Since no one else is taking the bait

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.

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26 thoughts on “Since no one else is taking the bait

  1. Juan Cristobal

    Setty,

    Nice post, although I can summarize Weisbrot and Ray’s point as follows: if the Venezuelan government benefits from a positive oil shock, and/or if they are allowed to borrow, and they spend all that cash, the economy will veer out of recession.

    I find it hard not to see that as a tautology more than an analysis.

    I guess I’m person No. 2 who read the entire post!

  2. Quico

    Oh gawd. Weitbrot. What is there to ad at this point?

    One point that really gets me about his analysis is his AMAZING blindspot on Inflation, which he just refuses to recognize as a problem. Amazingly, inflation gets described as only a problem to the extend that it slows GDP growth. Which entirely misses the rather more direct role inflation has in eating into poor people’s purchasing power, a problem Mark just can’t seem to wrap his mind around at all.

    In my weekend econopsychoanalist mood, I can help but think of the insidious way the State’s interests get conflated with the people’s interest in this kind of analysis. Little by little, “el pueblo” becomes an abstraction, just blurred out of view, as they start to take it as a simple axiom that the state’s interests are always congruent with the people’s. And so, if people’s grocery bills are rising 30% a year and their income is raising 20%, that’s a-ok with this guy.

    Ugh…

    1. Mark Weisbrot

      I have ignored Francisco Toro’s (a.k.a. Quico) ignorant remarks and insults for several years now, largely because he is not worth responding to, but for some reason I am going to waste a few keystrokes here.

      Once again, he accuses me of not understanding a basic economic concept that he himself does not understand.

      He writes: “if people’s grocery bills are rising 30% a year and their income is raising 20%, that’s a-ok with this guy.”

      So, let’s see, is this what happened in Venezuela during the last expansion (Second quarter 2003 to end of 2008)? Or are these just numbers that Toro is making up that have nothing to do with Venezuela? Here is one way to tell: the poverty rate fell by half during this period and extreme poverty by more than two-thirds. The poverty numbers are based on survey data that measures *real* cash income. They do not include other gains for poor people such as access to health care or education. So, if Toro’s story is true, that the income of the poor was falling behind inflation, while inflation was increasing during this period, the poverty rate would have increased, not dropped dramatically.

      Sorry to waste the readers’ time by responding to this garbage.

      Now, to respond to Setty, who at least knows how to carry on a civilized conversation. He writes:

      “The IMF and banks have a record for being overly negative and are blithely dismissed by the government. That’s no reason to be unduly positive.”

      We didn’t make any forecasts for the economy, so I’m not sure how we could be seen as “unduly positive.” The only prediction was a contingent one, i.e., that *if* the government maintains high levels of aggregate demand, the economy will grow. This is pretty basic, unless you have some reason, e.g. a foreign exchange constraint, to argue that the government can’t do that. Even taking into account all of the contingent liabilities of the government that you mention, and worst case scenarios, I don’t see how Venezuela runs into balance of payments problems. If you can make that case, then you have a case that the government cannot stimulate economic growth.

      It is also worth noting that we have been right about the Venezuelan economy for the past seven years, while the others have been wrong for at least five or six of these years.

      As for the crime issue, I never said that the homicide rate hasn’t increased under the Chavez government. So I’m not sure who you are referring to there.

      Here’s a prediction I will make: the government will reduce the homicide rate sharply in the next couple of years, as they already apparently have in Catia with a pilot program http://www.alertnet.org/thenews/newsdesk/N0397341.htm?utm_source=twitterfeed&utm_medium=twitter , and most of the media will pretend it hasn’t happened for as long as they can, as they did with the poverty reduction (see http://www.globalexchange.org/countries/americas/venezuela/venezuelan_poverty_rates_2006_05.pdf )

      1. ow

        Mark, I think you are being somewhat disingenious here.

        It is true that poverty has been reduced dramatically and it is also true that consumption is way up. And we could talk about why those things are though surely they should be no surprise given the huge oil boom and Venezuela has seen this before.

        But it is also true that the wages of people who have jobs are falling as their wages aren’t keeping up with inflation.

        The BCV Informe Annual came out last month and I can only assume you haven’t read it. Please do. Go to page 114 and you will see real wages listed from 1998 through 2009. With 1998 at 100 the public sector wages in 2009 were at 101.6 (ie, up slightly). Private sector wages were 79.1. And total average wages were 85.3. So FT is in this sense correct – inflation has outpaced wages during Chavez’s tenure. And no, they haven’t even gone up over the period of the oil boom, sad to say.

        If you look at page 113 you will see a comparison of the minimum wage with canasta alimentaria. It has also not kept pace over the course of the oil boom.

        As to your policy recommendations I find it really, really sad that you think the most important thing is for the government to use its oil revenues to boost agregate demand. Only if OPEC allows them to dramatically increase production and oil prices go higher still would Venezuela have the financial resources to boost peoples standard of living significantly beyond where it is now. Keeping oil as the only wealth generating sector in the economy and using its output to boost consumption rather than productive investment is a recipe for disaster. You could do the Venezuelan government a lot more good if you could explain that to them than you will do by publishing misleading Op-Ed articles.

        1. ow

          BTW, I almost forgot the most outlandish part of his article.

          Mark says that it was the opposition that predicted a spike in inflation as the result of the devaluation. Well, given that the opposition does nothing but oppose every single thing that Chavez does I am sure they did predict high inflation after the devaluation happened.

          However, it was the government itself which used the bogus inflation arguement as a reason not to devalue for years. It was obvious for many years that the currency valuation was hugely out of line and taking a toll on productive sectors of the economy. Yet the government steadfastly refused to devalue and Ali Rodriguez, Giordani and others routinely ruled out a devaluation saying, among other things, that it would increase inflation significantly and therefore would be unwise (this line was also taken by people like Greg Wilpert in discussions I had with him on Venezuelanalysis).

          So let me get this straight, the government itself refuses for years to devalue using the bogeyman of inflation as their excuse and then you say it was the opposition that predicted inflation?!?!?!?!?

          Sorry, but that is very, very dishonest. I know you have followed the debates on economic policy in Venezuela closely enough to know better.

          For the record here is the article where Wilpet argues against me on devaluation saying that it would spur high inflation:

          http://venezuelanalysis.com/analysis/2667

        2. Mark Weisbrot

          u should read what i wrote before responding. I didn’t say anything about “Keeping oil as the only wealth generating sector in the economy and using its output to boost consumption rather than productive investment.” Perhaps you have never heard of public investment.

          It’s amazing how none of you can respond to an argument that is in writing, without making shit up about what was written. I would be embarrassed if I did that. Note that I quoted above what you wrote instead of trying to pretend that you wrote something else. That is the proper way to debate something. Anything else is a waste of time.

        3. ow

          “u should read what i wrote before responding. I didn’t say anything about ‘Keeping oil as the only wealth generating sector in the economy and using its output to boost consumption rather than productive investment.’ Perhaps you have never heard of public investment.”

          perhaps you should read more attentively. That sentence didn’t refer to what you are saying, it referred to what the Venezuela government is doing.

          As to public investment I am fully aware of it and how some countries have used large amounts of it to assist their development. Unfortunately I see little worthwhile public investment in Venezuela, particularly when it comes to investments that would boost their tradables sector. Do you? If so, please share.

          I see little value to your continued efforts to point out that the main stream media and international organizations such as the IMF lie and give distorted information regarding Venezuela and its economy. That stuff may be annoying but in the end it has little impact (and curiously you never call out Venezuelan government officials when they give blatantly false information on the economy).

          On the other hand, Venezuelan policy makers are carrying many other policies that may be very harmful to the Venezuelan economy and result in it remaining both underdeveloped and reliant on a single commodity. Yet other than some meek criticisms of their exchange rate policies you are content to say nothing. Even given that you don’t have the ability to change Venezuela’s policies I believe it is a mistake to be so silent with respect to these errors as it is those errors, not the distortions of the international media, that will doom both the government and the legitimate accomplishments that it does have.

      2. Kepler

        I am very glad Ow answered to Mr Weisbrot. I have wondered what really motivates people like Weisbrot to write the kind of stuff he writes…for goodness sake, he is even said to be an economist and yet…

        I wonder how he feels at the end of the day…whether he feels he is defending some higher cause and because of that he has to hide the obvious…el fin justifica los medios…or else, reality is simpler.

        He should know there is an oil cycle and a country has a minimum of running costs to cover before social programmes are advanced. He should have done the obvious: first take a look at price evolution across a couple of decades (average for 1998: about $12 barrels and even if prices were higher before, they were still way below what they have been now).

        After that he could have gone into just very basic maths and calculated what Ow did, in detail.

        Simply put, Venezuelans just go the crumbles from the biggest oil boom in decades and those crumbles, although definitely more than what they would get in the nineties, haven’t been proportionate.

        The biggest winners have been people like Ramírez Chacín with thousands and thousands of acres of new land or governor Bolívar, the governor of Cojedes, who has been building his villas…or the Chávez clan in the Duchy of Barinas through all their front men.

        Regarding your death toll prediction: it is not so difficult to reduce a murder rate that has reached over 70 murders per 100 000 inhabitants now. Really. What about reducing the murder rate to the already very high levels we had when military man Chávez got elected? In 1998 the murder rate was 19 x 100 000.
        Please, and when someone is found with 10 bullets in his brain but no criminal around tottering a gun, don’t count the dead just as “violent death, unknown reason”.

      3. sapitosetty Post author

        MW: We didn’t make any forecasts for the economy, so I’m not sure how we could be seen as “unduly positive.” The only prediction was a contingent one, i.e., that *if* the government maintains high levels of aggregate demand, the economy will grow. This is pretty basic, unless you have some reason, e.g. a foreign exchange constraint, to argue that the government can’t do that. Even taking into account all of the contingent liabilities of the government that you mention, and worst case scenarios, I don’t see how Venezuela runs into balance of payments problems. If you can make that case, then you have a case that the government cannot stimulate economic growth.

        You said the Venezuelan economy may already be out of recession. That sounds to me like a forecast, even if you hedge it a bit. Like OW, I have never heard of anyone using seasonally adjusted numbers in Venezuela, but like I said before (now below) — not my specialty. I’m the oil guy.

        It is also worth noting that we have been right about the Venezuelan economy for the past seven years, while the others have been wrong for at least five or six of these years.

        I didn’t include this because I’m not sure about it, but I think that there is just one indicator that has made the difference between good and bad predictions over the years — oil output. You have taken government numbers relatively seriously, while the banks always discount output to a much lower level. The thing is, the government is gradually recognizing lower oil exports, while the outside estimators are gradually recognizing higher exports. Between those two trends, I expect the banks to be more accurate going forward.

        As for the crime issue, I never said that the homicide rate hasn’t increased under the Chavez government. So I’m not sure who you are referring to there.

        I didn’t say you had said anything one way or the other about it. I said you need to recognize the problem. What that means is, if you’re going to write about crime, you need to not just offhandedly mention the “high murder rate” but recognize — say — that it’s getting worse.

        I am not saying this to try to humiliate you. I want you, and your readers, to remain connected to reality. A reader in London who has never been to Venezuela is likely, like some commenters on the Guardian site, to leave your article with the idea that crime is just a bogeyman being invented to slander Chavez, and that the press is just writing in service of the opposition’s political goals. The opposite is true. Crime is a major problem, and the reporters I know who cover it are writing in service of the many people they know who have been kidnapped or killed. The political aspect is a news peg because it really is affecting Chavez’s hold on power. This is not the result of oppo propaganda or (as you hint in your intro) U.S. foreign policy goals. People in Venezuela who have always supported Chavez are abandoning him because too many of their family members and neighbors are getting killed.

        For all these words, I don’t expect to convince you of anything, any more than I expect to convince a bank that Venezuelan oil output is somewhat higher than their ex-PDVSA consultant has told them for years. For years people have criticized your use of the depths of the 2003 recession as your baseline, but you keep doing it. When discussing the Bush Administration, do you use the depths of the 2002 recession as your baseline? If anything, that would be more fair, as Bush came in at the end of a bubble, and there was nowhere to go but down, while Chavez came in with the economy in such bad shape that people wanted to throw the bums out and replace their constitution.

        1. Mark Weisbrot

          MW: We didn’t make any forecasts for the economy, so I’m not sure how we could be seen as “unduly positive.” The only prediction was a contingent one, i.e., that *if* the government maintains high levels of aggregate demand, the economy will grow. This is pretty basic, unless you have some reason, e.g. a foreign exchange constraint, to argue that the government can’t do that. Even taking into account all of the contingent liabilities of the government that you mention, and worst case scenarios, I don’t see how Venezuela runs into balance of payments problems. If you can make that case, then you have a case that the government cannot stimulate economic growth.
          __________
          Setty: You said the Venezuelan economy may already be out of recession. That sounds to me like a forecast, even if you hedge it a bit.
          _________

          MW: You’re reaching here. You accused us over being “unduly positive” about the economy. In the context of what u wrote (take a look at it), that looked like u meant the overall future, not one quarter. If you were just talking about one quarter of data when u said “unduly positive”, maybe you should have specified that.
          ____________

          Setty: Like OW, I have never heard of anyone using seasonally adjusted numbers in Venezuela, but like I said before (now below) — not my specialty. I’m the oil guy.
          __________
          MW: Check out the Venezuelan Central Bank web site some time, quarterly GDP is seasonally adjusted, but there’s a 6 month delay before they do the adjustment. All we did was do the adjustment in a timely manner, as the US and European governments do. If you read the paper, it explains the purpose and rationale of seasonal adjustments.
          ———————
          MW: It is also worth noting that we have been right about the Venezuelan economy for the past seven years, while the others have been wrong for at least five or six of these years.
          ____________
          Setty: I didn’t include this because I’m not sure about it, but I think that there is just one indicator that has made the difference between good and bad predictions over the years — oil output. You have taken government numbers relatively seriously, while the banks always discount output to a much lower level.
          _____________

          MW: I don’t know what this has to do with anything — Morgan Stanley, Fitch Ratings, the IMF — they are all using the same GDP numbers.
          ___________________
          Setty: The thing is, the government is gradually recognizing lower oil exports, while the outside estimators are gradually recognizing higher exports. Between those two trends, I expect the banks to be more accurate going forward.

          MW: As for the crime issue, I never said that the homicide rate hasn’t increased under the Chavez government. So I’m not sure who you are referring to there.
          _______________
          I didn’t say you had said anything one way or the other about it. I said you need to recognize the problem. What that means is, if you’re going to write about crime, you need to not just offhandedly mention the “high murder rate” but recognize — say — that it’s getting worse.
          ____________

          MW: OK it’s gotten worse (It’s not clear that it’s actually getting worse right now, i.e. this year). Thanks for telling me, I couldn’t have figured that out from all of the articles I cited that said that. Now you can criticize me for all the other things I didn’t say when writing about the media’s exaggeration and campaigning around the issue. Again, you are reaching here, trying to imply that I am dismissing something because I was writing about something else.

          Here’s what you wrote:

          “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.”

          Who exactly were you referring to here? Who “doesn’t accept this reality?” Another made-up straw man argument.
          ___________________

          Setty: I am not saying this to try to humiliate you. I want you, and your readers, to remain connected to reality. A reader in London who has never been to Venezuela is likely, like some commenters on the Guardian site, to leave your article with the idea that crime is just a bogeyman being invented to slander Chavez
          __________
          MW: Unlikely. But nice try.
          ______________
          , and that the press is just writing in service of the opposition’s political goals. The opposite is true. Crime is a major problem, and the reporters I know who cover it are writing in service of the many people they know who have been kidnapped or killed. The political aspect is a news peg because it really is affecting Chavez’s hold on power.
          ___________________

          MW: Well, that remains to be seen in the election, doesn’t it? I’m betting the election makes no difference at all to “Chavez’s hold on power.” (I like how you guys personalize everything, as if it’s the Third Reich or something).

          Please don’t pretend that you have not seen the media take up opposition campaigns a dozen times before this. Fine with me if you want to believe that CNN en Espanol showed that documentary on violence in Venezuela FOUR TIMES just at the time when the opposition launched their campaign around the issue, just to do their job as objective, neutral journalists. But don’t expect anyone who knows anything about the media to believe it.
          _________________

          Setty: This is not the result of oppo propaganda or (as you hint in your intro). U.S. foreign policy goals. People in Venezuela who have always supported Chavez are abandoning him because too many of their family members and neighbors are getting killed.

          For all these words, I don’t expect to convince you of anything, any more than I expect to convince a bank that Venezuelan oil output is somewhat higher than their ex-PDVSA consultant has told them for years.
          __________________

          MW: Or any more than I might expect you to look at the web site of the Central Bank of Venezuela and find seasonally adjusted data right in front of your face.

          You can convince me when you have an argument.
          ______________

          Setty: For years people have criticized your use of the depths of the 2003 recession as your baseline, but you keep doing it.
          ________________

          MW: Maybe you missed it, or maybe you are just exaggerating again, but in our last paper on Venezuela’s economic expansion, we use three different baselines and explain the advantage and disadvantages of each one. You can even pick your own favorite: See http://www.cepr.net/documents/publications/venezuela-2009-02.pdf , pages 6-7 .

          _______________________

  3. Rebecca Ray

    Hi Setty,

    I’d be glad to respond.

    Our paper does not say that we think the economy may have left the recession because of investment, oil, borrowing capacity, or anything else. Our paper says we think the economy may have begun to grow again because when we seasonally adjusted Q2 GDP figures, they were up over seasonally-adjusted Q1 GDP figures – substantially up.

    This was surprising on its face, but especially surprising considering the enormous troubles that Q2 saw: electricity rationing, the clamp-down on the black market for dollars, etc. Given that Q3 hasn’t had the same kind of growth-dampening shocks that we saw in Q2, it may be that Q3 also shows growth when its GDP numbers come out, and the recession may have ended.

    Of course we can’t be 100% sure that when the central bank comes out with seasonally-adjusted data for 2010 (it’s a few quarters behind), it will show this growth. We don’t know how they’re seasonally adjusting their data; we used the US Census Bureau’s X-12 Arima program. So we looked at the whole of our seasonally-adjusted series, the last 13 years (their figures begin in 1997), vs theirs – they are off by an average of less than 1/100th of 1% during that time. So this is our best guess of what their seasonally-adjusted #s will show when they come out.

    The rest of the paper – discussion of everything you list – is a survey of possible drivers of this surprising find.

    I hope that clears up some of where we’re coming from. The growth is observed, and everything else is secondary.

    -Rebecca

    1. ow

      Where does the BCV give seasonally adjusted numbers? All numbers I have always seen them use are year over year numbers and they use it in all official reports such as their year end reports. The government has also always quoted the year over year numbers and on that basis the economy contracted 1.9% in Q2 which was itself compared to a weak Q2 from 2009

      And now all of the sudden you want to start using a different set of numbers than what has been used by everyone all along (including yourselves). That appears to me to be quite dishonest and a crude attempt to change numbers simply because you don’t like the negative number put out by the BCV.

      I spent many years debunking opposition gross manipulation of numbers and statistics and all I can say is that it is really, really sad to see people supporting the government doing the same. At the end of the day they are equally wedded to preconceived notions of reality and willing to distort numbers to maintain their otherwise untenable positions.

      Their debt numbers, which they don’t support, are likely also false. I would like to see if they included all external and internal central government debt, plus PDVSA debt, and the $28 billion in debt to China (less what has maybe been paid off). I believe that number comes to far more than what they give. Also, if they compared dollar debt to Venezuelan GDP may I ask what exchange rate they used? Probably the inflated official exchange rate which adds yet another distortion and makes the numbers appear lower than they really are.

      Moreover, they left out the fact that Venezuela pays an extremely high interest rate on its debt. It is paying 12.5% interest on debt it is issuing wheres the US probably pays less than 3%. That means the burden of servicing the debt is much higher for Venezuela than any simple GDP/Debt ratio would suggest. With those interest rates even if your debt is say 50% of GDP you are having interest payments eating up large portions of government revenue.

      1. Rebecca Ray

        Hi ow,
        The BCV does indeed put out seasonally-adjusted GDP (you can see the series here: http://www.bcv.org.ve/excel/5_2_5.xls).

        This is, in fact, the usual way of measuring business cycles everywhere. If you look up US GDP growth, for example, you will find the numbers expressed in the same terms, as annualized quarterly growth: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. It is what CEPR uses regarding Venezuela as well as other countries. And I can assure you we haven’t changed our methods.

        The reason that this is the most common measurement outside of Venezuela is for its usefulness. At the beginning of a decline, a country’s GDP may be below where it was a quarter before, but still above where it was a year previous, and vice versa. In this case, the economy was still below where it was in Q2 2009, but above where it was in Q1 2010, indicating the possibility that it has hit bottom.

        I see two main reasons why this measurement hasn’t been used much by Venezuela observers:
        1. BCV is two quarters behind on updating this series. So observers have to do their own seasonal adjustment of the more recent raw data, as we have done. As we mention in our paper, we can’t be 100% sure that when BCV updates their seasonally-adjusted numbers, our results will match theirs. So most observers would probably prefer to just use the most up-to-date data released by BCV: year-over-year.
        2. BCV does not calculate the annualized rate of their seasonally-adjusted GDP figures. So again, this is work that the outside analyst has to do.

        As for debt, if we don’t use official exchange rates for government debt, we are suggesting that the government is acquiring debt – or will be repaying it – through black market channels. This is possible, but would require a paper of its own to justify. Setty has done a good job of pointing out the difficulty of getting a handle on PDVSA finances; likewise, we listed debt before PDVSA, and give an “about” estimate including it.

        Again, I hope this clears up some of our methods (assuming you’ve lasted through this much wonkery in one comment). One of the things I appreciate so much about Setty’s blog is that we can have this discussion in a fairly troll-free environment.

        1. ow

          Hi Rebecca:

          I understand seasonal adjustment and accept that it is an valid methodology. My concern was that you were using it in this particular case when its use is not widespread in Venezuela and I hand’t thought the CEPR had used it previously. If that were true using it now would be cherry picking statistics. In reviewing the principal CEPR articles on Venezuela I see that I was wrong on that last point, that you have indeed been using (if not all the time) and therefore your use of it now is completely legitimate. My bad, and I retract my comments on it.

          Having said that though, you do have to realize you are out of step with the BCV itself which consistently published the quarterly GDP numbers in their year over year form (see here: http://www.bcv.org.ve/c4/notasprensa.asp?Codigo=8759&Operacion=2&Sec=False )

          Regarding the debt issue I have to say I am still not at all convinced by the 18% number. I did find the 18% number, it is in the 2009 year end report of the BCV, page 180.

          There are numerous considerations that make your use of that number problematic.

          First, it is a 2009 number and therefore likely calculated at the 2009 exchange rate of 2.15 BsF. As more than half of that debt was foreign debt the devaluation of early 2010 has already likely bumped up the GDP percentage by a few points.

          Also, this number doesn’t seem to include any PDVSA debt. Looking that up on their web sight (they have a financial report just on debt) that is $21 billion.

          Further, it is not clear if last years barter debt of $8 billion from China was included in the BCVs 18% but regardless this year there was an additional $20 billion barter loan from China. In total therefore there is an additional $41 billion in debt not included in that 18% calculation.

          I am not sure what USD figure you are using for Venezuela GDP (can you share that and the exchange rate it was calculated at?) but $41 billion is likely to be another 10 to 15% of GDP.

          Also, saying that we should use a more realistic, non inflated exchange rate does not mean I am assuming the government will pay its debts via dollars obtained on the black market. Rather it means I assume they will be forced to devalue again, likely within a few years, even if they are as willing to live with as absurd an exchange rate as they were in the past.

          Given the debt left out of those calculations, the devaluation which occurred after the numbers were calculated and made them already partly obsolete and the still overvalued exchange rate I think presenting Venezuela’s debt as 18% is way off the mark. Doing a little math shows just what I have brought up can easily push it to around 40%.

          That still may not sound bad by First World standards these days. But keep in mind, Venezuela pays extremely high interest rates (over 10% versus 2 or 3% in the U.S.). This can actually make Venezuela’s debt more of a burden to its government than the much higher U.S. debt is to that government.

        2. ow

          This may be out of order with the comment below, if so please read the comment below first:

          The discussion of the debt may seem pedantic but there are a couple really important points here:

          a) why is an oil exporter running up significant amounts of debt during a huge oil boom. Keep in mind, this year oil is averaging $70 per barrel and last year, a supposed bust, Venezuelan oil was still over $50 a barrel and very high by historical standards. Something seems really amiss here.

          b) does CEPR really believe that maintaining high aggregate demand is the path by which Venezuela will grow over time? Does it think Venezuela will be able to continue to improve its citizens standard of living relying almost soley from the revenues brought in by a commodity boom. Although the CEPR acknowledges that very little has been done to diversify the economy away by oil it seems untroubled by this, even after 11 years of the Chavez government being in power (and 6 after the oil strike). As I read the CEPR reports it seems to me as if they treat Venezuela as a developed country such as the U.S. that just needs a dose of Keynesian economics rather than a underdeveloped country in need of very well thought out pro-development policies and high rates of productive investment.

          On one final note, I was surprised to see you doubt the PDVSA financial numbers. I’ve never seen a reason to doubt them and in fact Dr Weisbrot has in the past done analysis validating them. Maybe CEPR’s views on PDVSA are changing, but if they are then all the rest of your analysis has little foundation as many of the key BCV numbers you refer to, such as the current account balance, are directly impacted by PDVSAs financial numbers and are themselves in accurate if PDVSA’s numbers are inaccurate.

        3. sapitosetty Post author

          OW – I don’t think you understand what aggregate demand is. You seem to think they are talking about consumer demand. Get thee to a Wikipedia.

          Aggregate demand=Consumption + Investment + Government outlays + (Exports – Imports). That is, investment — the pro-development stuff you always go on about, factories, infrastructure, etc. — is part of aggregate demand.

          Elsewhere, nice catch on the BCV numbers on pay vs. inflation and pay vs. basket of basic needs. Depressing stuff but good to have in hand.

        4. Rebecca Ray

          Hi all, I’m afraid I need to bow out of this conversation for health reasons. I’ve been recovering from a year illness and this last week I’ve been getting progressively sicker again. I’ve enjoyed the chance to answer a few questions and I hope my answers have been helpful. My apologies.

    2. Juan Cristobal

      Surprising indeed that Venezuela would be growing at all given the anti-growth policies its government has implemented. At least on that we can agree.

      What is not surprising is that we are only now coming out of a recession that most other Latin American countries left behind many months ago. The unusual length of the business cycle suggests big problems.

      The relevant question isn’t “how are we doing?” The relevant question is “what took us so long?”

      1. sapitosetty Post author

        Venezuela entered recession late and is leaving late. Time will tell whether it is really leaving or whether that ostensibly positive quarter is a fluke. Not just in Venezuela but much more widely.

  4. sapitosetty Post author

    Hi Rebecca, thanks for joining in. Fair point. I didn’t argue with the GDP or seasonal adjustment numbers because they aren’t my specialty and I have no idea if they are right or wrong.

    I think the discussion part of your paper is more than an examination of the drivers of GDP. It’s also a forecast into the future. The IMF and banks have a record for being overly negative and are blithely dismissed by the government. That’s no reason to be unduly positive.

  5. Marcus Anonymous

    Mark Weisbrot wrote: The only prediction was a contingent one, i.e., that *if* the government maintains high levels of aggregate demand, the economy will grow. This is pretty basic, unless you have some reason, e.g. a foreign exchange constraint, to argue that the government can’t do that. Even taking into account all of the contingent liabilities of the government that you mention, and worst case scenarios, I don’t see how Venezuela runs into balance of payments problems.
    Those critics and defenders of the regime who argue over whether devaluation will spur inflation or slow the economy are both far too optimistic.
    As a result of its foreign exchange problems, Venezuela has already suffered a far worse fate: suspension of currency convertibility. Until last summer, there were two “fixed” rates in Venezuela at which some buyers could get limited supplies of dollars – but not immediately. There was also one “semi-official” rate at which one could buy foreign currency at unrestricted rates in unrestricted quantities (and at which PDVSA could obtain more Bs). Now the third (unrestricted) rate is gone: There are essentially three rates at which the government rations foreign exchange.
    In fact, Venezuela has an exchange rate regime that the IMF refuses to recognize. According to the IMF, (http://www.imf.org/external/np/mfd/er/2008/eng/0408.htm) Venezuela has an exchange rate peg to the U.S. dollar like Saudi Arabia or Barbados. But the key difference (and one that Venezuelans should readily recognize) is that that in the IMF’s description, “the official ‘fixed’ exchange rate” is the one at which domestic residents may freely buy and sell dollars in unrestricted quantities. In Denmark, the krone is pegged to the euro. If you want more euros than the private sector can sell you, you can buy them from the Danish Central Bank. The “crisis” would come if and when the Danish Central Bank runs out of euros.
    In Venezuela, that crisis has already come and gone. The “official ‘fixed’ rates” are the ones at which you may NOT buy or sell dollars. In Venezuela the fixed rate is the one at which an exporter (excepting the special case of PDVSA) is required to sell dollars. But the exporter may not buy them back at the same rate nor may he legally sell them to any other party. In fact, he may have to buy his imported raw materials at a more unfavorable rate than he sells his output (putting the exporter at a severe competitive disadvantage). If you ask the Danish Central Bank to sell you euros — they will. If you tell the BCV you want to buy $1 million at the official rate they will reply: “Doesn’t everybody?” That has enormous implications for the real economy and price level.
    The notional exchange rate at which you can’t buy and sell dollars is a mere curiosity. It won’t be hugely important if the rate at which you can’t buy dollars increases from 2 bolivars to 4 bolivars. So worrying about a change in the price at which you can’t buy foreign exchange is just the wrong thing.

    What is important to the domestic economy is the actual volume of imports and the degree of inefficiency created by Cadavi’s and the BCV’s allocation and rationing system. If the allocation for imports is too low, shortages and output losses will result, and ultimately inflation will result. The government realizes this — which is why they have issued new bonds just before the election as a way of supplying importers with borrowed dollars just before the election.

    Most of the rest of the world’s countries that have tried this arrangement, an overvalued official exchange rate and foreign exchange rationing, gave it up. It eventually becomes too painful and destroys export industries causing the economy to collapse. These policies were tried and abandoned in some parts of Europe in the interwar years. They were also tried with generally disastrous results and abandoned in many parts of Africa and Latin America in the decades after the Second World War. Zimbabwe’s economy was a recent rare example of what this does. Iran tried it briefly in the 1990s until the black market rate went to 20 times the official rate. Petro-states like Venezuela and Iran can do this for a while because it takes a longer time for an established oil industry to collapse especially if oil prices remain high. But Venezuela’s non-oil exports have collapsed.

    Venezuela is now a petro-state with import rationing: a combination that did not work well for the Soviet Union.

    1. Marcus Anonymous

      Weisbrot and Ray — I’m waiting to read your defense of your statement: “Even taking into account all of the contingent liabilities of the government that you mention, and worst case scenarios, I don’t see how Venezuela runs into balance of payments problems.”

      I’ll take your silence as a concession!

  6. otto

    Hey i have this entrenched view, wanna hear about it?

    No thanks, i have my own entrenched view and your entrenched view isn’t going to change my entrenched view.

    Well your entrenched view sucks.

    No it doesn’t.

    Yes it does.

    No, yours sucks, not mine.

    No it doesn’t.

    1. Marcus Anonymous

      Come on Mark!

      You said about a country where private purchase or sale of foreign exchange is illegal: “I don’t see how Venezuela runs into balance of payments problems..”

      AND YOU HAVE TO LET OTTO DEFEND YOU?

      Well, I hope that you’ve changed your position. It’s obviously contrary to the facts.

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