Investment Now and Then
How many times have you heard the following – “There is no investment in Venezuela”? If you follow the reporting on Venezuela closely you’ve probably heard it many times. So many times in fact that most people probably accept it as being true without ever bothering to check its validity.
However, with the new Venezuelan Gross Domestic Product numbers coming out recently I decided to check it for myself. Now when looking at economic statistics there is almost never a line called “investment” – instead they call it Gross Capital Formation. And sure enough the Venezuelan central bank publishes those numbers right here.
Investment – or Gross Capital Formation – is almost always measured as a percentage of GDP. The reason for that is that it is widely assumed that in order to maintain a healthy rate of growth in your economy you need an investment rate of at least 25% of GDP. Some hyper-growth economies such as China have rates over 40% which helps explain their very high growth rates.
How does Venezuela stack up when compared to this? Lets take a look:
First a note on these numbers. I compared the first quarter of each year – not entire years. I did this as obviously for 2007 the only number available is the first quarter. Quarterly comparisons are perfectly valid as long as you always compare the same quarters of the years, which is what I did. The only exception to this is 1997 which for some reason they didn’t give by quarter but only for the full year. So the comparison for that year may not be exact but hopefully it is close.
Jumping right into these numbers we see that Venezuela has actually not done so bad. In fact, in 1997 and 1998 before Chavez came into office Venezuela had an investment rate of 25%. Pretty good as that would be enough to sustain growth.
Then came the early years of the Chavez administration and investment did drop – maybe he did scare some investors after all. However, by 2001 and 2002 investment recovered again to healthy levels as maybe investors realized that Chavez wasn’t so bad for the economy after all.
Then comes the deluge. In 2003 investment dropped to less than 15%. And remember, given that these are percentages of GDP the total drop in investment would have been even more dramatic as GDP itself dropped significantly. But of course we all know what the precipitating factor was behind this – the 2002/2003 opposition led oil strike.
Since 2003 the Venezuelan economy has recovered and investment has recovered along with it – quite dramatically in fact. Note that so far this year investment is almost a 32% of GDP. Not Chinas levels yet – but certainly getting up there. This is a very impressive number. And this certainly gives lie to the bogus assertion that investment is low in Venezuela. The reality is high, and climbing, in Venezuela.
So as it turns out, lack of investment is another one of those imaginary problems that exists mainly in the heads of people who don’t bother to look up the actual statistics.
Now, I do want to make another couple of points regarding these numbers.
First, many newspaper articles, particularly ones written by people who oppose Chavez like to make a big deal out of supposedly diminished private investment. However, these numbers are only total investment – I have never seen BCV numbers that separate private from public investment. However, what counts is total investment and by that score this government is doing well.
Second, it would be nice to be able to determine exactly what kinds of investments these are. The reason is that some investments, such as infrastructure, don’t tend to lead as much to additional revenue and income as other types of investments, such as new factory equipment. Again, the BCV does not present distinct numbers for those types of investments as far as I know.
A reasonable guess would be that with the Chavez government a lot of this investment is in infrastructure such as subways, highways, homes, hospitals and stadiums. But it is also likely that a fair amount is going for new factories as a large section of Venezuelan industry is currently operating at full capacity and as we previously saw manufacturing has expanded by over 30% so far under Chavez. What is more, it is also likely that a lot of the 25% of GDP that was investment in 1997 and 1998 was in the oil industry which was not exactly helpful to Venezuela’s economy.
In any event, what we can and do know is investment, like so much else, is way up in Venezuela. And that is definitely a good thing.
GDP Growth Now and Then
Last week Venezuelan Gross Domestic Product (GDP) numbers came out for the first quarter of 2007. Given that there is no more important measure of the state of an economy than GDP I generally rush to report the new numbers on the economy.
But of late I have to admit my enthusiasim for reporting these numbers has waned. It is not because they have somehow become less important – they still determine if Venezuelan’s are living better or living worse. It's just that in the case of Venezuela they have become so redundant – GDP increased blah blah percent, the private sector increased blah blah percent, commerce increased blah blah percent and on and on. After 14 quarters of this it gets old.
So this time I decided to do something different. But before getting to that let me give at least a perfunctory rundown of the just released GDP numbers: overall GDP grew by 8.8%; the private sector grew 10.3% while the public sector grew 1.7%. Non-petroleum GDP grew 10.6% led by construction which was up 26.5%, commerce up 20.8%, communications up 18.3% and transport up 16.4%. Manufacturing was up 7.8% and food processing up 12.5%.
So there you have the numbers. They are good, if boring.
Now here is the interesting analysis. Keeping in mind that the 1st Quarter of 2007 is the eigth anniversary of Chavez being in power (he assumed office in the beginning of 1999) I thought it would be interesting to compare the 1st Quarter of 2007 with the 1st Quarter of 1999 and see how the economy has fared under Chavez. Fortunately all the data is here so the analysis would be easy.
But then I realized something even more interesting could be done with this – we could look at this same data for period before Chavez came to office. Originally I hoped to do it for the 8 years proceeding Chavez coming to office. However, in obtaining the actual data I was limited to going back to 1993 as that is as far as the BCV data went to. Still, comparing the 1st Quarter of 1993 to the 1st Quarter of 1999 covers a six year period and allows for a interesting and valid comparison. When the actual comparison was done to say it was illuminating is an understatement.
In the following graphs there will always be two numbers – the first is the percent change in the given segment of the economy from 1993 to 1999, before Chavez came to power, and the second is the change between 1999 and 2007, the period since Chavez came to office.
The first graph gives the percent growth of GDP over each of the periods:
Certainly there is quite a contrast – in the six years before Chavez came to office the Venezuelan economy grew a grand total of 2.1%. Remember, that is not 2.1% per year. That is a grand total of 2.1% in six years. That is right – the average yearly growth would have been less than .4% per year. Try not to blink, you might miss it.
In the 8 years since Chavez came to office the economy has grown by a total of 30.3% - or almost 4% per year. Those numbers may not set the world on fire but they are still quite good and they beat what the previous administrations did by a factor of 10!
There is one important observation that needs to be made based on this chart. The anti-Chavez opposition often claims that the current growth is unsustainable. Maybe it is, maybe it isn’t. But it misses the point – at least there is growth now! Before Chavez came to office there was in effect no growth at all – sustainable or otherwise. It is certainly a more than a little rich of the opposition to critique Chavez’s economic growth as somehow being deficient when they themselves couldn’t get the economy to grow at all!!
Yet this will get even more interesting as we dig a little deeper into the numbers so on to the next graph which shows how the Non-Oil segment of the economy did:
Here the division between Chavez’s economy and what came before is even more stark. Under Chavez everything besides oil has grown almost 37% while before Chavez everything but oil actually shrank by 7.1%. Yes, that is right, the same people who now bitch about Chavez’s not doing enough to diversify the economy away from oil actually managed to shrink everything else when they were in office! Thankfully, Chavez has more than reversed what they screwed up but the nerve of what these people complain about given their extremely poor performance is something to behold.
But hold on to your hat, as the most breathtaking is yet to come. Here is the slide on how manufacturing has done:
From 1993 to 1999 manufacturing GDP declined a stunning 15.9%. From 1999 to 2007 it increased by 34.3%.
Now sit back and think about this for a moment. Virtually every day the opposition media screams that Venezuelan industry is being ruined by government. Then we have people like Simon Romero of the New York Times claiming that Venezuelan manufacturers are being “stymied” by Chavez. Listen to them and it is clear that Chavez is a one trick pony – it is all about oil as Chavez’s Venezuela makes less and less and instead most everything is imported.
Yet looking at the numbers we see that when it comes to those assertions down is up and up is down. It was the previous governments that trashed Venezuela’s manufacturing sector and put it in to a serious decline. Under Chavez that has been reversed as Venezuela produces 34% more now than when he came to office!
Remember that the next time you read some opposition newspaper or blog spouting off about how bad Chavez has been for Venezuela’s ability to make things besides oil – that assertion is flatly false and the people who say it are either ignorant of reality or lying. Rather it was THEY who ran the manufacturing sector into the ground. Gee, talk about projection!!!
Ok, now that the general trend has been established here maybe we can run through some of the rest of the of the data a bit more quickly.
Here is the percent change in construction GDP:
Same basic story line: Chavez is kicking but; his predecessors sucked.
Here is the percent change in commerce GPD:
Again, Chavez rocks, his predecessors were pretty lame.
Here is the percent change in transportation GDP:
Note the base on this graph is not zero and that in fact both the Chavez government and the previous administrations have gotten telecommunications to quite well with over 100% growth for both of them. What can you say – Venezuelans love their cell phones. Given that the pre-Chavez period is only six years compared to the eight year Chavez period the pre-Chavez period actually had the highest annual growth.
And prior governments did respectably in other areas too. Mining would is one example:
One might now ask, is there any area that grew under prior governments but shrank under Chavez? Indeed there is, the oil sector:
I’m sure some will be very counter-intuitive to some who will ask aren’t Venezuelan oil revenues much higher now? Indeed they are. But remember all these numbers are REAL GDP, meaning they factor out prices so that they are measuring actual activity in each sector. So what this graph shows is not how much revenue came from the oil industry – rather it measures oil industry activity and oil production.
Once you realize that the graph makes perfect sense. The governments proceeding Chavez ramped up oil production as much as possible and opened up the oil industry to foreign investment which further increased activity in that sector. The Chavez government on the other hand significantly reduced oil production in order to comply with OPEC production quotas and it has pretty much put a stop to new investments by foreign oil companies.
Of course, it is not coincidental that the previous governments only really “outperformed” the Chavez government in this one sector. The reason is that because in reality they didn’t perform well by doing this. Ramping up production and busting OPEC quotas only serves to help crash prices, bring down oil revenues and help put the rest of the Venezuelan economy in a recession. Hence, even in the one area where it looks like the previous governments had some success in reality they failed.
I hope readers have found all this to be revealing as I have. I knew the Venezuelan economy as doing better under Chavez than under his immediate predecessors. Yet I truly had no inkling it was doing THAT much better, nor that his predecessors were such abject failures in many of the areas that they now try to critique Chavez on.