Hugonomics

What is the economic legacy of Hugo Chávez? A common criticism is that by changing how Venezuela sliced its economic pie, he also reduced the size of the pie for his fellow citizens. The Venezuelan economy did perform dreadfully through much of his presidency, and it continues to suffer from high inflation and rising debt. But when you strip away the ideological debates about Chávez’s 14-year tenure and just look at the numbers, it’s not entirely clear that he left Venezuelans worse off.

A happy recent development in economics has been the recognition that increases in equity and efficiency can go hand in hand, especially when inequality has reached a level that threatens living standards for everyone. In the 1990s, Venezuela may well have reached that level. The country had high inequality in incomes and one of the most inequitable distributions of wealth — at least judged by land — in the world. As research by the International Monetary Fund has suggested, so much inequality can indeed reduce economic growth. The reason is simple: The wealthy can grab economic opportunities that might be a better fit for poorer people with more suitable talents.

Of course, economic theory also suggests that too little inequality can stifle growth completely. In a socialist state of the kind Chávez professed to pursue, incomes would be equal regardless of effort. Notwithstanding the commitment of ardent socialists to their national project, workers’ effort might lag, resulting in an economy that failed to fulfill its productive potential.

So what happened in Venezuela? Chávez undertook an enormous agenda to redistribute income and wealth through a variety of social programs and the nationalization of assets in industries ranging from agriculture to telecommunications. According to the Venezuelan government’s statistics, inequality did eventually fall quite a bit during his time as president, or at least through 2009.

Four years later, the end of Chávez’s rule has left two big questions for economists: First, were his programs truly responsible for the reduction in inequality? And second, did these changes in the distribution of income result in more growth or less?

Though it’s never possible to compare a country’s economic history to what might have taken place with difference policies — you only live once — in this case the timing of the trends offers some answers. Inequality in Venezuela didn’t start dropping until 2006, seven years into Chavéz’s presidency. So if the incomes of the poor were increasing during that time, the incomes of the rich had to be increasing at the same rate.

Assuming the Venezuelan figures on inequality are correct, the most likely explanation is that the steep climb in oil prices starting in 2004 allowed Chávez to spend much more on programs for the poor, including those that raised their incomes merely by distributing cash. At the same time, by taking over private assets that would have gained value because of higher oil prices, he may have prevented rich Venezuelans from profiting during the boom.

Did this decrease in inequality have any effect on growth? Adjusted for inflation, average incomes in Venezuela fell until 2003, then began to rise again until hitting a plateau around 2009. The turnaround began before income inequality started to shrink, again coinciding with the upward turn in oil prices. Indeed, about a third of Venezuela’s GDP comes from oil, and per capita income tracks the oil price fairly closely.

A more interesting gauge of Chávez’s success is to look at how much the non-oil portion of the Venezuelan economy expanded. Based on a rough calculation of oil revenue — Venezuela’s annual production multiplied by the average price of a barrel of crude — sales accounted for only about 20 percent of GDP in 1999, yet by 2005 they were already peaking at 37 percent. After taking a big knock during the global financial crisis, sales settled at about 25 percent of GDP in 2011. (Note that this measure does not include refining and other oil-related industries.)

The size of Venezuela’s non-oil economy also fluctuated during this period. From 1999 through 2005, just before inequality started to fall, per capita income not from oil sank by 16 percent, adjusted for inflation. It’s likely that these were dark days for those who neither worked in the oil industry nor benefited from social programs funded by oil revenue.

Starting in 2006, the non-oil economy began to grow again. It, too, suffered during the global financial crisis, but by 2011 non-oil income per capita was 11 percent higher than when Chávez took office. That was progress, but 11 percent was still a pretty mediocre figure; on an annual basis, non-oil income per capita grew just 0.9 percent during the majority of Chávez’s presidency.

The numbers look even worse in comparison to Venezuela’s neighbors. Peru’s oil production is about 6 percent of Venezuela’s, but its per capita income managed to grow by almost 60 percent between 1999 and 2011, according to the IMF’s estimates. The pie also expanded much more quickly in Ecuador and Colombia.

Venezuela certainly reduced inequality, but it hardly seems to have resulted in more economic growth. It’s not hard to guess why. Chávez’s moves to reduce inequality weren’t the only relevant parts of his economic strategy. His hostile attitude toward wealthier countries, combined with the threat of nationalization, undoubtedly discouraged foreign investment. While neighboring countries modernized their regulations and improved their business climates, Venezuela maintained a reputation as one of the toughest places in the world to run a company.

Economic growth and rising incomes aren’t everything, however. Economists are taught to care most about wellbeing, which can and should be gauged in other ways. And here’s the kicker: If there is one area where Chávez appears to have succeeded, it is in enhancing human development as measured by the United Nations. Even though Peru’s incomes grew much more quickly between 2000 and 2010, Venezuela passed its neighbor in the U.N.’s favored metric.

Could Chávez have done even better with higher economic growth? Perhaps, but we’ll never know for sure. Instead, we’ll see whether Venezuela can cement its progress in human development atop a rather shaky set of economic foundations.