Growth and Development in Venezuela

Growth and Development in Venezuela Growth and Development are terms that are often used synonymously to indicate progress or movement in the forward direction. However, the nuances of these two terms differ. While growth is a more short-term, spurt-like movement, development encompasses a whole array of progressive moves in different aspects of life. Economic growth is indicated by an increase in a countrys  gross domestic product, or  GDP which is an economic model that reflects the value of a countrys output. In other words, a countrys GDP is the total monetary value of the goods and services produced by that country over a specific period of time. Economic development is usually indicated by an increase in citizens quality of life. Quality of life is often measured using the  Human Development Index, which is an economic model that considers intrinsic personal factors not considered in economic growth, such as literacy rates, life expectancy and poverty rates. Economic growth adopts a quantitative approach and takes place at a revolutionary speed. It is interested in quick/immediate gains, in the market period. As against this, economic development prefers to take a qualitative approach, emphasizing on the quality of the production and equitable distribution rather than its quantity. It is more evolutionary, and follows a sequential pattern of outcome. It has immediate as well as futuristic gains i.e. it is more sustainable. Economic growth is a necessary but not sufficient condition of economic development.There is no single definition that encompasses all the aspects of economic development. The most comprehensive definition perhaps of economic development is the one given by Todaro:‘Development is not purely an economic phenomenon but rather a multi – dimensional process involving reorganization and re orientation of the entire economic and social system.’Amartya Sen defines economic development in terms of personal freedom, freedom to choose from a range of options. While economic growth may lead to an increase in the purchasing power of people, if the country has a repressed economy, there is lack of choice and hence personal freedom in restricted. Hence once again growth has taken place without any development. While economic growth may result in an improvement in the standard of living of a relatively small proportion of the population whilst the majority of the population rema ins poor. It is how the economic growth is distributed amongst the population that determines the level of development. This shows us how important growth is for development to take place, but also how growth in itself is not enough; It should instead be a necessary ‘pre-condition’ to ‘takeoff’ for a country to leap forward. (Rostow’s stages of growth) In the country of Venezuela, let us see whether there is consistent growth, and if there is, then whether there is an effective turnaround from growth into development. Country Profile: Venezuela is officially called the Bolivarian Republic of Venezuela and is part of the latin American countries. It lies on the northern coast of South America. It has a dense population of 29,100,000 approx, in the country area of 916,445 sq.km. It was first colonized by Spain in 1522, and later in 1811 got its independence and was one of the first Spanish-American colonies to be free. Later in 1830, it gained complete independence as a sovereign nation. The main interest in colonial Venezuela for Spain was geographic: its geographical position was a very strategic one and gave protection against enemies. Also, later in the 1620s, Venezuela became well known for its cocoa production and export. The sizable profits earned from this industry were carried away by the Spanish. Oil, as a commodity was virtually ignored until the 1900s. In Venezuela, the benchmark or watershed year can be counted as 1989. In this year, there was the launch of an ambiguous liberalization policy called â€Å"the Great Turnaround†. This entailed huge exchange rate devaluation, liberalization, privatization of trade, financial deregulation including free interest rates, no restrictions on foreign investment and new tax reforms. Post the economic boom in 1974, the economy was dragged into a downswing and GDP declined by 15%; this led to political pressure on the country by private companies. Liberalization was brought in to help the economy to revive itself. The final push to implement the liberal policy in 1989 was given by a balance of payments crisis in 1988. During 1970-2012  consumption expenditure per capita  in Venezuela increased by 8344 US dollars (in 12.3 times) to 9084.1 US dollars. The average annual growth of Consumption expenditure per capita in Venezuela was 198.7 US dollars or 26.8%. GDP per capita USD= 6401.91 PCCE/PCI= 9084.1/6401.91=1.4189 Gross Savings (% of GDP) = 26% (in 2012) The main economic driver of the Venezuelan economy is the production and export of crude oil. Venezuela is endowed with rich natural resources and has the largest oil reserves in Latin America and the Caribbean. It was also the world’s third largest exporter and ninth largest producer of oil. Its national petroleum company- Venezuelan Petroleum Corporation (PDVSA) is the third largest international conglomerate of oil. In 1990, Venezuela was also deemed to become an international leader in the export of its abundant mineral wealth namely- coal, iron, steel, aluminum. The production and export of crude oil forms the heart of the Venezuelan economy. The period of the oil industry in Venezuela can be roughly traced over four periods, namely: 1912-1943: the discovery and the initial production of oil. 1943-1974: Affirmation of Venezuela’s control over the oil industry. 1974-1998: The boom in oil production and prices, and also the nationalization of the oil industry. 1999-2003: Government’s attempt to regain control over the industry to curb its growing independence. (Refer Appendix, [1] for period from 1980-2000) In 1912, the petro-state of Venezuela was born and from then on, it took its baby steps to becoming the world’s second largest oil producer following U.S in 1929.In a short span of 15 years from 1920-1935, Venezuela’s oil share of exports exponentially shot up from 1.9% to 91.2%. This had an immediate and direct impact on the economy called as â€Å"the Dutch disease† [2] by many economists. This implied massive declines in agricultural production and also in industrialization. In 1943, Venezuela aimed at strengthening the industry and hence passed the Hydrocarbon Act. This tied the state income more closely and tightly to oil revenues. The law affirmed that foreign companies could not make more profits from oil than they paid to the Venezuelan state. This led to a growing reliance on the state. {This can be compared to the MRTP act initiated by the Indira Gandhi government in India} However, in the 1950s, the world oil industry felt the effects of the oversupply of oil (especially from the middle east) and hence oil prices drastically and chronically reduced. To confront this problem of oversupply, in 1960, the OPEC was formed as a cartel. Venezuela also created the Venezuela Oil Corporation, which formed the basis for oil nationalization. Post the formation of the OPEC, in 1973, oil prices and Venezuelan revenues from it increased four-fold, from 1972-1974. This lump sum increase made development a nearer goal to achieve. President Perez called his project â€Å"La Gran Venezuela† or â€Å"sow the oil† which encompassed fighting poverty through price controls and also the diversification through import-substitution techniques. This was also accompanied by the nationalization of the Oil company namely, PDVSA. The windfall gain from the oil boom ushered in an era of positives for Venezuela, but it also brought chronic inflation and massive indebtedness. This can be shown by the business cycle in appendix [3]. After the periods of boom, the economy got dragged into a slowdown due large scale inflation. Later in 1998 when oil prices lowered (because of oil members breaking their quotas) the economy of Venezuela took a hit and the per capita income steadily decreased. This is again shown in the business cycle in appendix [3] with the depression phase. The election of President Chavez in 1998 strengthened OPEC countries to maintain oil prices at a high rate. He persuaded all the head of states of the OPEC nations to stick to their quotas and to not oversupply oil. His efforts had immediate results and the price of oil rose for the firm time since 1985, to more than $27 per barrel. Thus, we see how oil revenue and government income in Venezuela are indivisible. President Perez indirectly wished to adopt the ‘unbalanced version’ of the ‘Big Push Model’. He claimed ‘sow the oil’ which in other words meant increasing revenues from the oil sector would fuel development in other sectors such as agriculture and industry. But this failed to happen since with a four-fold increase in oil revenues, government expenditure also increased and even surpassed the newfound revenues. When the oil prices took a hit, the government spending could not decrease as easily it was first increased. This gave rise to deeper debt. In between 1970 and 1994, public debt rose from 9% to 53% of GNP. Also, due to growing importance given to the oil industry, agriculture was neglected and contributed merely to one tenth of the economy in 1950s when it was one third of the GDP in 1920s. Presently, agriculture comprises of only 6% of the GDP. Thus, the Big Push to just one sector did not help in the case of Venezuela as other sectors did not benefit as much. Politics and Oil The oil economy of Venezuela left an imprint on its politics. The ‘clientelistic’ [4] nature of the state led to being increasingly bureaucratic. Maximum people working in the formal economy (approx 50% of the working population), about 45% of them are employed in the government, or rather in the government –run oil industry. Yet another consequence of Venezuela’ss oil wealth, is what political scientist Terry Lynn Karl calls â€Å"a pacted democracy.†This entails democracy which is held together through an agreement amongst elite groups, usually opposing, and powerful interest groups. It is a kind of truce among them which is struck to maintain their personal interests and privileges. Differently put, even when a single party won the elections, the revenues from oil had to obligatorily be shared among members of other parties, more or less among the voting results. This guaranteed the different interest groups access to jobs, contracts and ministries and even the power of the union federation, CTV was similarly divided. Thus, this level of bureaucratization in Venezuela, the clientelistic trends, and the ‘pacted’ nature of its democracy made Venezuela resemble a one-party socialist regime. In Venezuela, during the rule of President Hugo Chavez, his manifesto drew heavily on the Marxist ideology. Marx fought for the proletariat or the ‘have-nots’ of society, claiming that they were the ones who did the real labor (manual labor) as against the bourgeois or the ‘haves’ who only indulged in intellectual labor, took advantage of the labor class, usurped their profits and exploited them. Chavez, in 1992, attempted a coup because he believed that the president was corrupt. When later he was elected as president, he vouched to end poverty and exploitation and redistribute the profits earned by wealthy businessmen. Owing to a leftist and socialist ideology, he aimed at attaining and asserting control over privately owned property. Thus, eventually, he gained control over all the factors of production- land and its resources (oil), capital, labor. He did as he told he would do, and his governance was labeled as â€Å"petroleum socialism†. Oil was used as a measure of control in terms of the domestic economy as well as the international political affairs. PDVSA is the Venezuelan state-owned petrol company. In 20002, Chavez claimed that 10% of its revenues must be invested in social programs. The kind of domination control over oil that a corrupt or unstable government claims is detrimental to the country’s economic development. Chavez implemented many social programs to combat poverty and reduce inequality. These programs were supported by the PDVSA and were fabricated to meet the basic needs of the people. Some of them are: Health: Mission ‘Barrio Adentro’ or â€Å"inside the neighborhood† has set up clinics and made doctors available in areas previously lacking these facilities. Mission ‘Alimentacion’ or Mission Food, a food plan funded by the government in order to supply products through grocery stores (Mercal and PDVAL) without the aid of intermediaries. Also to set up community kitchens to provide three free meals per day. This mission has benefited about 15 million people. Mission Sonrisa or Mission Smile which addresses to the oral health of the people by the setting up of many new dentistry clinics. Mission Christ Child and the inauguration of a neonatal intensive care unit and enhance the quality and access to facilities for pregnant women. Education: Mission Robinson was created with an aim to eliminate illiteracy. This mission taught approx 1.8 million people to read and write. Mission Rivas aimed at integration of Venezuelan people into the elementary and secondary education and proved beneficial for more than a million. Mission Sucre had been set up to help improve the access to higher education. About 700,000 people profited from it and successfully completed their graduation. Housing: Mission Habitat, in 2004, helps the people secure housing through credit facilities and also helps in creating integrated communities. Employment: The Great mission Knowledge and Work hopes to integrate 1 million jobless people into the labor market, which will also help reduce unemployment. All these missions did a great deal in alleviating poverty and reducing inflation and unemployment in Venezuela. Hugo Chavez concentrated on an expansionary fiscal policy through social spending. Social expenditure from 1911-2011 accounts for more than 60% of revenues- this is nearly double of the expenditures made in previous periods. The number of households living under the poverty line in 2003 was 55% which by 2011 fell to 26%., and those families living in extreme poverty has fallen to 7% from 25%. In 2003, there was again a spike in poverty, inflation and unemployment due to a coup to overhaul Chavez’s government. There are other factors which show an impact of the missions of the overall welfare of the country. For example, infant mortality rates and malnutrition victims have fallen; while school enrolment and graduation rates have risen. The Gini coefficient of Venezuela, which measures inequality on a scale of 0-1, is 0.394. Thus, these missions were effective instruments for alleviating poverty, by tackling urgent needs of education, food, health, housing etc. They began in 2003, and 36% of state revenue went into funding them between 1986 and 1998, while 60% of revenue was spent between 1999 and 2011. Politicization of the missions: But, there are claims that Chavez’s social missions served two very different purposes: they were subject to political manipulation (i.e. to buy votes) and also allowed for a direct distribution of oil rents to the low income population. The government used these funds clientelistically and also distributed them to the very poor. It is seen that Chavez distributed these oil revenues to primarily those poor section which were sure vote banks for him. Thus, the missions helped to buy votes. Chavez’s government also laid emphasis on providing all citizens with identification cards. These cards would be required by them at the time of gaining access to cash transfers. At the time of election, this card got automatically transformed into an election card and was required by the National electoral Council for voting purposes. (Mission Identidad) These missions have been dispatched to the masses and seem to be catering at a mass scale. Therefore, they are more quantitatively-aimed than quality-oriented. The infrastructure is not well maintained, the teachers are paid a pittance and schools seem to be largely used as a site for ideological indoctrination. Wrt health-Some of Venezuelas public hospitals are closing. Others are ridden with crime. Many physicians are quitting medicine starting new careers in Venezuela or emigrating, upset at being paid a pittance or not at all. Medical supplies are in short supply. Wrt job and employment conditions- Investors are running away from here since the government is taking over many companies. There is an outward movement of the educated class of engineers, doctors and other professionals to other countries where the pay is better. There is an influx of migrants, mainly for blue-collar jobs.