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Tuesday, November 21, 2006

Is Venezuela a Success?

The Venezuelan economy under Hugo Chavez:

Comment: Chavez reign defies economic analysis, by Oscar Raul Cardosa, Project Syndicate: Hugo Chavez's almost eight years in power in Venezuela — which he will seek to extend in presidential elections next month — seems to defy economic analysis. Indeed, any and all economic examination of Chavez’s Venezuela confirms Edgar R. Fiedler’s quip that if you "ask five economists something, you will get five answers... or six if one of them is a Harvard graduate".

Some people see in Chavez an innovative statesman who has seized an almost magical moment — the windfall Venezuela has received from sky- high oil prices — to change the rules of the game in his country. ... In that two-year period, Chavez stepped on the gas for his social reforms — education, healthcare, etc – and also in regard to breaking down the country’s excessive concentrations of wealth. ...

With oil prices now six times higher than they were when he came to power, Chavez presided over economic growth of nine per cent in 2005 and ... the first quarter of 2006. Above all, however, he has achieved a 6.3 per cent effective reduction of poverty, after taking over a country whose vast majority — 80 per cent — was perched between poverty and squalor.

Seen in this angle, Chavez appears to have real achievements. But there is another, darker, angle from which to view his presidency. It is possible to see in Chavez but another Latin American populist sorcerer’s apprentice, one whose political shelf life will expire whenever oil prices begin their inevitable shift backward. To those who think that this is the case, Chavez is not an innovator but someone who is merely squandering Venezuela’s oil wealth in the same way that governments did following the oil shocks of the 1970s.

The notion of specific "Chavist" growth can also be challenged. The highest growth achieved in the Chavez years is lower than Venezuela’s average during the second half of the 1990s, when oil was the exclusive domain of the private sector.

Moreover, growth under Chavez seems to reflect an increase in domestic consumption resulting from the flow of petrodollars and nothing more fundamental... So nothing Chavez has done translates into a fundamental improvement in, or diversification of, Venezuela’s economy. ...

True, businessmen have tempered their criticisms of Chavez and seem eager to participate in the profit feast brought about by increased consumption. But they may also be waiting for the first external shock to puncture the Chavez balloon before they pounce.

These two versions of the Chavez years are both distorted — to a certain degree — by nostalgia. Those who see him as successful have the 1960s and 1970s as their dream fantasy. Their main arguments are reminiscent of the arguments put forward by those who backed the Cuban Revolution.

Those who revile Chavez often do so in the name of the "Washington Consensus"... Chavez is portrayed as a return to the Latin American populist heresy, a heresy that must be resisted because it affects not only the country with the largest oil reserves outside the Middle East, but also because it may tempt the rest of Latin America down that road.

But history never truly repeats itself. The years of the biggest transformation demands in Latin America or those of its docility to economic orthodoxy will not come back because we can remember them. Especially, the view of the Washington Consensus seems irretrievable...

Yet one thing is clear: Chavez was the first ruler of his generation to recognise the region’s fatigue and disillusion with neo-liberalism, and to propose new rules of the game. In the end these may not be the rules he envisions today, but neither are they a spent force. To believe that one can accurately foresee what will become of Chavez and Venezuela brings to mind another warning by Fiedler: "He who lives by the crystal ball must sooner or later learn to chew glass."

There seems to be a presumption that more equality equates with lower growth. For example, while discussing policies Democrats might pursue to reduce inequality, David Wessel asks today in the Wall Street Journal:

What can Democrats do to resist inequality in a way that doesn't choke off economic growth? Can government slice the economic apple more evenly without shrinking it?

And later adds:

Republicans as prominent as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke recently have warned ... of risks posed by widening inequality. But many conservatives fear taxing the rich in response would reduce incentives for innovation, entrepreneurship and education -- and thus reduce economic growth to the detriment of all. Their counsel: Try to lift incomes of the poor and middle class, and don't worry if the rich do even better.

That is, growth must not be reduced even if it means we must accept widening inequality. However, it hasn't been established that more equality is harmful to economic growth, so I don't accept the presumption that lower economic growth is a necessary consequence of higher equality (and even if it were the case that efficiency and growth are reduced, there may be equity considerations that justify promoting more equality, i.e. the standard efficiency-equity tradeoff and related arguments).

Richard Freeman and Alexander Gelber recently looked into the question of how effort varies with inequality:

Optimal Inequality/Optimal Incentives: Evidence from a Tournament, by Richard B. Freeman and Alexander M. Gelber, NBER WP 12588, October 2006 [open link]: Abstract This paper examines performance in a tournament setting with different levels of inequality in rewards... We find that that total tournament output depends on inequality according to an inverse U shaped function: We reward subjects based on the number of mazes they can solve, and the number of solved mazes is lowest when payments are independent of the participants' performance; rises to a maximum at a medium level of inequality; then falls at the highest level of inequality. ...

Thus, it is not at all clear that moving from high to moderate levels of inequality reduces economic incentives and economic growth.

Update: The Economist blog, Free Exchange, follows up on whether Venezuela's economic policies have stifled economic growth.

    Posted by on Tuesday, November 21, 2006 at 05:25 PM in Economics, Income Distribution, Policy | Permalink  TrackBack (1)  Comments (37)


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    OVER at Economist's View, Mark Thoma considers whether the populist programme of Hugo Chavez has done good or ill for Venezuela's economy: [Read More]

    Tracked on Saturday, November 25, 2006 at 04:30 AM


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