be afraid to advance an explanation. (Note: the INE graph was not clear enough to reproduce so I used an Excel sheet to redraw the graph).

The first thing that people should be aware of is that the INE considers as fully employed anyone who works at least 15 hours a week, even if it is selling coffee from a thermos jar to drivers in Caracas permanently gridlocked highways. In other countries “fully employed” means 40 hours week jobs, paying taxes or at least participating in social security system. Not in Venezuela. Consequently the real unemployment number is higher. But readers of this blog already knew that. We do not know the numbers on how those that are without a “real” job did during this last semester, if they did get finally a real job. I could not find this info in INE. But I suspect that if these numbers were good INE would find a way to measure them and advertise success.

Thus we are stuck with the mystery on how come two years of high growth have not dented unemployment better. Actually, the stagnation of these past 6 months is dramatic: the economy only generates enough jobs to absorb those who join the job market, barely at that. There is unfortunately only one possible explanation: the private sector is not hiring. We know from the extensive public works taken place for the last two years and for the bevy of “misiones” social programs that the public sector is hiring or at least giving 15 hours a week “activity” to lower unemployment rolls. Thus the bulk of hiring must come from the state.

The private sector paralysis in hiring

Why is the private sector not hiring as it should even though consumption is increasing? Very simple: restrictive labor laws did not allow for the normal ebb and flow of workers that are seen in developed economies. Many enterprises had inherited bloated payrolls from 2002 and 2003 which have to be fully made busy again before anyone thinks of hiring new people. And this situation is not about to improve as El Universal informs us that the productivity of the Venezuelan worker is still ONLY 73% of what it was in 1985! Clearly the need for modernization will not allow for sustained job increase in the foreseeable future. Not to mention that the INE recognizes that in June 2006 the Venezuelan industrial park production potential was used only at 77%! There will be at least the need for a new year at 9% growth before a majority of industry feel the need for expansion and hiring.

The regime's responsability

But the government is also largely at fault. It inherited already archaic labor laws, very punitive for the employer, without any incentive to create new jobs. The Chavez administration is diligently making the situation worse. You can read, in English though ill translated, a fearful catalogue on how the legal system currently built by chavismo is meant to control the private sector tightly, perhaps even to eliminate it whenever it will be politically necessary for the regime.

The graph above gives actually a dramatic example on how intemperate laws coming from some "spontaneous" declaration of Chavez can affect employment. A couple of months ago Chavez decided that pregnant women should get increased post maternity benefits, in particular the "lactation" benefit. In Venezuela more and more women stop lactation as soon as possible as it becomes very problematic to work and nurture. Still, the regulations were giving already to the mother plenty of time at home after birth and thus most of them had ended breast feeding before retuning to work. There is nothing wrong with the idea of extending lactation period if it were a choice for the woman, and if it were a new regualtion that would be established progressively over, say, a year. But as a result of Chavez big mouth suddenly women in procreation age are finding doors shut. In a country where it is allowed to specify the sex of the person sought in a want add it is easy to imagine how unjust for women resulted the fast and populist words of Chavez. You can see this crystal clear in the jobless jump for women for July, by more than one point while men jobless rate accelerates its decrease! I am eagerly waiting the August result. And by the way, as far as I know only this blog has observed that.

Business lack of trust in the future

In fact, let’s not be afraid of words, the environment for private investment is hostile. The first thing that attracts investors is return. Be they Venezuelans with money stashed away overseas or new foreing investors seeking good returns, Venezuela does not provide them with international levels of investment return. Why? The constant talk of socialism of Chavez; the rising insecurity be it personal (crime out of control) or juridical (invasion and seizure not only of agrarian lands but now of private buildings in Caracas); the mere fact that the judicial system is rigged in favor of Chavez and that in any litigation that you might have as a consequence of a contract with the government the odds are stacked against you; and more such as the bureacratic morass to start a new business. The only significant investments we can see (numbers are not clear in either BCV or INE) are on the oil industry where returns are big enough, or on other systems where Venezuela is too backward so that you are protected from the government to tamper with your business (communications and car manufacturing for example). The rest of business invests only what it must to keep the production facility running. More on investment risk in English here.

But there is something of a vicious circle with the lack of investment. In Venezuela money keeps coming from high oil prices but goods produced locally are not increasing fast enough for the new demand. As a result the government is having more and more trouble controlling inflation (a big jump last months trashed any hope of a single digit result this year). It is speculated that the BCV will soon be unable to control liquidity and inflation might spin out of control. Business people know these things and are certainly considering it if they plan to invest since high inflation requires even higher returns to protect the capital. In English here.

This lack of investment, of trust in the future of the country can also be sensed through telling details. For example Colombia which used to have Venezuela as it second provider of goods has it now as 5th. That is right, Colombia which is Venezuela natural export market due to our long border and highly settled areas each side of the border is now buying more from Mexico, Japan or Brazil! In fact a few days ago I was reading bemused that the INE director was reporting huge Venezuelan exports increase while the private sector (AVEX) was reporting meager results. Who was lying? I suspect that the INE director Eljuri for one simple reason: the Venezuelan currency is overvalued artificially as it is a government position to try to stem inflation by importing goods cheaper. The present minister Giordani was already in charge in 1999 to 2002 when the bolivar experienced its first devaluation under Chavez. He left and came back and is making yet again the same mistake, this time less noticeable courtesy of high oil prices. Investors will be wary of investing and getting into debt if a possible devaluation is in the wings.

Conclusion

The recovery that we see in Venezuela is mostly a consumption driven growth based on easy oil money, as we have already seen in the past. It is not driven by exports. It is not driven by creation of new production facilities. It is not driven by expansion of installed capacity. It is not driven by an increase in the demand from higher paying jobs.

It is driven by higher pay checks in the public sector and the military. It is driven by cash grants to the lower classes that pledge allegiance to the regime. It is driven by their pent-up material needs that are justly satisfied now, though unjustly acquired since they do not derive from their actual work.

But the regime constant attack on private enterprise and capitalism, the regime ever expanding threat against private property, the regime ill suited, ill designed, ill planned international agreements, the regime lack of general vision except lately "socialism for the XXI century" is killing any trust by the private sector to generate the investments that should be made to ensure a sustainable growth in the economy over the years, a real growth able not only to lower the unemployment figure, but more importantly, the number of the terrible underemployment in which millions of Venezuelan are stuck.

This post deserves an epilogue

Today’s El Nacional carried this great cartoon of Ugo. In it we see a Chavez biking real fast but helped with kiddy wheels in the form of oil barrels. This is a brilliant representation of not only Chavez conditional political success but on how fragile the Venezuelan economy is. One helping wheel fails and we all go crashing real bad considering the speed.