The Center for Economic and Policy Research, the Washington think tank that saw the housing bubble when everyone else was saying “this time it’s different,” has a paper out about Venezuela’s economy (PDF). Marc Weisbrot and Rebecca Ray say the country’s economy may already be out of recession and is poised for a much healthier recovery than the big-time bank economists think. Weisbrot repeats his main points in an editorial in the Guardian of London, saying that the broadcast and print is ignoring good news.
As regular readers know, I try not to be polemic here. This is mostly a news blog. And to be clear, I like CEPR. I am a contrarian by nature and I appreciate that they are there, pointing out groupthink on economic issues. This is especially important in cases like Venezuela or Chile, when there is indeed groupthink in press and political circles, causing people to see only foolishness in Venezuela and only valor in Chile. Weisbrot is right to criticize the Chicken Littles who have for a decade insisted that oil output is on its way to negative numbers and taking Chavez down.
However, there’s a lot to complain about in this paper, and since nobody else is taking the bait…
The authors say Venezuela’s economy will be OK because of a mix of private investment and public investment. They say private investment recovered quickly after the 2003 recession, indicating it may do the same in 2010-11. That ignores the many differences between 2003 and now. Businesses now lack credit both in Venezuela and abroad. There is an increased fear of expropriation. (The nationalization of the Lake Maracaibo maritime industry, the Puerto Ordaz hot briquetted iron industry, the new Caracas Sambil shopping mall and farmland have showed locals that they will be screwed even harder than foreigners if the president decides to take over.) The price of oil is at a plateau well below its recent peak, so there is little expectation of demand growth. Without expected demand growth, why invest in bigger factories, stores or real estate developments?
Weisbrot and Ray say the government can continue to spend, as it has a relatively low debt-GDP ratio of 18%, citing official numbers. The problem here is that official figures ignore a lot of upcoming payments that are effectively debts, even if they aren’t being recognized as such. For example: I told you before that PDVSA is making no provision for its ConocoPhillips arbitration, to the point of not once mentioning the case in the 2009 annual report. But Oil Minister Rafael Ramirez recently told Reuters the Texas company is suing for $30 billion (and we have our ways of knowing that he’s telling the truth). Caracas newspaper El Mundo happened to run a story a few days ago, excerpted here about the real debt. They used conservative figures for arbitration payments and added in the value of Venezuela’s pre-sold oil and aluminum as debt, giving a public debt figure almost twice as large: $112.9 billion. I don’t know how the arbitrations are going to go, but the worst-case scenario is well above that figure. Even being conservative, that’s 32% of GDP on a PPP basis. The debt-GDP ratio was higher in 2002-04. Other than that post-oil-strike period, the ratio hasn’t been so high since 1996.
The point of all this is that the public sector may not have much power to maintain or revive internal demand. The government was already spending full speed before the crash. The only way to keep up the pace now that countercyclical spending is needed would be to issue debt, but lenders are demanding high interest rates, making it harder to borrow.
The authors anticipate this argument, saying, “In the case of a collapse of oil prices, the government has considerable borrowing capacity. This was demonstrated in April with a $20 billion credit from China.” But that makes no sense. That’s like saying someone who just drove 500 miles on a single tank of gas has shown that he has plenty more fuel in the tank. The $20 billion credit from China used up borrowing capacity, it didn’t show anything about the country’s future ability to borrow. OK not quite true — the Economic Hit Man-style terms, in which much of the money will go straight from China Development Bank to Chinese companies, without ever visiting Venezuela, shows that the country is already hurting for lenders.
Finally, the authors quite reasonably throw out the oil factor. They get their numbers wrong, but their point is right: Venezuela has a buttload of oil. It may soon have the world’s biggest government-recognized reserves. You can never bet against a country with that much oil. But there’s even a problem with oil:
1. The old Maracaibo oilfields are drying up, badly. There is room for recovery but drilling and maintenance have plummeted since nationalization of the maritime industry last year. I was just out talking to people in the region, and I talked to people in positions to know who are convinced that production is below 700,000 barrels a day in a basin where proper maintenance would allow 1.2 million barrels a day of output.
2. The new eastern oilfields like Furrial are at risk of similar decline because of the nationalization of the gas compression facilities there last year. For now, they are the cash cow.
3. LNG and the Orinoco Belt are way behind schedule. As far as I know, and I may be wrong about this, the planned new Orinoco Belt projects won’t provide government revenue for at least five years because they will start with “early production” that reinvests all its money in the further development of the project. I believe this reinvested money is tax-free, but it may be subject to taxes or royalties. I’ll find out. Even if it is, the income will be pretty slim until at least 2015 unless oil prices rise a lot.
4. Weisbrot and Ray say oil prices will rise: “U.S. Energy Information Administration forecasts oil prices at $85 per barrel over the next 5 years, which is 20% above current price.” First of all, on the day the report was published, crude was at $74.99, so that 20% should say 13%. Second, I followed the footnote and don’t see anything about $85 a barrel. What I see is, “The Reference case assumes that the world economy— and liquids demand—experience significant recovery in 2010, with total liquids consumption returning to the 2008 level of just under 86 million barrels per day.” So sure, if the 2010 recovery is “robust,” great. I suggest the authors contact an economist named Mark Weisbrot at CEPR, who recently wrote that “a double-dip recession” was “a real possibility.” So if the recovery isn’t robust, and Iraq oil comes onstream, and non-OPEC countries like Brazil and Colombia keep using oil development as their economic stimulus plan — What does the EIA say for the low-price scenario? Prices stabilizing for the long term at $51 a barrel. Ouch.
Update: It occurs to me I didn’t write a conclusion. That’s because I’m not an economist and I don’t have either the international knowledge or the economic models to help me evaluate what will happen with Venezuela’s GDP or felt reality in coming quarters. It could be that after all, Weisbrot’s and Ray’s conclusion is correct, that the economy will recover sooner or more strongly than the banks say. Or maybe the considerations I’m raising here would change the outcomes a lot. All I’m asking is that both authors and audiences think about these factors. As I said up top, I like CEPR and see a need for people who question mainstream economic groupthink. But in writing such an analysis, it doesn’t help to use inaccurate or overly optimistic assumptions.
Finally, a note to Mr. Weisbrot in response to his column in the Guardian, since I’m fairly sure that he’s one of about three people who will make it this far into this blog post.
Mark: There are indeed biases in the press, but when it comes to crime, we in the international media have been giving Chavez a pass for years. Polls from all political leanings have found crime to be the #1 concern for Venezuelan people. The international press never had a good hook for the story, because there were no politicians raising a stink, no reliable statistics, and no single shocking massacre to make editors take notice. Now, as you note, politicians opposed to Chavez are gaining popularity because of crime. Contrary to your sideline quarterbacking, that is a news peg.
I agree that fears of crime can be exaggerated. However, the recent crime stories in the foreign press are far from extreme.
In three years in Venezuela, I have been robbed four times, one of which involved a young man whacking at my arm with a machete and then ordering me down an isolated trail in the woods. Only my quick dive saved my arm; who knows what I saved by running away and escaping.
Of course I didn’t report any of the robberies to the police, who are generally to be avoided. In fact, I have faced 3 police shakedowns by the Chavez-controlled Metropolitan Police.
In 2009, in my Caracas office, there were five Venezuelan employees. Two of them had siblings murdered in the course of the year. In the last three days, murder has entered my life twice more. Two days ago, I stayed with a friend who was being very cautious about closing the various gates on her building, because one resident in was killed in the lobby last year. Yesterday another friend, a tango dancer, told me she couldn’t get up the energy to go to this year’s tango championship after the event’s host was killed on the night of the semifinals — allegedly by the police officer he had hired to guard the club.
I was just traveling through the interior of the country, and every single Venezuelan I interviewed who had any skepticism about Chavez gave crime as the reason. I met one guy, a 23-year-old Chavez supporter, who said it has always been this bad, parroting the president’s line. Everyone else says it’s gotten much worse. The most touching story may have been the simplest. A 67-year-old empanada cook, pulling apart a chicken with weathered fingers in her beat-up little shop where they sell big meals for $3, told me that in the evening, she used to sit in her doorway in Barquisimeto and watch the neighbors. Now, she said, nobody sits on their stoop, out of fear.
It may be true that some articles use inapt comparisons or dodgy statistics. And you’re right that there is an annoying media trope in which Chavez is always bad. However, the point is unequivocal: Venezuela has grown more violent under Hugo Chavez, with poor people taking the brunt of it. If you don’t accept this reality, you not only undermine your credibility, you disrespect the daily struggles of the same poor Venezuelans you claim to support.