Venezuela’s productivity problem
While much of the developed world is mired in sluggish growth or downright recession, a few days ago Venezuela came out with healthy GDP figures. According the country’s central bank, GDP grew at 5.6 percent in the first quarter of the year, outperforming Brazil, Mexico, and Colombia, and equaling Chile. Unnamed government officials cited in ...
While much of the developed world is mired in sluggish growth or downright recession, a few days ago Venezuela came out with healthy GDP figures. According the country’s central bank, GDP grew at 5.6 percent in the first quarter of the year, outperforming Brazil, Mexico, and Colombia, and equaling Chile. Unnamed government officials cited in the Wall Street Journal expect the GDP as a whole to grow by 5 percent in 2012.
This is welcome news, especially after the country was hit hard by the financial crisis of 2008-2009. Unfortunately, this growth spurt will not last.
With a presidential election coming up, the government has been spending heavily — and then some. Although large amounts of spending are unaccounted for, thanks to Venezuela’s notoriously obscure fiscal accounting, we do know the government continues to issue debt and raise debt limits despite historically high oil prices. The Economist is forecasting the budget deficit will top 6.7 percent of GDP this year.
Spending during an oil boom may be a good way to win an election, and it certainly helps to provide a temporary blip in GDP numbers. But it does very little for productivity.
Productivity — roughly defined as the value of the goods and services produced by the average worker — has long been understood as the main driver of sustained growth. Productivity growth helps explain why some countries grow faster than others over long periods of time, and why some countries are wealthier than others.
There are various ways for policymakers to have a positive impact on productivity. For example, increasing capital generally raises productivity, for the simple reason that capital allows workers to add more value to their production processes. Similarly, better infrastructure has a positive impact on productivity, as do education, greater access to technology, and simplified bureaucracy for businesses.
Research by three prominent Venezuelan economists has detailed the challenges that Venezuela faces in its quest to boost productivity. In addition to factors such as infrastructure, education, and technology, the authors cited Venezuela’s increased propensity for an over-valued exchange rate, as well as the country’s political processes and the (negative) priorities of main political actors.
A quick look at the sectors that are contributing to this latest bout of growth suggests that it is not based on palpable productivity gains. Growth figures are driven by four main components: public construction, financial services, communications, and retail commerce. All of these are related to an increase in government spending. None of these industries is likely to form the basis of future growth. The main reason workers in these sectors appear more productive is because of the oil money going around, which allows mobile phone companies to sell more imported goods and banks to offer more services. Once the price of oil reverts to the mean, these productivity gains will disappear.
I was reminded of Venezuela’s productivity challenge on a recent trip to Caracas. The plane was delayed over an hour because the airline had a hard time getting a hold of a (spare) part for the plane — partly because of Venezuela’s foreign exchange controls.
Once we landed, we had to wait an extra hour for luggage. Traffic into the city took another two hours. All in all, a one-hour trip became a six-hour ordeal. In the meantime, our cab driver could only wait at the airport. He couldn’t go back to the city because of the traffic, and we couldn’t take another cab because of safety concerns.
In the developed world, our driver would have done several runs back and forth from the airport. He could have checked traffic conditions, and he could have checked at what time the plane would land.
There are countless other stories that come to mind. People wait in line for hours just to cash a check. Getting currency for your company to import essential raw materials takes weeks, if not months; most firms have entire departments to deal with the paperwork. During the Chávez era, all of these bureaucratic obstacles have gotten worse.
Venezuelans have become noticeably less productive in the last twelve years. And yet, GDP keeps growing.
The secret to economic growth in the Chávez era is simple: Sit on top of something the whole world wants, sell it at an ever-increasing price, and spend your earnings generously. It has nothing to do with being better at your job.
Juan Nagel also blogs at caracaschronicles.com.