Myths And Realities Of The Distorted Venezuelan Economy Part I

July 2, 2016

By now, news about shortages, hunger and protests in Venezuela have become quite fashionable in the international press. It is a crisis that is difficult to understand: How did such a wealthy country get into such a state that it can’t even feed it’s people? How could the one time appealing Chávez revolution stray from its supposedly heroic course? What went wrong in Venezuela?

For those of us chronicling the fake revolution, this is no surprise. We have been recording the inefficiencies, the corruption, the waste and the incompetence of Chavez and his cronies, to say nothing of the hare brained policies and controls of the last seventeen years.

Despite this, people want to be simplistic about what is going on in Venezuela. They think it can be understood simply as the “fall in oil prices” or “Things went wrong after Chávez died”, ignoring the fact that the origins of the crisis, as well as its most symptoms, such as shortages and inflation, began appearing in Venezuela long before Chávez died and way before the the downturn in oil prices began in July 2014.

The biggest myth is that the fall in oil prices is at the root of the current problems. Nothing can be further from the truth. As shown in the graph below from Econoanalitica, the Venezuelan economy was in trouble long before that:

eco

As oil prices hovered around US$ 100 per barrel in 2012, the Venezuelan economy began sputtering under the weight of irresponsible policies and ever increasing Government controls. In the first quarter of 2013,  when Chávez died, oil was at a hundred, but the Venezuelan economy could barely manage less than 1% growth in GDP. And by the first quarter of 2014, with oil still above US$ 90 per barrel, the economy began contracting by 5-6%.

And long before the fall in oil prices, inflation, which was already running high, began soaring:

Inflacion.jpg

jumping from 21% in 2012, to 40.6% in 2013 and increasing to 62.2% in 2014 as oil prices finally began their decline. No direct effect of the oil price drop there either.

And as oil prices began dropping in the summer of 2014, scarcity levels had already reached absurd levels, as shown in this graph:

Shortages.jpgAs by the time oil prices began dropping, Venezuela (the plot is only for Caracas) was showing shortages for 50% of the items considered to be basic.

Of course oil prices exacerbated the situation, increasing it to the near 90% levels seen today, but the root causes were sowed during many years by the absurd policies, widespread controls and increasing domination of the Government in the Venzuelan economy.

So, PLEASE, don’t blame the drop in oil prices for Maduro’s and Venezuela’s problems. You don’t see the same thing happening in say, Ecuador, an oil-dependent country with an equally populist Government, but where policies have not had the level of improvisation and ignorance that Venezuela has had.

What happened and is happening in Venezuela has its roots in policies that began in 2002-2003, when Hugo Chávez decided to involve the Government in producing foodstuffs, as well as controlling prices and the rate of exchange. The Government got involved initially in sugar, farming and milk production and distribution. Grandiose projects were started, most of which were never finished and produce very little today. Today, even some of the more emblematic products in which the Government got involved, are mostly imported with heavily subsidized dollars. Thus, not only was the Government a failure in producing these products, but it also destroyed the ability of the private sector to compete, as it began limiting their access to foreign currency, while importing products at the lowest possible available rate of exchange.

Since this was not working, the Government began then controlling prices, later extended to controlling profits of companies, a true recipe for disaster. And as the Government did this, it spent more on importing less, as the inefficiency and corruption, as well as over-pricing, began dominating the whole food chain from importing to distribution, leading to where we are today.

And as the Government did this, it created ever increasing and intertwined distortions, most of which are not only still in place, but are part of a complex and convoluted economy, which will be discussed in Part II, and which needs to be fully overhauled from scratch in order for the Venezuelan economy to begin a new path to normalcy.

But in the end, the fall of oil prices had little to do with most of it, in the same way the rise of oil prices did not create the value or the wealth that it should have.

 

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18 Responses to “Myths And Realities Of The Distorted Venezuelan Economy Part I”

  1. Ira Says:

    I think the next myth you should debunk Miguel is that of VZ’s huge oil
    reserves, as one of the largest in the world:

    Media keeps reporting on their world-leading proven reserves, but they’re NOT proven reserves at all, and are in fact at the very low end of the global list:

    Proven reserves means oil that can be extracted at a reasonable profit, based on current price. Saudi oil is easy to get to; VZ’s oil costs a fortune just to get from the ground, let alone mix and refine.

    There are an estimated 200 million tons of gold ore on the oceans’ floors, unfathomably more than all of the world’s current gold reserves combined.

    But what good is it if it costs you 1000 times more to get it than it’s selling for?

    So the misconception that VZ should be “rich” because this thick crude borders on total nonsense.


  2. […] Myths and realities of the distorted Venezuelan economy Part I, Miguel Octavio, The Devil’s Excrement […]

  3. Ira Says:

    This is probably the most important, most significant piece that Miguel has written since forever.

    It’s only guys (and gals) like us that can strip away the bullshit media talking points attributing VZ’s calamity to falling oil prices.

  4. Boludo Tejano Says:

    Miguel Octavio, a comment of mine with a link got sent to the spam folder.

  5. M Rubio Says:

    I’ve long said that this economy is now so convoluted, so false, that if we went back to square one tomorrow, it would still take years to straighten it all out and get it functioning corrrectly.

  6. IslandCanuck Says:

    Del Pino, the president of PDVSA, has just announced to the world the they are producing 3.8 million BPD.

    He must be smoking the same stuff Maduro uses.

    The accepted number is about 2.3 million BPD

  7. Dean A Nash Says:

    Important work, Miguel. Those who distort history now will surely do their best to distort it in the future.

  8. Boludo Tejano Says:

    Another way to look at Venezuela’s economic performance before the precipitous fall of the price of oil in 2014 is to compare its economic growth with the rest of the world from 1998-2013. In 1998, the year Chavez was elected, Venezuela’s export price for oil averaged around $10/BBL for the year. As such, 1998 serves as a measure for what Chavez inherited and also for Venezuela’s economy when the price of oil was low. In 2013, Venezuela’s export price for oil was around $100/BBL, so the 1998-2013 comparison will also look at the economy’s performance during the oil price boom.

    GNI per capita, PPP (constant 2011 international $), % Growth 1998-2013
    East Asia & Pacific (developing only) 193.8%
    Upper middle income 117.8%
    East Asia & Pacific (all income levels) 111.2%
    South Asia 106.0%
    Middle income 102.4%
    Low & middle income 97.6%
    Lower middle income 86.9%
    High income: nonOECD 68.3%
    Least developed countries: UN classification 53.6%
    World 45.0%
    Sub-Saharan Africa (all income levels) 43.4%
    Heavily indebted poor countries (HIPC) 36.2%
    Middle East & North Africa (developing only) 32.2 %
    Latin America & Caribbean (developing only) 31.6 %
    OECD members 21.6%
    Venezuela 13.5 %

    From 1998-2013, Venezuela’s economic growth was anemic compared to that of most other countries, in spite of the oil price bonanza.. From 1998 to 2013. the price of oil increased from about $10/BBL to about $100/BBL. While the drastic fall of the price of oil from 2014 on has had a negative effect on the Venezuelan economy, the Venezuelan economy was performing poorly before 2013. The above figures show that- in addition to what Miguel Octavio has already posted.

    World Bank: World Development Indicators

  9. Roger Says:

    Its all about the title to this blog. In 1976 when oil was booming Alfonzo said: “ Ten years from now, twenty years from now, you will see: oil will bring us ruin… Oil is the Devil’s excrement. ” and everyone thought they were now rich. By the early 80’s oil had busted and the Bolivar long pegged at 4 Bs to the dollar began to inflate. By the early 90’s just before the coup, it was 58 to the dollar and the middle class professionals I met on my first trip there were quick to point out that their wealth and savings had gone down the crapper, interest rates thru the roof and the government and others did not care or even were making money at their expense. Within months it was 85 to the dollar and climbing by the day. Then came the 1994 Venezuelan banking Crisis with banks failing by the day and 53% of value equal to 35% of GDP down the tubes! A major disaster for even a G7 country. The government rather than use oil money to drive an economic recovery, went more populist even printing more money. By the next election, Venezuelans were ready to try anything, as long as it did not hurt. Chavez and his circle had no idea the disaster they had been left with and listened to every political crackpot with their easy way out. Until the oil boomed again they just wallowed along. As usual, when it did, he and most Venezuelans said we have unlimited riches again and can live in Utopia. Even then, they forgot to consider the coruptos greed and their lust for land and other peoples money and property. We talk about the Arepa Index but what about the Hummer Index? Have they declined? With the latest bust, we see the governments who listened to Alphozo and now hold even larger mineral investment trust funds and those who spent and now find what they created a burden.

  10. jak Says:

    I haven’t seen a link to this article on your site. Perhaps you know if the numbers are correct in which case it is very telling.

    http://www.forbes.com/sites/timworstall/2016/06/26/congratulations-to-bolivarian-socialism-venezuela-now-faces-imminent-famine/#1f57f24f81c0

    “Also, even now, with oil below USD $50/barrel, Venezuela has an export income larger than that of Peru, a country with identical population and where there are zero reported shortages of any kind.

    The estimate for Venezuela’s export income this year would place it at an amount almost equal to that of Colombia, a country with nearly double the population of Venezuela. Thus, it is incontestable that the decline of oil income is not the cause of the tragic situation in which Venezuelans find themselves.”

    • .5mt Says:

      From jaks fine link:
      We can’t talk about the remains of colonialism or racism, as in Zimbabwe, the detritus of Tsarism, the cruelty of Stalin, war, nor in fact anything at all other than just pig headed, ghastly, purblind stupidity over economic policy.

      If out of country watch the video at the end.

  11. Ira Says:

    Yeah, this article was definitely worth writing, Miguel.

    It’s incredible how so many credible news outlets attribute VZ’s decline to lower oil prices, when we all know this was just a contributing factor.

  12. Alexander Guerrero Says:

    Just few words, not mine, but Adam Smith’s ones, who let anyone which read his The Theory of Moral Sentiments and The Wealth of the Nations…….to understand how wealth is created, Smith was a convinced calvinist and a strong oponent of mercantilism, this citation found several times in Smith’works ssys …..”…estated fors not create wealth, they destroid it….” It is not complicated understand this implications of these words since as all clasics economist discution anout political economy in the early XIX century that economics is just mstter of incentives. Everybody knows the differences between one burocrat, from a minister to a political kommisar and one enterpreneuor when dealing with rational decisions folliwing the structure of incentives which emerged from their property rights definitions, how own what snd why. Chavist revolution was not a fake revolution, was s real one, indeed, the revolution, a political mechanism to transfer people property rights anf oenership to the State, no matter what name you give, nazism, fascism,socialism,comunism, at the end of the day, same shit. Predict what it was to hsppens in Venezuels after the approval of the new constitution in 1999 was not too difficult, we did, wrote, declare to the media and discussed all over the country, that venezuelans were trapped between the tragedy of the commons and the mercantilism, so, it is my way of defining socialism. Venezuela state and government own today 73% of GDP while in 1999 it was 24%. If bring Smith’s eord wuoted above, thete not be any surprises, the oil rent eas not a wealth but a windfall of oil money, loolk at this figure, in 1999 the oil GDP -public and private was 26%, today when all oil GDP is realized by State is just 7.5%. Whst do you think about?.

  13. TV Says:

    The fall in oil prices exposed the ‘revolution’ for what it is. It hastened the inevitable nothing more.


  14. If you add the oil price data from 1996 to 2016 you will see that this year’s average price is higher than the 1996-8 price.

    I’m fairly familiar with the industry, oil price is higher, but production is down. The problem is compounded by the light and medium oil production decline, and the need to import diluent to mix a marketable blend using the Orinoco crude.

    Pdvsa has also lost technical and management capability. The loss is massive, today the organization is low performing, and it’s not even aware of how poorly it performs. The Marxist mumbo jumbo about the workers managing the business makes things even worse. They have internal pressures between incompetent managers and engineers, and a Union force which believes it can run the business (which of course they can’t, Marx was an imbecile who never worked inside a well run industrial organization, had no idea whatsoever about the gears that must turn just right to make the organization perform, and his followers remain as ignorant about these issues as a chimp is ignorant about space flight.

  15. From Brussels Says:

    This article really shows that the original sin started in 1998!!! Then was just a disaster waiting to hapen. Good explanation!


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