Tuesday, September 13, 2005

The Industrial tissue of Venezuela

One indicator of the good health of an economy is the measure of its manufacturing capacity. Even when manufacturing is a small portion of the economy, that it grows, that it generates new jobs, is always a sure sign that the future prospects of a country are good.

In the past two years numbers have been thrown right and left to try to pass the effect on Venezuela of the amazing increase in oil price as a genuine economic growth. Indeed, early this year there was a sense, already fading, that things might be going a little bit better. Many reasons for it, but my own explanation was that all the government spending has been stimulating consumption and some sectors, well, they had to grow. But it is an artificial growth, very much threatened by other governmental polices such as the massive foodstuff import through Mercal to distribute subsidized governmental grocery stores. Food plans do work for a while but rarely, if ever, do they promote food stuff production. For example Venezuela which used to produce all the chicken or meat it consumed, now must import a fair share of it.

But I digress as for today's point. Tal Cual published the numbers from Conindustria (a manufacturers association) which simply count how many manufacturing plants exist in Venezuela, regardless of the sector they belong to. As usual I did not like the presentation in absolute numbers so I normalized it all to 1996 as 100%. A little bit of Excel and graphics and you can see the result below. I have included the three top political moments in Venezuela's recent history, those that conceivably would have affected the most manufacturing creation: Chavez election in 1998, the April events of 2002 and the 2002-2003 strike.

Now, before we interpret these results, we must realize that these cannot explain all of Venezuelan economical performance as it does not look at social programs or to the large creation of cooperatives (from which we have no hard data as to their economic input except unverifiable government numbers), nor does it include the public sector activity. We are here looking at this graph as a reflection on how the general economy confidence and diversity is affected. And the result is not good.

To simplify the data shown by Tal Cual I have limited myself to three lines, one from the total manufacturing plants (red), one from the large manufacturers (more than 100 workers, in fuschia) and one from the small manufacturers (from 5 to 20 workers, the seed for future medium and even large plants, in yellow). And I have added the ratio between small and large manufacturers, a ratio which should be increasing in a country which is experiencing development, exploring new economical options, and decreasing in a country where only established business survive and entrepreneurs are disheartened. Unfortunately for Venezuela this curve (dotted sky blue) tends to drop!

The striking result is that the decline has started before Chavez and was greatly affected by the recession of 1999 and 2000. During that time a combination of low oil prices and a pugnacious period for a new constitution conspired together to close a considerable number of business. However Chavez search of excuses for his management will not be satisfied with these numbers. The tendency to decrease has not been either dramatically exaggerated by the coup or the strike and is far from reverting by the end of 2004 in spite of the vaunted recovery: more production but no more private business creations! If the small business and the total numbers did seem to stop their decline, the larger concerns kept falling all through 2003 and 2004.

Clearly the private sector is not investing, is not generating jobs besides what it might do to recover its pre Chavez production. This graph is unfortunately yet again another example on how easy it is to destroy the economic texture of a country and how difficult it is to create it. The enabling law of 2001, the one which started all the political troubles of the recent years, is the main hindrance for a strong real manufacturing recovery.

The government has no real plans, or at least no plan that make sense. Cooperatives can be a good solution but not when they are organized as ways to get government subsidies as is the case for many of those created these days, thinly disguised cash distribution programs. And the congestion proposals are only scaring the private sector (more on this some other day). In fact the only response is a threat to seize around 700 closed or underperforming manufacturing plants (in english here). As if these businesses, probably closed for economical reasons for now years as seen on the graph above, will just restart because the government wills it so. Or will it all be another cash redistribution program to Chavez newly rich friends that will benefit from the state forcing the sale on the cheap of under used installations? The more than likely unfortunate answer shall not be much delayed.

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