Reflections On Venezuela’s “Economic Miracle”

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Reflections On Venezuela’s “Economic Miracle”

Reflections On Venezuela’s “Economic Miracle” by Andrew Syrios, Mises Institute

Back in 2013, Salon took a quick break from criticizing a caricature of libertarianism to let David Sirota write an embarrassing article praising socialism in what turns out to be a fantastic case study in both the dangers of socialist economics and of course, speaking too soon.

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The article was titled “Hugo Chavez’s Economic Miracle” and it was certainly not the only one of its kind to come out at the time. It may seem like twenty-twenty hindsight to criticize such foolishness, but it might be instructive as well. However, looking at Venezuela now as compared to the country Sirota saw in 2013 and thought provided an economic alternative to American capitalism (a truly free market was never discussed) serves as a good example of what Nicolás Cachanosky calls “the bait-and-switch behind economic populism.” Or namely, that government policies focused highly on consumption and lowly on investment will show good economic signs at the beginning, only to be followed by an inevitable decline and likely disaster.

Sirota’s article at least begins by lamenting Chavez’s rather poor record on civil rights (like shutting down a TV station that was critical of him) and noting “a boom in violent crime.” This may somehow be an understatement as Venezuela ranks second in the world in murders per capita at a terrifying rate of 53.7 per 100,000 citizens annually! (So much for socialism alleviating crime.) He finally does arrive at his case for this “economic miracle” that Venezuela was experiencing under Chavez (which, I should note, makes up only one paragraph of his entire article),

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…according to data compiled by the UK Guardian, Chavez’s first decade in office saw Venezuelan GDP more than double and both infant mortality and unemployment almost halved. Then there is a remarkable graph from the World Bank that shows that under Chavez’s brand of socialism, poverty in Venezuela plummeted (the same Guardian data reports that its “extreme poverty” rate fell from 23.4 percent in 1999 to 8.5 percent just a decade later). In all, that left the country with the third lowest poverty rate in Latin America.

How much of this was due to Venezuela being an oil-rich nation is debatable. But it’s also very much worth observing that these positive (and underreported) trends existed throughout Latin America, including in countries such as Colombia that have moved in the opposite direction economically. According to the World Bank, Between 2005 and 2013, Colombia’s poverty rate (as opposed to extreme poverty) fell from 45 percent to 30.6 percent, Peru’s fell from 55.6 percent to 23.9 percent, Uruguay’s from 32.5 percent to 11.5 percent, Paraguay’s from 38.6 percent to 23.9 percent, and Ecuador’s from 42.2 percent to 25.6 percent. Venezuela, for its part, fell 43.7 percent to 25.4 percent, which seems to be about average. The same could be said for GDP and Venezuela’s infant mortality rate also only ranks in the middle of the pack.

And of course, all of this was prior to Venezuela’s recent economic crisis.

The fall in the price of oil has certainly harmed Venezuela, but then again, the rise in oil prices during the last decade certainly contributed to its “economic miracle.” However, Venezuela’s problems were starting to become apparent before the drop in oil prices. Back in October of 2014, just before the price of oil sank, Venezuela ran a 17 percent budget deficit and was dealing with a variety of shortages. Furthermore, while every major oil exporter has been hurt by the low oil prices, they have all weathered the storm much better than Venezuela.

It appears that the drop in gas prices simply exacerbated, and more accurately, exposed the problems caused by Chavez’s (and his successor Nicolás Maduro’s) extreme populist policies. As Nicolás Cachanosky notes in his review of Rudiger Dornbusch and Sebastián Edwards work on Latin American populism, regimes that follow such policies go through four economic phases. In stage I,

The populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.

This is the stage Venezuela was in when Salon saw fit to publish Sirota’s article in 2013.

But then comes Stage II when “bottleneck effects start to appear” and “the underground economy starts to increase as the fiscal deficit worsens …” In Stage III, “Shortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves).”

This is exactly what’s happening in Venezuela today. Venezuela’s projected inflation for 2015 is a whopping 64 percent! The country with the second highest rate in South America is Argentina at 10.9 percent. The CIA Factbook lists Venezuela’s budget deficit at 29.4 percent and Moody’s downgraded Venezuela’s credit rating to the lowest rating possible for a country not in default. And there is serious talk of that coming to pass as well.

The government has instituted price controls to fight inflation and predictably, massive shortages have forced Venezuelans to turn to the black market for ordinary daily goods such as milk and toilet paper.

Venezuela’s unemployment rate shot up from 5.5 to 7.9 percent in January of 2015 and is likely to rise further. Even as it stands now, it is the third highest rate on the South American continent (excluding Central America). And as one would expect, poverty has started to rise again as well.

After Stage III comes Stage IV, which Cachanosky describes as follows,

A new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime.

Whether it comes to that is still yet to be seen. But what this economic crisis does highlight is that short-term success should never be taken as proof of a long-term solution. And this is particularly true when it comes to quasi-socialist and extreme populist governments. In the long-run, countries that follow these policies have a consistent track record, which is basically the same as what we’re witnessing now in Venezuela.

We’ll have to see if Salon writes a follow up.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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33 COMMENTS

  1. Guess what, I was looking for White Onions today, and didn’t find any. Just Red Onions. Purchased 6 Oranges today and all of them were from South Africa. I was pretty sure we produce Oranges in Florida and California, but for some unknown reason we are importing them from South Africa. Oh well….as you can see, shortages are everywhere, even here at the Land of Fantasy, the United States.

  2. I don’t know you or venezuela, but to compare not finding something at walmart to the shortages in that country…..I mean really. Perhaps your purpose is just to argue with people. Have a good day.

  3. haven’t been to venezuala, but sounds just like russia. Sure lots of fancy cars among the connected wealthy class, but the middle class lives very difficult lives.

  4. I can see by your comment history that you like to get into arguments with people and attack them but I think you should make sure you understand the point someone is making before you go off on your diatribe. I’m sure this will illicit a round of angry spouting from you….

  5. Gisela, maybe you are from the upper class and you hate the common people. The usual people love Chavez, the hero of XXI century.

  6. You are right, Sarroso. However, there is a huge social problem: criminality. How to solve it when CIA works to make m ore criminality?

  7. Stupid paper. ” Moody’s downgraded Venezuela’s credit rating to the lowest rating possible”. Is this an argument? Moody received an ORDER to do so and obeyed. The best solution is to close all these “institutes” as Moody, Standard&Poors a.s.o.. They are simple devices to kneel independent countries.

  8. Where socialism creates a problem Capitalism finds a solution. No Toilet Paper? No problem; get a Hand Bidet Sprayer and you don’t really need Toilet Paper anymore, just a small towel to dry off. 10X cleaner and healthier too.

  9. I was amazed to see those super highways,subways

    That you are amazed indicates how little you knew about Venezuela. The Caracas Metro/Subway
    began operation in 1983, well before Hugo Chávez took office in 1999. Ditto the super highways.

    I have the impression the Right Wing News Media and the Wolfowitz Doctrine are trying to brainwash the american people with lies, again.

    Since you do not like lies- a commendable attitude- perhaps you should become acquainted with some facts about Venezuela. Your remark about being “amazed” about the existence of subways and superhighways in Venezuela indicates that your knowledge of Venezuela isn’t that high.

    The final year of the Fourth Republic was 1998, a year where the price of oil fell as low as $10/BBL. What has Chavismo done with what it inherited? How does Venezuela compare with
    other countries from 1998 to present?

    GDP per capita, PPP (constant 2011 international $) % Growth 1998-2014
    Venezuela 9.0 %
    Latin America (Developing) 32.8 %

    In spite of an oil export bonanza which lasted until mid-2014, Chavista Venezuela’s economy has not performed well compared to Latin America: 9.0% per capita income growth for Venezuela, compared to 32.8% for Latin America. Facts, not lies. Venezuela’s record of poor economic growth also applies when Venezuela is compared to the rest of the world. Worldwide, Venezuela ranked 132nd of 161 countries in GDP per capita, PPP (constant 2011 international $) % Growth 1998-2014 . This subpar economic growth was evident before the fall in the price of oil in the last year. From 1998-2012, Venezuela ranked 132nd out of 180 countries in percentage growth in GDP per capita, PPP (constant 2011 international $), a subpar performance. A low oil price couldn’t be blamed for this subpar performance because 2012 was a year when PDVSA reported an average oil export price in excess of $100/BBL.

    These per capita GDP figures indicate that 16 years of Chavista government has seen Venezuela lose ground economically compared to other countries.

    In 1998, Venezuela ranked 9th in Life Expectancy in Latin America. In 2013, it ranked 11th. Worldwide, Venezuela’s rank in Life Expectancy fell from 70th in 1998 to 84th in 2013. Similarly to per capita income data, data on Life Expectancy indicate that that 16 years of Chavista government has seen Venezuela lose ground compared to other countries.

    Such facts do not indicate that Chavismo has been a good steward for Venezuela.

    brand new BMWs and Mercedez Benz everywhere. Private multi million dollars Cessna Citations and Gulftream IV taking off from La Carlota airport.
    So what else is new? Oil export income can pay for a lot of luxury goods. Remember ” ‘Ta barato.Deme dos?” [“That’s cheap, give me two.” Venezuelan on a shopping trip to Miami?] That joke about the free-spending Venezuelan is about 40 years old.

    BTW, even Venezuelanalysis a pro-Chavista publication, admits the existence of food supply problems and long supermarket lines, and has done so for years.

    World
    Bank: World Development Indicators

  10. creo que es asi como te sientes tu… No vale la pena discutir con gente con la cabeza cuadrada! ja! dejalo asi y sigue en tu nube de felicidad

  11. I agree with you paisana, just let him blab. He obviously has an agenda and that is to spread lies about what we know is happening. My mother just arrived from Venezuela 2 weeks ago and I KNOW that you cannot find basic food stuff and higiene products. Add to that the dangerous insecurity, rampant corruption and disregard of human rights. Now the government has taken over Polar, the only private company that was working and supplying the country with some much needed products. All hell is gonna break loose there, we will see what the pajarraco above will say then. He’s an socialist IDIOT!!!.

  12. did you really see what are you talking about? coconut oil? seriously? is that SO important for your basic needs? Come On..in Venezuela we dont have the basics, as chicken , meat, harina Pan for our daily bread Arepas, Toothpaste, toilet paper, MILK for the children (the ones who suffer more) . Nutrition in Venezuela is ZERO now as we can not get the basic nutrient food that any human being needs. Go and research a little bit better .. so you will now. Medicines? Chemotherapy? Many peoples is struggling even to find Acetaminophen …Investigate a bit more or better: go there and live there (not in a hotel) for some months.. then we can talk about.

  13. me das lastima .. I feel pitty for you.. go there and live in Valencia or any city in Venezuela not the capital..Surely you are another blind one.. Loro Sarnoso! (well that’s your fake name isn’t it?)

  14. I tell you one more thing! what Colombia has to do with all these? I love Colombia and have lot of good colombian friends ! you are a xenophobic full of hatred one. You show it in your words

  15. me haces reir.. nacida en Caracas,Venezuela. sinceramente por tu nombre se entiende todo: Perico sarnoso? en serio? debes ser uno de esos chavistas pagados para meterse en la social media. En algo SI tienes razon! me vine a US hace pocos meses pero toda mi gente sigue alla…y creeme que no hasta hace pocos meses vivia el dia a dia asi que… mejor TE CALLAS!

  16. So, what…?, here in the United States I go to Wal-Mart and I don’t find milk. Last night I went to my local Wal-Mart and didn’t find any milk. I had to drive to another supermarket and they didn’t have it. I had to drive to a gas station and I finally found it. The same happens with many products. I was looking for Oranges and I didn’t find any oranges, the other day I was looking for Coconut Cream because my wife was trying to make a coconut cake, and I didn’t find Coconut Cream anywhere. I was looking for Lemons and I didn’t find any Lemons, I asked the lady at the supermarket why they didn’t have any Lemons and she told me we are “out of season”. Oh well, Gisela Conte, it happens everyday, everywhere around the world. So, stop complaining.

  17. I’m Venezuelan … and we encounter the shortages every single day. You only buy the basic products with you ID number.. and in Valencia from where I’m from you don’t find chicken, PAN, Meat Etc at the regulated prices. With the high inflation.. the salary cant make it to get the very basic things. Go there and try to get a medicine in the pharmacy. No way. Of course you talking about getting alcohol.. is that a daily need for you? for me certainly not. I just need to get my basics at least to eat properly and now that is almost impossible without doing crazy hours of lines

  18. he is talking the real thing.. I’m Venezuelan and I can tell you that is so! so don’t be “surprised” Again: go there.. live there as a normal person and then ..we can talk

  19. you visited but you don’t live there.. with the risen crime and shortage… I bet you went to a nice hotel… but go there and live as any person..then we can talk. The Mercedes and BMW is only a 5% of the people and are the new boliburguese new rich class that makes juicy business (corruption) with the government.

  20. What non sense are you talking about? my friend owns a Piper Aztec and we flew to Los Roques Islands, he has owned this airplane for more than 20 years. He is an attorney in Caracas and he also owns a mansion at the Lagunita Country Club, his home was built in the 1980s. I bet you are being brainwashed by FoxLiesNews. As you can see, there are many rich people in there, most of them own factories and businesses, and love their country.

  21. I purchased shampoo at Central Madeirense supermarket, it was in front of my hotel, and I didn’t find any trouble. I even purchased a bottle of imported Scotch Whiskey. I spent more time walking from my hotel room to the supermarket, than purchasing shampoo, soap, razor blades and a bottle of Whiskey at the supermarket. As you can see, you are probably living in other country and you have never been to Venezuela.

  22. The BMWs and Mercedes and Cessna Citations are owned by the “new class” who somehow get US $ at the three official exchange rates all under 200 while the black market is over 800, middlemen’s commission in everything the country is now importing or participating in the contraband to Colombia. Of course, government officials enjoy part of the booty; the President of the National Assembly is reputed to be a billionaire and the former President of PDVSA is now being accused by a US court. Socialism is a bankrupt system and Venezuela is no exception

  23. How long did you have to stand in line to buy shampoo? My brother-in-law (in Caracas) just spent 6 hours to get some. Now almost all of my wife’s family are looking to escape, but it may be too late. I guess if you actually lived there you might form a different opinion…

  24. And why the Right Wing News media is picking on Venezuela?, I just came from Venezuela on a business trip and I was amazed to see those super highways, subways, electric trains, cablecars, malls, brand new BMWs and Mercedez Benz everywhere. Private multi million dollars Cessna Citations and Gulftream IV taking off from La Carlota airport. I have the impression the Right Wing News Media and the Wolfowitz Doctrine are trying to brainwash the american people with lies, again. Just like Iraq and Afghanistan.

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