Voice

Hugonomics

Was Chávez good for Venezuela?

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.

THOMAS COEX/AFP/Getty Images

Daniel Altman

The Doomsayers Are Wrong Again

Wall Street isn't worried about the U.S. debt. Too bad Washington's budget hawks aren't listening.

In the waning days of 2010, with President Obama's stimulus package in full swing in the United States, the interest rate doomsayers were already wringing their hands. The government could manage its borrowing for the time being, they said, but rates would soon rise and make the national debt unsustainable. Three years later, that hasn't happened, yet the doomsayers haven't changed their tune. Will they be wrong again?

In December 2010, the Congressional Budget Office issued a report entitled "Federal Debt and Interest Costs." At the time, the federal government's interest payments had fallen to their lowest level, as a share of GDP, since the 1970s. How was this possible, given the ballooning size of the national debt? In two words: relative value. Investors were desperate for solid, safe assets, and there wasn't much competition from other securities in the wounded, languid markets. So the United States was able to borrow at some of the lowest rates in history.

As the interest rate doomsayers pointed out, this was possibly a temporary situation. If interest rates rose, the United States would be forced to roll over its debts at higher rates; paying interest on time would become much more difficult, if not impossible, unless the overall level of debt were reduced. The CBO was sure that this dark day was coming, and said so in the abstract of its report: "The interest the government pays on that debt is currently low by historical standards as a percentage of GDP but is expected to grow rapidly over the next several years as interest rates rise."

It didn't happen. Since December 2010, interest rates have actually fallen from about 3.3 percent for 10-year Treasurys to 1.9 percent at the time of this writing. The rates were already low in 2010; now, having dropped as low as 1.5 percent last summer, they're still close to rock bottom.

So why were the interest rate doomsayers so wrong? It's not as though Congress and the White House reached any sort of grand bargain to reduce the nation's debt between 2010 and 2013 -- quite the contrary. But during that time, forecasts for the national debt did decrease somewhat because of projections for health-care costs. They fell enough that by 2020, Medicare and Medicaid were expected to cost about $200 billion less per year than the CBO had forecast in March 2010. Also, the Republicans in Congress may have succeeded in blocking more fiscal stimulus, but it's not clear that the credit markets expected any new stimulus measures to pass in the first place.

No, the handling of the nation's fiscal situation probably had very little to do with the path of interest rates. So what did happen? It wasn't the federal government's demand for credit that drove the changes; it was the supply.

Despite the manufactured debt ceiling crisis in 2011 and the general dysfunction in Washington, investors were more than happy to pour billions of dollars into the Treasury's coffers. Some of them came from developing countries where rapid growth continued to generate profits and surplus tax revenues in search of safe homes. Amid the enduring uncertainty in the global economy, the American taxpayer was still seen as one of the world's best bets. At the same time, the Federal Reserve continued to pump new money into the markets. By committing to do so for several more years, it ensured that credit would remain cheap for the public and private sectors.

Today, the interest rate doomsayers are still shrieking about the government's demand for credit. They say Washington must cut spending now in order to reassure the markets that the United States will be able to pay its debts in the long term. "The US will reside in the debt danger zone for the foreseeable future in the absence of action," wrote Douglas Holtz-Eakin, a former director of the CBO.

These fears are overblown. The Treasury could double the interest payments on every single bond, note, and bill outstanding today, and the overall cost would still be lower as a share of GDP -- about 2.8 percent -- than at many times in the late 1980s and early 1990s.

Granted, interest rates in the markets can change quickly (just ask any European finance minister), but interest rates on the entire federal debt can't change that quickly. The reason, as I've pointed out here before, is that the Treasury has been steadily lengthening the term of its borrowing. This means those debts don't roll over nearly as often as they used to, and the country has more time to plan for changes in interest rates.

Moreover, the markets likely believe that the debt will come down naturally, for reasons that Nobel laureate Robert Solow recently pointed out in an op-ed for the New York Times. When strong growth returns to the American economy, tax revenue will rise and debts will be paid off, making more room for private borrowing.

For now, however, growth is sluggish and investors are still eager to buy American debt; the Treasury's last auction for 30-year bonds was almost three times oversubscribed. With the eurozone in trouble and Japan pursuing higher inflation, there are few safe places to park one's money. Yet a recovery in the eurozone or an eventual return to price stability in Japan won't bring on any sort of debt crisis in the United States. Either of those would signify a return to growth abroad, which would create demand for American goods and services as well. Faster growth in the United States would lead to smaller deficits and a smaller-than-expected national debt.

Under these circumstances, the interest rate doomsayers would be wrong again. Problems abroad are holding back growth in the United States (as are premature budget cuts here at home, according to Solow). As long as they do, the Fed will keep flooding the markets with money, investors will keep flooding the Treasury with money, and interest rates will stay low. When the problems abroad sort themselves out, interest rates may indeed rise -- but the national debt will shrink at the same time.

None of this will come as any surprise to people who work on Wall Street instead of in Washington. Financial analysts and economists don't see any urgent threat of higher interest rates or unsustainable debts; if they did, then interest rates on Treasury securities would already be higher today. No, the only threat is the one that people in Washington have conjured up to justify deep cuts in federal spending. Why would anyone listen to them?

JEWEL SAMAD/AFP/Getty Images