The Trouble With Venezuela (Part One-and-a-Half)

After writing the first part of a critique on Venezuela’s present economy, I was busy preparing some bemused mutterings about the current foreign exchange regimen when I suddenly realized Bloomberg had beaten me to the punch with this article dated September 3rd 2007.

As befits a news agency with a reputation for unbiased and informative journalism, the headline was understated and non-partisan: “Chavez Economy Unravels as Bolivar Devaluation Pressure Climbs”  

There followed an article from Alex Kennedy and Matthew Walter about how bad things are in Venezuela. We are told that:

  • “Annual inflation has risen to 16 percent.”
  • “..consumers face shortages of meat, flour and cooking oil.”
  • “Chavez may have to devalue the bolivar to reduce the gap (between the official exchange rate and the unofficial parallel rate) and increase oil proceeds that make up half the state’s revenue.”
  • We are also reminded that Chavez calls capitalism “evil” and he’s currently on a “march to socialism”. Thanks guys.

There’s plenty more where those came from, but let’s start here. The present inflation rate is 15.9%. This compares to 17.2% last month and 16.5% at the beginning of 2007. If we look back at previous Augusts, we see August 2006 at 15.0%, August 2005 at 15.3% and August 2004 at 21.2%. Presumably our commentators …..oops sorry reporters wished to make it clear they were comparing a year over year inflation rate and that gaping 0.9% gap was suitably newsworthy.  Even so, they can’t go too far back as inflation is in fact substantially lower now than in previous years.

Now the food shortages. Helpfully, Kennedy and Walter explain further down the op-ed OOPS… SORRY AGAIN!! …the report that goods (and I quote) “have disappeared from store shelves in Caracas at times this year”. Worried about this alarming turn of events, your correspondent took time out to contact acquaintances in Caracas. Dear reader, rest easy. It would seem that the present time is not one of “those times” and the supermarkets have adequate supplies for the moment. Apparently mayonnaise stocks are a tad low, but the aforementioned staples of meat, flour and cooking oil are all in stock. Phew! 

As for the given reason why Chávez (not his administration or government, of course, but good ol’ Hugo himself) may have to devalue, it sounded a little odd. Why should Hugo have to devalue while running a balanced budget? Am I missing something? Is it to do with the amount of money one analyst speculates that Chávez will spend in the run-up to the constitutional reform vote? Is it because devaluation eases inflation…no no!! That can’t be right! Ok, is it because the parallel market is only 10% of all forex trade? No!…that can’t be right either! Hmm, so is it because… No… sorry… give up. 

And then there are the quotes. It would seem that Kennedy and Walter have a useful list of contacts for Venezuelan economy quotes. 

  • “For the macroeconomic house of cards not to come crashing down, the price of oil has to go up at double digit growth rates…” (Richard Hausmann, teacher of economics at Harvard)
  • “It’s like our director of marketing, our director of sales, our director of manufacturing is President Chavez,” (Edgar Contreras, food manufacturing executive in Caracas)
  • “We can’t go on like this.” (Edgar Contreras)
  • “People are invoking their right to circumvent what are very, very stiff (foreign exchange) controls..” (Alberto Ramos, Goldman Sachs)
  •  “A devaluation is a foregone conclusion. The only question is when.” (Richard Hausmann)
  • “The growth in imports is so out of whack that it’s choking off the local sector…” (Teodoro Petkoff, publisher of Venezuela’s Tal Cual newspaper)
  •  “The engine of growth isn’t the real economy. It’s the government.” (Teodoro Petkoff)
  • “This has been the worst managed oil boom in Venezuela’s history..” Richard Hausmann)

In the spirit of balanced journalism (they are after all journalists, not commentators, please remember) they gave us one quote from government circles:

  • “We’re not going to devalue no matter how much they pressure us,” (Finance Minister Rodrigo) Cabezas told reporters in Caracas on Aug. 31. “The so-called parallel market doesn’t dictate our fiscal, exchange or monetary policies.”

Now as a matter of fact, your correspondent happens to agree with some of those quotes and disagree with others. That’s fair enough, debate is a healthy thing etc. But when one sees so many voices giving a negative view of current affairs and only one supporter of the government who happens to be the very same finance minister pushing through these policies, it all seems a little lop-sided, does it not?

If this were the only example of this kind of journalism from news sources on Venezuela then I could rightly be accused of being just a bit too touchy. But to give just two more examples (from a list that would take up far too much RGE monitor bandwidth if expanded upon): 

  • On 25th January 2007, in the London Financial Times article “Cheap Petrol May Be Victim of Chávez’s Socialism”, reporter Andy Webb-Vidal told us Venezuela‘s inflation rate is already running at close to 25 per cent per annum”. In fact, Venezuelan inflation hasn’t been that high since early 2004. Today’s rate of 15.9% may not be the best of situations, but there’s no need for such …ahem exaggerations.
  • On September 1st 2007, Bloomberg reported the latest macroeconomic figures from Peru and Venezuela. Under the happy headline “Peru Inflation Slows in August as Bus Fares, Fuel Prices Drop”, Lima correspondent Alex Emery noted Peru’s month on month rate rose and the year-on-year rate dropped. Meanwhile, under the worrying headline “Venezuelan Inflation Accelerates on State Spending” Caracas correspondents Theresa Bradley and Steve Bodzin noted Venezuela’s month on month rate rose and the year-on-year rate dropped.  

Why not read that last one again and play spot the difference?

Back to those quotes, and to choose just one of them, “This has been the worst managed oil boom in Venezuela’s history,” said Ricardo Hausmann.  It’s an opinion, and a strong one at that, but that’s fine with us. Hausmann is eminently qualified to speak on the subject and his viewpoint is noteworthy. However there are plenty of achievements that counter such a comment. According to accepted and reliable sources, poverty levels have dropped dramatically. School attendances have quadrupled. The middle class is growing as a percentage of total population. Health care is now widely available where it was once scarce. Unemployment levels have dropped significantly. Salary increases have outstripped inflation in the last 3 years. All these improvements and more are arguably attributable to that oil boom, even without considering the political pressure of an attempted coup, a crippling oil strike and a recall election that stripped away development time between 2002 and 2004.

To hear that spending oil boom money on the poor constitutes bad management is all well and good, but why can’t we at least hear an opposite view from another eminent economist? It is of course a rhetorical question, but I feel like answering it anyway. It seems to me that we are not given balanced articles on Venezuela because reporters, controllers and editors are not interested in balanced articles on Venezuela, not even in the quality services like Reuters, Bloomberg, DJNW, WSJ, FT and all the rest. We are told Chavez has taken $17Bn from the central bank reserves, but we are not told about the Fonden reserve set up with a very large chunk of that money. We are told that Chávez has threatened to take over cement makers when all he said was the government wanted to look into said cement maker’s environmental record. The list goes on.

My conclusion is a simple request to the newswires: When it comes to Venezuela, more facts, more balance and less spin. Please. There are already enough opinions of all colours, flavours, sizes and shapes about Chávez without otherwise reliable services adding their two cents. I’m now going back to my charts and stats to try and write a real part two.

8 Responses to "The Trouble With Venezuela (Part One-and-a-Half)"

  1. Otaviano Canuto   September 3, 2007 at 8:01 pm

    I wish the dozens of lopsided articles on many matters that one sees everyday in the press could receive one-and-a-half notes such as this

  2. Anonymous   September 4, 2007 at 5:23 am

    Mark – you are so right about the commentaries…sorry reporting…on the Venezuelan economy.   From 1961 to 1998 the bolivar fell from 4.3 to the dollar to 517 the day Chavez took office in 1999. Correct me if I am wrong but this is a devaluation of 12023% or 325% per year. Even based on the parallel exchange rate of 4900, devaluation in the Chavez years has been 948% or 111.5% per year. Based on the official exchange rate of 2150 it has been 416% or 49% per year. Mathematica do not lie.  In the 1990’s, during the last “capitalist government” inflation only ever was under 30% (29.9%) in 1997 and for at least 3 years, even in 1995 when inflation hit 103%, wages were frozen, plunging everyone into more poverty and wipting out all but 4% of the middle class, which was 28.8% of the population in 1980.  These are the policies espoused by Ricardo Haussman, an hysterical, obsessed anti Chavez critic.  Interestingly enough, Bolivia is gradually implementing similar policies and as a result Bolivian fx reserves are at an historical high, since the rich European minority cannot siphon off the money from the central bank.  BTW – the 2002-2003 “oil strike” was nothing of the sort. It was a total sabotage of the industry by middle managers who walked off the job but left behind sabotaged computing controls and arranged the seajack of the PDVSA tanker fleet. It was not strike for improved wages or working conditions, but an organized attempt to overthrow the government. Let’s all get our facts straight.

  3. Guest   September 4, 2007 at 6:19 am

    This news reports are exaggerated and probably bad journalism but I feel they are closer to the truth than your own reporting. Indeed the government is struggling to control prices, recent inflation slowdown in July and August have to do more with reduction on VAT and price controls that the increasing gap between demand and offered caused by the expansionary fiscal policy (and by measures like these VAT cuts and price controls). Inflation reached 20,4% early in February and probable will finish close to this rate in December.  Price tension tend increase the gap between official and market exchange rate end therefore the pressure on the government to devalue. Obviously they resist this move because they are worried about the effect on inflation.

  4. Eugene Weixel   September 5, 2007 at 3:23 am

    Thank you for this breath of fresh air. A fundamental in a democracy is an informed citizenry. So many journalists are failing to remember their responsibilities.

  5. ossipago   September 5, 2007 at 8:17 am

    I enjoyed the article and look forward to part two. In this article you say “according to accepted and reliable sources…” I was able to find in basic searches corroboration for most of your points, but the quadrupling of school enrollment and the growth of the middle class was more elusive. Could you offer sources / footnote possibly?

  6. Guest   September 5, 2007 at 5:50 pm

    A most excellent analysis of Venezuela. Good to hear a more balanced view of the country!

  7. mark turner   September 5, 2007 at 6:33 pm

    Thanks for the comments and also to the people who took time to send me a mail.   Not really keen on seeing somebody use the anonymous button to insult an established professor of economics in such a gratuitous way. If you have a criticism, it’d surely get more traction if it were presented in an adult way with a decent critique (and perhaps with a name). This is just the kind of thing that I’m trying to rally against no matter which side it comes from*. From what I understand, constructive criticism is more than welcome in this sphere as it keeps debates alive and minds sharp. On the other hand, insults are just insults, wherever you may go.  Again, thanks to all for taking the time to comment.   *Ending a sentence with a preposition reminds me of a joke. As this isn’t the post with the greatest gravitas of all time, I will indulge:  A priest was waiting at a bus stop, when along comes a skinhead punk rocker who says to him,  “Oi you!..what time is the next bus at?”  The priest replies, “My dear boy, don’t you realise that you cannot end a sentence with a preposition?”  The rocker says, “Oh…alright..sorry ’bout that.”  Priest, “That’s quite alright.”  Rocker, “So anyways..what time is the next bus at you bastard?”

  8. mark turner   September 5, 2007 at 7:22 pm

    ossipago, 

    As the idea behind this space is not to be too “paper-like” (in my view, anyway), I decided not to add footnotes or references. But i am happy enough to add them on here.
     
    Regarding the increase in schooling: 
     
    http://www.sisov.mpd.gob.ve/estudios/158/LOGROS_AGOSTO2007.pdf 
     
    The relevant chart is: Matrícula Escolar y Número de Escuelas Bolivarianas Período escolar: 1999-2000 al 2005-2006 
     
    You’ll see that the education stat mentioned in this brief post is only one of many statistical improvements to the Venezuelan education system.

     

    As for the reference to the middle class in the blog, this is an “El Universal” news article dated 30th July. For confirmation of their numbers the place to go to the BCV website (it’s very good, by the way)

    Middle-class households prevail in Venezuela, Central Bank says

    The Central Bank of Venezuela (BCV) published its survey of household budgets, with data collected in November 2004-November 2005, showing that Venezuela is a country where the middle class is gaining ground, while the number of households living in extreme poverty and the number of households in high-income strata are shrinking.

    BCV research based on Graffar method, which focuses on the profession of the head of the household, education level of the wife, main source of revenues and lodging conditions. In this way, the bank groups households in five different strata.

    The top rank, comprising the high-income households, includes 5.8 percent of households in Venezuela. The second and third positions comprise 64.9 percent of households, with the fourth and fifth ratings including 27.4 percent and 1.9 percent of households.
      
    Compared to 1997, when the previous BCV survey was conducted, the number of households in stratum 1 fell 0.8 percentage points. Stratum 2 soared 3.6 percentage points, stratum 3 climbed 0.1 percent, and strata 4 and 5 dropped 1.6 percent and 1.1 percent, respectively.

    In 2005, the monthly revenues of the 357,776 households in the top rank averaged USD 1,822.75. Average revenues for the 1,232,000 households in the second stratum were USD 1,138.64. The 2,750,000 households comprising the third rank earned USD 747.92. In the fourth rank, including 1,682,000 households, revenues averaged USD 434.95. And for 119,378 households in the lowest rank, revenues averaged USD 212.56.

    According to BCV, 30 percent of Venezuelan households are living in poverty, with 10 percent of them in extreme poverty.