Archive for October 4th, 2006

Book Review: Venezuela in Debt by Jose Guerra

October 4, 2006


I have
just finished reading the book ďVenezuela EndeudadaĒ (Venezuela in Debt)
by Jose Guerra just published by De la A a la Z Ediciones, a very timely and
well documented contribution to understanding the effects of the Devilís
Excrement. Guerra was Chief Economist of
the Venezuelan Central Bank until 2005 and is a Professor of Economics at
Universidad Central de Venezuela. The book is subtitled ďFrom Carlos Andres
Perez to Hugo Chavez

The book
draws parallels to the Presidency of Carlos Andres Perez (CAP) to that of Hugo
Chavez, exploring the contradictions and similarities between the two periods. The
book explores and shows the paradox that the country tends to go higher into
debt in periods of oil bonanza, as Governments do not only spend the windfall,
but actually spend more, making the economic cycles sharper when oil prices
drop. Thus, debt service conditions economic policy because of the weight it
represents in the budget. Guerra notes in particular how periods of high oil
prices in 1974 to 1978 and now from 1999 to 2005, have coincided with the
periods of highest deficit spending in the countryís recent history. In both
cases, the deficits were associated to the expansion of the Government in the
countryís economy, which required and is currently requiring huge expenditures.

Guerra
goes back to the 1920ís reminding us that Dictator Juan Vicente Gomez actually
paid the countryís external debt in 1930, thanks to the application of the hydrocarbon
bills of 1920 and 1922. From then until 1969, the countryís debt was basically
nil, with the Government spending only the income it received. It is not until
CAPís ďGran VenezuelaĒ
project that the country in the midst of extraordinary oil income, also
increased its debt from 9.2% of GDP in 1974 to 29% of GDP by 1978 when CAPís Presidential
term ended. The next Government controlled interest rates, discouraging savings
in local currency, encouraging people to save abroad (sound familiar?). When
oil prices dropped, there was a deficit in the balance of payments and the currency
was devalued sharply for the first time in more than 20 years. As oil prices
dropped in the mid 80ís the Government acquired more debt as the only way of
sustaining spending.

In the 90ís
despite low oil prices, debt as a percentage of GDP actually went down, as the
Caldera Government reduced debt to only 18% of GDP from a high of 72.6%,
despite the lower oil prices.

Finally,
Guerra arrives at the Chavez era, showing that the first two years were
completely the opposite of the last sixand that the more things change the more they stay the same. The first two years spending went down
due to low oil prices; no new debt was issued internationally turning erroneously
to the internal market. The result of this were two years of recession, which
made the Government turn its policies 180 degrees, with the Government
developing a policy of increase and deficit spending while anchoring the
exchange rate, which led to the sharp devaluation of February of 2002.

Since then,
Guerra quantifies how the Government increased spending, going from 21% of GDP
to 27.4% in 2005, while total debt increased to 33.4 % of GDP, without considering
that of the Central Bank, which reached 10.3% of GDP (from essentially zero in
2000) in , which gives a total of 44.1% of GDP in 2005.

The
problem is that this is another severe distortion in the economy. Debt service
has increased sharply at a time of high oil prices. When and if prices drop,
debt service, already higher than social spending, will be difficult to be
covered, unless there is a devaluation that reduces internal debt, but impoverishes
the population. Add to it military spending, funding for the ďreservesĒ, direct assistance
programs and the recipe for disaster has already been formulated. And Guerra gives us all of the quantitative details.

The book
also has a very nice introduction by economist Gustavo Garcia, who notes the
absence of ďeconomic rationalityĒ in Venezuelaís current finances. Add to this
the nice tables of statistics throughout the decades (and the book!) and I can
not but recommend this book to anyone interested in the dynamics of the countryís
debt and the strong support to the idea that oil is indeed ďThe Devilís
Excrement

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