[R-G] FT: Chávez’s Iron Grip on Economy 'Unsustainable' / CEPR: The Venezuelan Economy in the Chávez Years

[Yoshie Furuhashi]

Surprised to see the FT cite Mark Weisbrot. -- Yoshie

<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