Megan on Chavez

by on March 8, 2013 at 3:30 pm in Current Affairs, Economics | Permalink

Venezuela’s oil output has fallen by almost a third since Chavez took power.  That’s why Venezuelan economic growth is pretty underwhelming.  Those social programs so beloved of Nation writers came out of investment funds that were previously used to keep oil production high–necessary, as we’ve discussed, because Venezuela’s sludgy crude is hard to get out of the ground.   Which gives us a paradox: Venezuela’s reserves are growing, but its production is in decline.

The only reason that the economy isn’t worse is that oil prices have stayed high.  But with production falling, Venezuela doesn’t just need high oil prices, but continuously rising oil prices, to keep funding all that government spending.  This is why Venezuela has been one of the hawkiest hawks in OPEC, always agitating for tighter quotas and higher prices.  A country with falling production doesn’t need to worry about tighter quotas.  But they do need to worry that lower prices will throw their budget disastrously out of balance.

Here is more, devastating throughout.  Here is the closer:

Politically, what Chavez did was successful.  But that success came at the cost of the future.  Instead of building a more stable foundation for long-term prosperity, Chavez started cutting chunks out of the house and handing them out to the crowd.  Socialists, especially, take note: he essentially destroyed one of the most competent, successful, state run companies in the world.  Thirty years from now, that–and not the transitory social programs that were thereby funded–will be his real legacy to Venezuela.

anon March 8, 2013 at 3:44 pm

Thirty years from now, that–and not the transitory social programs that were thereby funded–will be his real legacy to Venezuela.

Bolivarian Socialism, i.e., South American magical thinking.

rjs March 8, 2013 at 7:55 pm

30 years from now they’ll still be sitting on the largest oil reserves on the planet, and they’ll be worth more then than if they’d had exploited them now…

joshua March 8, 2013 at 8:05 pm
emess March 9, 2013 at 12:26 am

Hydrocarbons are used for far more than just fuels.

And I would not bet the house that alternative energy will have completely displaced fossil fuels by then either.

john personna March 8, 2013 at 3:48 pm

I had no love for Chavez, but “let others burn their oil first” seems a viable strategy. The quote above makes it sound unexpected that oil prices would be higher, later. Obviously not. This is (in the best case) Yergin’s bumpy plateau. It is a seller’s world going forward.

Anon March 8, 2013 at 4:12 pm

Brilliant! Conservation through incompetence!

The rest of the world will look like fools in two centuries when peak oil hits.

john personna March 8, 2013 at 4:17 pm

Well, nations fall on both sides of Hotelling’s rule, in two forms of incompetence. “Iran Oil Revenue Quickly Drying Up, Analysis Says”

Willitts March 8, 2013 at 9:14 pm

I don’t think so. As oil price rises, alternatives become relatively cheaper. At some point the fixed costs of the new infrastructure become admissible, alternatives are adopted, and oil demand and price plummet.

Imagine that in ten years we could cheaply create flawless, colorless, gem quality diamonds. Is the correct answer to sit on your pile of diamonds now? No, you need to beat all others to the market before your stash is worthless. Indeed, the expectation of a new entrant is enough to pull prices down.

john personna March 9, 2013 at 10:20 am

You no doubt drive an electric car then.

So Much for Subtlety March 8, 2013 at 10:44 pm

Imagine Country A and Country B. They have about the same amount of oil. Country B sits on their oil hoping it will be cheaper later on. Country A aggressively drills for oil. With the revenue, they build a network of schools and universities, they send everyone to school, they buy in Western technical excellent.

Thirty years down the track Country A is moving out of poverty and towards developed status. Even though they have no more oil, they design their own cars, have a thriving auto export industry and are moving into making mobile phones. Country B is still dirt poor and their main export is goats.

You forget everything that people can do with their money *now*.

Nor is this hypothetical. The Shah of Iran did precisely Country A’s strategy with his money. The Revolution side tracked that a little, but now car exports have joined carpets as one of Iran’s three biggest exports. When Iran runs out of oil it may actually do well.

8 March 9, 2013 at 12:50 am

The send everyone to college model has failed miserably across much of the world because their economies cannot support an educated workforce. However, the point stands. Any capital intensive investment will have long lasting effects. For example, they could build next generation nuclear reactors to replace the energy lost from oil. Which is also Iran’s strategy today.

john personna March 9, 2013 at 10:26 am

Yeah, “just pump the oil and build a new economy” is proving hard in narrow situations, when you don’t have much else going on than oil. On the other hand, rich diverse economies like the US don’t really say “no problem, we’ll just import all our oil.” Even we see a political draw (at least) to “energy independence.”

Megan McArdle March 9, 2013 at 7:40 am

The problem, which I alluded to in the piece, is that this is not a cost-neutral decision. An oil well is not (unless you’re in Saudi Arabia) like a bottle of wine: cork it and open whenever you’re ready. If you stop doing the stuff to keep it productive, like maintaining pressure to drive the oil to the surface, it becomes much harder (and more expensive) to get the oil out of the ground later. So oil prices have to go up by quite a lot to make this a good strategy.

prior_approval March 9, 2013 at 8:23 am

Except that this is what much of Venezuela’s oil wealth consists of –

‘The Orinoco Belt consists of large deposits of extra heavy crude (oil sands), known as the Orinoco Oil Sands or the Orinoco Tar Sands. The Orinoco Tar Sands are known to be one of the largest, behind that of the Athabasca Oil Sands in Alberta, Canada. Venezuela’s non-conventional oil deposits of about 1,200 billion barrels (1.9×1011 m3), found primarily in the Orinoco oil sands, are estimated to approximately equal the world’s reserves of conventional oil.[1] Petróleos de Venezuela S.A. has estimated that the producible reserves of the Orinoco Belt are up to 235 billion barrels (3.74×1010 m3)[2] which would make it the largest petroleum reserve in the world, before Saudi Arabia.’ http://en.wikipedia.org/wiki/Orinoco_Belt

No drilling involved, in any sense that an old fashioned Texas oilman would recognize.

TMC March 9, 2013 at 11:37 am

No need to wait to later, then. Drill, baby!

So Much for Subtlety March 9, 2013 at 9:13 pm

No, that is what Venezuela’s hydrocarbon reserves consist of. Their wealth comes from current production which is boringly mainstream – oil and gas using traditional drilling techniques. And hence vulnerable to slow decay if left untouched. Especially as they drill in their lakes for oil a lot – sort of on-shore off-shore drilling.

john personna March 9, 2013 at 10:23 am

I’m sure it is possible to ruin a productive reservoir, but I suspect it is also harder than lay commentators think. It is nonetheless a strong morality tale.

Ray Lopez March 8, 2013 at 4:20 pm

Balderdash. All of South America is a basket case that looks to North America for money, let’s face it. Was Pinochet saved by rising copper prices or Milt Freedman? Probably the former. Was Lulu a free-marketeer? No, but it worked out that way. Was Argentine strongman Peron, or current prez Cristina Fernández de Kirchner free marketeers? No and no. Name one country in all of South America–make that all of Latin America– that is free market oriented. Maybe Panama and Columbia with their drug-war obsessed presidents (including Noriega). Mexico with a population of 100M+ had at one point a GDP equal to greater Los Angeles, USA (I see they finally raised centro banca interest rates this week). And I speak as a Google scholar. Nuff said.

Doug March 8, 2013 at 5:11 pm

Wrong! Real copper prices fell quite precipitously from 1970 to 1990. The fact that Pinochet was able to make Chile turn from the one of the poorest least developed nations in Latin America to the richest, all while its primary export price was collapsing, makes the man one of the greatest economic leaders of the 20th century.

http://minerals.usgs.gov/minerals/pubs/commodity/copper/240798.pdf

Venezuela in contrast has managed to move backwards during the greatest bull market for oil in the 20th century. Chavez is a bumbling idiot. But he sure can sing folksy songs and play guitar well on TV!

Willitts March 8, 2013 at 9:07 pm

Chile’s economy began to take off in 1991 with a wave of privatisations AMD market liberalisations. They hit a setback in the early 80s when a recession hit the large real and financial sector conglomerates. Later waves of privatisation were broader based, but broad share ownership wasn’t stable. Pinochet’s accomplishments worked, but he made a mistake in allowing too much consolidation.

prior@approval March 9, 2013 at 1:11 am

‘makes the man one of the greatest economic leaders of the 20th century’

And what is a little murder and torture, compared to that?

So Much for Subtlety March 9, 2013 at 4:23 am

Allende was importing East German and Cuban “Security” experts. It was not a choice between democracy and torture. It was a minimal amount of torture or it was the Killing Fields. Well, the GULAG perhaps. You pick the lesser of two evils. Which the Chilean Parliament and Supreme Court did by asking Pinochet to step in.

Ray Lopez March 9, 2013 at 6:34 am

Allende was unstable (e.g., he committed suicide rather than go through a trial and be executed, IMO a more heroic death), but it is not true that Allende imported Commie security agents. He had a few Cuban bodyguards but that is all. Allende’s Chile was actually trying to appear balanced to Nixon’s USA, but Kissinger, a ruthless operator, nixed that. Read the boring but balanced book by Tanya Harmer for more info. BTW, the MEX central bank cut interest rates this week, my bad.

prior_approval March 9, 2013 at 6:37 am

And Pinochet ‘imported’ our expertise while doing the death squad tango (oops – wrong counrtry, though same three letter agency).

Pinochet is the one who killed and tortured, not Allende – who was ever so not mysteriously killed during the coup. And strangely enough, it was Pinochet’s goverment that committed a bombing in DC –

‘The Letelier case (September 21, 1976) refers to the killing in Washington, D.C. of Orlando Letelier, a Chilean political figure and later United States-based activist, along with his American assistant, Ronni Moffitt. The assassination by agents of the Chilean secret police DINA of the dictatorship of Augusto Pinochet was one among many in Operation Condor.’ http://en.wikipedia.org/wiki/Letelier_case

Not a Cuban or East German in sight for that act, one must note. And for those more interested in how the Pinochet’s ilk worked, this link about Operation Condor should be adequate background – http://en.wikipedia.org/wiki/Operation_Condor

As a final note, one of Allende’s fellow travellers is the current president of Uruguay – José Mujica http://en.wikipedia.org/wiki/José_Mujica Still not approaching Pinochet’s level of death and torture, on a daily, weekly, monthly, or annual schedule, however.

So Much for Subtlety March 9, 2013 at 7:51 pm

Ray, I am not so sure he was unstable. In the right circumstances suicide may well be a rational option. But of course there is a massive contradiction between saying Allende was not importing Commie security agents when your next sentence is that he was guarded by Commie security agents. Who was providing those Cubans? Blackwater? Allende might have been trying to appear a lot of things, but what he was doing was taking Chile down the same path as Castro did. Made harder because he could not invite his Soviet Brothers to liberate Chile in person, so America had to be lulled into doing nothing, but still that is what he was doing.

P_A, an out standing example of nonsense even from you – not actually untrue but not merely missing the point but desperately trying to distract attention from it. Allende did not get his way. Pinochet acted first. But his Cuban, East German and Soviet friends certainly killed and tortured.

Pinochet did not need to import any expertise. It is not as if Latin American governments have any problems in this area. In so far as they did, they seem to have got most of their knowledge from France – which sent experts to Argentina to teach the lessons of Algeria. Which is why electricity was so commonly used.

Mujica has mellowed. The Soviet Union is no more. He has stopped believing that the GULAG is a sensible solution. He is more like, if you need a comparison, Kurt Waldheim. You wouldn’t have wanted Waldheim to have been President of Austria when he was young, because he was a Nazi. But once the regime fell, he moderated his views and was neither a particularly bad or a particularly good President. But that doesn’t mean Mujica wouldn’t have been a disaster if he had won power back in the Seventies.

TallDave March 11, 2013 at 10:20 am

Allende’s rule came to end because he was importing the kind of Communism that led to the deaths of millions elsewhere. Pinochet was almost certainly less bad than Allende would have been.

The Anti-Gnostic March 9, 2013 at 9:11 am

Foresight, compared to what Bolsheviks do when they get in power.

Maksym March 9, 2013 at 2:54 am

Cooper prices are what sustains the system impossed by Pinochet (with blood) today. The country has no innovation nor industry. No industrial policy, no cluster development, no nothing. I bet everyone here still thinks Chile has been doing great. Chile’s economy is basically copper , retail rent-seekers, and some other commodities.

Ray Lopez March 9, 2013 at 6:41 am

The paper you cite does not support your thesis: except for the 1971-3 recession, copper prices actually rose, and dramatically, in real terms. They only fell in 1980–and not coincidentally Pinochet was out of office as president in 1981.

tt March 8, 2013 at 4:36 pm

“Megan” ?
you are on a first name basis with “Megan” ?

Jol March 8, 2013 at 4:45 pm

McArdle concedes that the poverty rate fell dramatically under Chavez but seems to believe that given the oil boom, it should have fallen much more. But note that, between 2002 and 2010, oil-rich Mexico, which wasn’t saddled with a lunatic socialist executive, saw its poverty rate drop from 39.4% to 36.3%. In the same period, Venezuela’s dropped from 48.6% to 27.8%. See
http://www.eclac.cl/prensa/noticias/comunicados/9/45169/tabla-pobreza-indigencia-18paises-en.pdf

DocMerlin March 8, 2013 at 4:57 pm

Mexico is a much larger country relative to its oil output, compared to Venezuela.

mdv1959 March 9, 2013 at 1:03 am

Let’s check back in five years shall we? Unless they have something other than oil to turn their economy around I’ll bet the gains will have been temporary.

And if Chavez was such a man of the people how was it that he amassed a billion dollar+ fortune?

what helped pave the way for chavez? March 8, 2013 at 4:59 pm

any analysis/re-cap of chavez or looking to his legacy is lacking without touching on the http://en.wikipedia.org/wiki/Caracazo.

Brian Donohue March 8, 2013 at 5:45 pm

Damn- that poverty rate trend looks like really good news.

More evidence that suggests that although the 21st century has so far been stuffed full of first world problems, it has been a great story from a “worldwide GINI coefficient” standpoint, although those who favor the GINI measurement prefer a more parochial application for some (surely non-political) reason.

TallDave March 8, 2013 at 5:52 pm

Chavez is an interesting case of both looting the country and buying political power with the state’s largesse.

BTW, relative poverty rates are meaningless, and GINI is oft-abused. GINI is really only relevant in cases where the wealthy are using political power to extract wealth, but it’s also possible to, say, invent Google or Amazon.

Mark March 8, 2013 at 8:56 pm

The wealthy do use political power to extract wealth since everything except wealth is taxed. Property rights are just a social construct established and protected by the government so the beneficiaries of that social construct should pay for it. Wealth isn’t taxed, but economic activity such as income is taxed, as well as the blood of those who defend the government that sustains property rights, to subsidize wealth.

Taxing economic activity and the blood of others to pay for the protection of property rights creates centralization of wealth that is subsidized by the taxation of producers.

TallDave March 11, 2013 at 10:18 am

The wealthy in rich countries are generally unable to use political power to extract wealth on significant scales, that’s the main reason why rich countries are rich. See Acemoglu and Robinson.

All of society benefits from property rights (except perhaps political elites would prefer to expropriate wealth using state force). If you don’t think so, visit a country that doesn’t have them!

Ray Lopez March 9, 2013 at 6:44 am

And let’s not forget, TallDave, the famous Pareto Index that has been held to be invariant across every society ever measured, that every student of income inequality should be familiar with. If nature deems inequality invariant, who are we to try and overrule nature? http://en.wikipedia.org/wiki/Pareto_index

TallDave March 11, 2013 at 10:21 am

Good point!

NAME REDACTED March 8, 2013 at 7:34 pm

This is essentially what politics is all about: How to create a tragedy of the commons for the voters such that you or your cronies stay with the power, until just before the jig is up.

The Anti-Gnostic March 9, 2013 at 9:14 am

Reactionary bigot. I’m calling Homeland Security.

dirk March 8, 2013 at 9:37 pm

The main argument I’ve heard from the Chavistas is that the literacy rate has increased substantially & childhood nutrition has been much better. If true, are there likely to be material returns on those investments? Aren’t literacy and childhood nutrition considered good low hanging fruit to pluck for a developing country? Or has MR University failed me?

DocMerlin March 8, 2013 at 10:53 pm

“Aren’t literacy and childhood nutrition considered good low hanging fruit to pluck for a developing country?”
Deworming too, deworming has shown the biggest returns in some very poor parts of africa atleast.

dirk March 8, 2013 at 11:11 pm

Chavez gave the poor a lot more healthcare, if that counts.

I’m actually curious what some of the typically racist responses here might be to the notion that Chavez has made the poorest of the poor more literate and healthier. Was it an investment in the “wrong” part of the population? Surely, if the story is true, average IQ levels in Venezuela have risen. Why wouldn’t that be a better long term investment than oil production? I guess it comes down to how much. But how much in either or makes a difference? The headline poverty reduction numbers sound dramatic.

dirk March 8, 2013 at 11:37 pm

To be clear, the reason average IQ’s must have risen under Chavez is because increased childhood nutrition in an otherwise malnourished population raises IQ’s. Arguably, increased literacy rates do too.

Would a non-Chavista government have made these investments in human capital?

dirk March 9, 2013 at 12:15 am

One last point. I find Chavez distasteful and didn’t like his methods. But we should leave our mood affiliations beside in judging his reign. What if he did allocate capital in a better direction than it would have been otherwise? It would make the Libertarians cry, buy what if it is the truth?

mdv1959 March 9, 2013 at 1:19 am

Was it an investment in the “wrong” part of the population? Surely, if the story is true, average IQ levels in Venezuela have risen. Why wouldn’t that be a better long term investment than oil production?”

What good was the investment if they go into an economic tailspin that leads to chronic shortages and a massive resurgence in poverty? They better hope that investment in education translates to some real GDP growth in the near future.

Also there’s no reason a good leader couldn’t have both maintained the oil industry and ramped up spending on social programs in a more sustainable way. From what I can tell his legacy is that he looted the country and crippled their golden goose.

dirk March 9, 2013 at 1:45 am

Doesn’t public choice theory mean it was impossible for Venezuela to get a “good leader” given their circumstances?

The question is whether Chavez was worse than another plausible leader.

Steve Sailer March 9, 2013 at 6:03 am

It was a race thing. Chavez was a pardo and he stood up for his fellow nonwhites against the white people who have run Venezuela (poorly) for 400 years. You hear a lot of bad stuff about Chavez in America because you hear mostly from Venezuelans who are white. (The only Venezuelan I’ve talked to recently, for example, is a blond guy named Thor.)

Chavez was a brave guy. RIP.

The Anti-Gnostic March 9, 2013 at 9:05 am

My response (ha ha) would be that you will get a lot further with things like sewer systems and vitamins than, say, pretending everybody is capable of post-secondary or even secondary academics if we just throw enough money at them. The US has plucked the low-hanging fruit, and we should stop doing things that result in negative returns.

Chavez was never my problem. If he advanced Venezuela along the road to a society where people can find their own level, good for him.

So Much for Subtlety March 9, 2013 at 9:23 pm

I assume the typical HBD response would be that Venezuela has a White upper class and a mainly mixed race lower class. Therefore given the Whites mostly look after themselves, investing in the poor is a waste of time and money. You can make them healthier, which is a good thing, but even if they are more literate, it is unlikely to improve their IQs much.

Also it is far too soon to see any sustained improvement. If someone claims there has been, Chavez fixed the figures. It will take a generation of better nutrition and improving schools (and I don’t know which is likely to be the more important) to have much of an impact.

But the real question is political, not genetic in my opinion. As I am not a HBD-er. Has Chavez taught mixed race Venezuelans not to Act White? Has the idea become implanted that it is wrong to compete with Whites on White (or perhaps Modern) terms? Will Venezuela’s African-Americans go the same way as America’s where academic success is seen as shameful? If so, all the school funding in the world won’t help – see New York’s 80% illiteracy rate among school graduates.

Steve Sailer March 9, 2013 at 6:09 am

The Rockefeller Foundation’s anti-hookworm effort in the U.S. South a century ago did wonders for the South and the U.S. as a whole.

Ray Lopez March 9, 2013 at 6:51 am

And let’s not forget this year’s eradication of Dracunculiasis, which experts say is harder to combat that smallpox: 1/18/2013 · (CNN)– A rare tropical disease called Guinea worm {Dracunculiasis} is closer to being eradicated, according to former President Jimmy Carter and other experts The worm can be up to three feet long, and looks like a very long spaghetti noodle. No vaccines or treatments are available for Guinea worm Prevention strategies include filtering drinking water and discouraging people with Guinea worm from wading in water. Water can also be chemically treated with larvicide.

RR March 8, 2013 at 11:43 pm
freethinker March 9, 2013 at 1:53 am

“Socialists, especially, take note: he essentially destroyed one of the most competent, successful, state run companies in the world. ” OK. But a socialist can respond: “Libertarians, take note, George Bush, whom you adore, essentially destroyed one of the most competent, successful, economies in the world and landed it, and the rest of the world, in the great recession ”
Socialists can point out that even if we grant Chavez’s socialism destroyed one firm, even perhaps one economy, Bush with his libertarian outlook undermined the economy of the entire globe.

Alexei Sadeski March 9, 2013 at 3:22 am

Bush II was one of the least libertarian politicians in ever.

Brandon Berg March 9, 2013 at 5:42 am

Freethinker, eh? I guess it’s true: You get what you pay for.

Millian March 9, 2013 at 5:52 am

I am no lib’t, but this is a straw man. Bush is notable economically mainly for large increases in medical and military Govt spending, as well as 2007-8 economic interventions. Not much of a lib’t platform.

cthulhu March 9, 2013 at 12:02 pm

In what cloud-cuckoo-land is GW Bush adored by libertarians? He was a disaster as a president; his only redeeming qualities were that he wasn’t Al Gore or John Kerry (now aka the Foggy Bottom fool).

anon March 9, 2013 at 12:25 pm

+1

TMC March 9, 2013 at 12:14 pm

Also note it is our current Dear Leader that has turned a recession into a depression.

Larry Siegel March 11, 2013 at 12:22 am

I do not adore GWB but I like and respect him more than most libertarians do. He did not destroy the United States. I live there and it’s still here. Real per capita GDP is about where it was in 2005 which I remember as a prosperous year, and are considerably higher than in 2000 when Bush was elected. It’s disappointing to have 8 years of zero net growth but it hardly qualifies as destruction of a country. Let’s moderate our rhetoric please.

Thom March 11, 2013 at 6:02 pm

Most libertarians who I know were disappointed in Bush because they thought the PATRIOT act should have been a lot tougher than it was, and that they thought the bailouts of the banks and the airlines just didn’t go far enough, and believed that the war should have been fought in a few additional countries.

freethinker March 9, 2013 at 2:00 am

Jol: ” between 2002 and 2010, oil-rich Mexico, which wasn’t saddled with a lunatic socialist executive, saw its poverty rate drop from 39.4% to 36.3%. In the same period, Venezuela’s dropped from 48.6% to 27.8%. ”
Ah but you forget that what matters for libertarian fundamentalists is not that poverty rate dropped more in Venezuela than in Mexico. What matters is that Chavez was a socialist, so the reduction in poverty was a criminal act, while his Mexican counter part was not a socialist so the lower reduction in poverty rate … for that matter even increase in poverty under his regime … is to be admired .

So Much for Subtlety March 9, 2013 at 4:26 am

Relative poverty is a dishonest and useless measure anyway. But anyone on the Right is likely to say that it is not important what short term changes Chavez can make. What matters is what long term benefit exists. If Chavez destroys the economy and wastes the oil revenue in a vote-buying exercise, which he did, then in the long term all the people of Venezuela will have is equal poverty. Mexico is actually going somewhere people might want to go.

Millian March 9, 2013 at 5:56 am

That comparison is more damning for the Left, though, when you include a broad sample of countries (Brazil, etc). It suggests that broad secular factors determine regional changes in poverty, and all your beloved State planning matters little.

Steve Sailer March 9, 2013 at 6:07 am

“This is why Venezuela has been one of the hawkiest hawks in OPEC”

Venezuela founded OPEC in 1960. A Venezuelan patriot named Juan Pablo Pérez Alfonso modeled OPEC on the Texas Railroad Commission. Without OPEC, the American oil companies would have pumped Venezuela dry for $3 a barrel.

Ray Lopez March 9, 2013 at 6:54 am

I hope you are not an economist Steve Sailor, as you are ignorant of how horizontal cartels work. No cartel can ever raise the long-term price of any good controlled–at best, they keep the price a bit above the free market price. So oil would have gone up from $3 a barrel even with no cartel.

Floccina March 12, 2013 at 5:47 pm

It is not as if the Government of Venezuela would have been well run absent Chavez.

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