<http://www.ft.com/cms/s/0/d83b3294-51b4-11dc-8779-0000779fd2ac.html> Chávez's iron grip on economy 'unsustainable'
By Benedict Mander in Caracas
Published: August 23 2007 22:36 | Last updated: August 23 2007 22:36
President Hugo Chávez's tightening grip over Venezuela's economy is generating distortions that economists fear could, paradoxically, eventually lead to a loss of control.
Price controls, currency controls and negative real interest rates are just some of the elements that have contributed to one of the highest rates of inflation in the world and a substantially overvalued exchange rate.
"This regime is not sustainable. It is only propped up by the high price of oil," says Jose Guerra, a former director of research at the central bank.
"Venezuela has already experimented with these policies in the past and it ended up going broke."
The controls introduced by Mr Chávez are, in part, an attempt to offset the inflationary effects of large-scale government spending, afforded by record oil prices, to boost economic growth.
In this, the government has succeeded: growth has averaged 12 per cent in the past three years, leading to a drop in the rate of poverty from 43.9 per cent when, Mr Chávez was first elected in 1998, to 30.4 per cent in 2006.
This has won Mr Chávez increasing levels of support from the electorate, who are expected to vote in favour of his proposed reforms to the constitution in a referendum that would allow him to be re-elected indefinitely.
But his economic policies have triggered high levels of consumer demand that now far outstrip the economy's productive capacity, with negative real interest rates providing consumers no incentive to save their cash.
Unbridled spending combined with price controls that are intended to check the inflationary effects of such policies has lead to scarcity of basic goods such as milk, eggs, beans and beef.
To counter this, imports have tripled in the past three years in an effort to make up for the economy's inability to support demand. But rising inflation and an increasingly overvalued exchange rate will continue only to make imported goods even more attractive, just as non-oil exports become too expensive on world markets. This would make Venezuela ever more dependent on oil, which accounts for almost 90 per cent of exports.
Ironically, one of Mr Chávez's key policies is to stimulate "endogenous development" to steer Venezuela away from its dependence on oil.
"If the price of oil suffers a significant world decline, the retail sector will not be able to support the current level of imports without the country sliding into immediate trade deficit," says Mark Turner, an analyst at Hallgarten, who adds that central bank reserves would not last long under such pressure. "Recession would be a real threat to the economy as well as the administration running it."
But Mark Weisbrot, an economist at the Centre for Economic and Policy Research, argues that the Venezuelan economy "does not fit the mould of an 'oil boom headed for a bust'."
He says that a large current account surplus, rising foreign exchange reserves, and low levels of external debt are enough to insulate the economy from any imminent danger, although he concedes that the currency is at least 30 per cent overvalued in relation to the dollar.
"This is something that will have to be remedied if Venezuela is going to pursue a long-term development strategy that diversifies the economy away from oil," he says. However, he concedes that the government is reluctant to devalue due to the effect this would have on inflation.
<http://www.cepr.net/index.php?option=com_content&task=view&id=1250&Itemid=77> New CEPR Paper Looks At Venezuela's Economy During the Chávez Years
For Immediate Release: July 26, 2007
Contact: Dan Beeton, 202-293-5380 x104
Washington, DC: A new paper from the Center for Economic and Policy Research looks at the Venezuelan economy during the last eight years and finds that it does not fit the mold of an "oil boom headed for a bust," as is commonly believed.
"There's no obvious end in sight for Venezuela's current economic expansion," said economist Mark Weisbrot, Co-Director of the Center for Economic and Policy Research and co-author of the paper "The Venezuelan Economy in the Chávez Years." [Download the paper at <http://www.cepr.net/documents/publications/venezuela_2007_07.pdf>.]
The paper notes that Venezuela's economy was wracked by political instability for the first four years of President Hugo Chávez's tenure, but has grown steadily and rapidly over the last four years, after political stability returned to the country following the oil strike of December 2002 to February 2003.
Since the bottom of that downturn in the first quarter of 2003, Venezuela's real GDP has grown by 76 percent.
Moreover, the private sector is still a larger share of the economy than it was before President Chávez took office.
In real (inflation-adjusted) terms, social spending per person has increased by 170 percent during the period 1998-2006. But this does not include the state oil company PDVSA's social spending, which was 7.3 percent of GDP in 2006. With this included, social spending was at least 314 percent more in 2006 than in 1998 (in terms of real social spending per person). This has brought about significant gains for the poor in health care, subsidized food, and access to education, some of which are detailed in the paper.
The official poverty rate, which measures only cash income and does not include such advances as increased access to health care and education, has dropped by 31 percent from 1998 to the end of 2006 – from 43.9 percent of households to 30.6 percent. Measured unemployment has dropped from 15 percent in June 1999 to 8.3 percent in June 2007.
The authors also look at fiscal, monetary, exchange rate and other government policies, as well as investment and the sustainability of the expansion. They note that the government faces significant challenges over the intermediate run in controlling inflation and bring Venezuela's currency to a more competitive level. However, the country's declining public debt (as a percentage of GDP), large current account surplus, and the accumulation of reserves have given the government considerable insurance against a decline in oil prices. This favorable macroeconomic situation has also left the government with much flexibility in dealing with inflation and the related imbalance in the exchange rate. The authors therefore conclude that – contrary to popular belief -- there is no imminent threat to the country's current economic expansion. -- Yoshie