Globalization on Poverty and Income
Distribution in Venezuela
Abstract
By using the World Development Indicators (2007) provided by the World Bank, this
study seeks to investigate how globalization has affected the income distribution, poverty,
and quality of life in Venezuela. This case study focuses on data since 1990 and uses a
social accounting matrix and model simulation to determine how a growing world economy
has affected a country whose government favors a social economy rather than a liberal
democratic plan. My analysis suggests that globalization has worsened the income
distribution and poverty headcount in Venezuela; however, the poverty gap fared worse
under globalized conditions than it would have under relative autarky. Accordingly, many
human development indicators suggest improvements in Venezuela, but it still falls behind
the rest of Latin America on a few measures.
Jane Doe1
I. Introduction
How has globalization affected the income distribution, poverty, and quality of life in
Venezuela? The research question addressed in this paper is whether globalization has
paved a favorable or grim path for future economic development in Venezuela. Using data
provided by the World Bank (such as the 2007 World Development Indicators), this study
1
Contact: jane@uvm.edu. Phone: 802-656-6600. I would like to acknowledge the
inspiration of my colleagues in the Human Development Network of the World Bank.
After having the opportunity to act as an intern in the network’s Chief Economist’s Office,
I have gained insightful exposure to how poverty and development affect human
development outcomes in developing countries. My experiences at the World Bank,
specifically with my mentor Dr. Amartya Sen, have strengthened my interests in economic
development. I would also like to acknowledge Professor David Ricardo for his relentless
assistance and insight throughout this research. Lastly, I would like to thank my family and
friends, both here at the University of Vermont and in Pennsylvania, for their continued
love and support through the good times and bad that have made me strong enough to
fight, stay positive, and continue to do what I am most passionate about. Without them, I
would not be where I am today. All errors are the exclusive responsibility of the author and
all usual disclaimers hold.
conducts a simulated Mundell-Fleming model with a Social Accounting Matrix (SAM) for a
base year of 1990.
The evidence suggests that the effects of globalization on the
Venezuelan economy heavily depend on fluctuations in the demand and price for oil and
on the political culture dominating policy making. Overall, because of this monopolized
market, a lack of diversity in the market, and over-spending on ineffective social programs,
Venezuela has failed in the game of globalization. Despite this, there have been gradual
improvements in some indicators of quality of life such as fertility, literacy, and infant
mortality.
The structure of this paper is as follows: In section II, I provide an overview of
policy issues in Venezuela and its lack of acceptance of liberal foreign policy while
thoroughly describing the country’s macroeconomic profile from 1980-2005. Section III
discusses Venezuela’s rejection of globalization as it retracted from progress in the late
1990s; section IV explains my methodology and describes my simulation models testing
the counterfactual with an empirical analysis of Venezuela’s economy since 1990; section V
provides my poverty and income distribution analysis; and section VI describes a more
detailed look into Venezuela’s dependence on oil exports and the dangers of a
monopolized market and what this means for the future of Venezuela’s economic
development. I complete this investigation in section VII with my conclusions.
II. Policy Issues
With strict currency controls, price controls, nationalization of important aspects of the
economy (the oil industry), and policies that strengthen trade unions, Venezuela’s present
economic policies do not adhere to the Washington Consensus; but, the country has
opened its economy for international trade (with most of the country’s income depending
on its oil exports). The present government values socialist economic prospects rather
than the more liberal perceptions held by the World Bank and IMF. From 1958 to 1978,
2|Page
however, Venezuela demonstrated good economic performance, high growth, low
inflation, decreasing poverty, and low unemployment (Monaldi et al. 2006). Since 1978,
on the other hand, economic performance has been quite dismal: it has experienced the
worst per-capita GDP levels in Latin America, high inflation, increasing unemployment,
and increasing poverty (Monaldi et al. 2006). Although the institutions that were created in
the 1960s generated cooperation, reforms were implemented in the 1980s that were
intended to improve democracy but actually weakened the party system. This resulted in
volatile policy making, increased stakes of power, a lack of cooperation, and a highly
polarized public sphere (Monaldi et al. 2006).
According to the World Development Indicators (2007), the level of income held
by the richest 20% of the population dropped from 60% in 1981 to 52% in 2003, yet the
income share held by the poorest 20% of the population has remained steady around a
mere 3%. The unequal income distribution continues to worsen. GDP per capita (PPP,
constant 2000 USD) has dropped from $6,714 in 1981 to $5,900 in 2006, but was much
higher before this time period (hitting $7,301 per capita in 1975). Many researchers argue
that GDP per capita is not a clear indication of human development outcomes, but the
World Bank also provides that the poverty headcount ratio (at $2 a day) has dramatically
increased from 25% in 1981 to 40% in 2003 and unemployment has risen from 7% to 17%
in the same time frame.
In a society with such an unequal income distribution, rising unemployment rates
and increasing poverty levels, one might suspect that the quality of life would be steadily
decreasing as well. Although this is true in some regards, Venezuela has managed to
increase its literacy rate of those over the age of fifteen from 89% in 1990 to 93% in 2006
and infant mortality rates have dropped from 46% in 1980 to 21% in 2005. At the same
3|Page
time, due to changes in the budget composition, Venezuela’s debt growth has been one of
the highest in Latin America while public spending has simultaneously grown dramatically
during the period 1999-2004 (Puente et al 2007). With President Chavez (who criticizes
globalization and American foreign policy) taking office, increases in public spending on
“social” programs actually have proven to be unsustainable and inefficient, diverting
resources from high to low value uses, and inequitable/regressive, redistributing income
from lower to higher income groups. The allocation of resources also tends to reflect the
preferences of interest groups (Puente et al 2007). With these tendencies, of course the
income distribution has continued to worsen as the intended beneficiaries become worse
off and the government is infiltrated by corruption.
Weisbrot and Sandoval (2007) point out that there was an overall economic
downturn in Venezuela: it lost 24% of its GDP as a result of an oil strike from December
of 2002 until February of 2003.
This demonstrates the dangers of Venezuela’s
dependence on the oil industry. Since then, however, real GDP has grown by 76%.
Weisbrot and Sandoval (2007) claim that the government’s expansionary fiscal and
monetary policies have contributed to this expansion. Table 2.1 illustrates the real GDP
composition by percentage from 1990-2005 as provided by the World Development
Indicators (2007). Government spending increased from 8.4% of GDP in 1990 to 11.3%
of GDP in 2005 as consumption dropped from 70.5% to 58.6% in the same time period.
Weisbrot and Sandoval (2007) note that the poverty rate decreased from 55.1% in 2003 to
30.4% at the end of 2006. Unemployment, also, dropped from 19.4% in June 2003 to
8.3% in June 2007 (Weisbrot and Sandoval 2007).
Table 2.1 Real GDP Composition, 1990-2005
YEAR
Consumption
Investment
1990
70.50
10.20
1991
76.20
18.70
Government
8.40
9.70
Exports
39.50
31.40
Imports
20.20
26.20
4|Page
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
78.80
81.50
77.30
76.60
68.30
65.10
71.10
69.70
64.20
69.10
66.50
67.60
62.40
58.60
23.70
18.80
14.20
18.10
16.60
27.70
30.70
26.50
24.20
27.50
21.20
15.60
21.50
21.70
9.20
8.50
7.20
7.10
5.00
13.50
13.50
12.30
12.40
14.20
13.00
12.90
12.60
11.30
26.40
27.00
30.90
27.10
36.50
29.30
20.90
22.90
29.70
22.70
30.40
33.80
36.20
41.00
28.90
27.20
22.30
21.80
21.30
22.00
22.70
19.20
18.10
19.40
18.10
17.00
20.10
21.30
Source: World Bank (2007)
Venezuela has a fixed exchange rate and capital controls in place. The main
challenge facing the economy at the moment is the rate of devaluation and inflation. With
the Bolivar pegged at 2,150 to the dollar, the Venezuelan currency is overvalued and has
devalued to more than 4,000 Bolivar per dollar since 2006 (Weisbrot and Sandoval 2007).
As 17.6% of GDP in 1990, the current account balance fell to -6.4% of GDP in 1992.
Since 1992, the current account balance increased to 13.1% of GDP by 1997 suggesting
that the Bolivar was indeed overvalued. Again, the current account balance dropped to
4.9% of GDP in 1998 and then rose to 13.7% of GDP by 2003 (World Development
Indicators 2007). Inflation rose rapidly during stages of political instability and the oil strike
in December of 2002; the inflation rate declined since the strike, but has been steadily
increasing since June 2006 and reached 19.4% in June 2007. With exchange controls and
a government current account surplus, there are no forces that would normally provoke
devaluation (Weisbrot and Sandoval 2007). This demonstrates what is commonly known
as Dutch disease which describes the relationship between exploitation of resources and a
decline in the manufacturing sector. By raising the exchange rate, the manufacturing sector
is less competitive on the global stage (Ebrahim-Zadeh 2003).
5|Page
When compared to the rest of Latin America, as shown in Table 2.2, Venezuela is
falling behind. Although the country’s current account balance remains more stable (and
positive as a surplus) while Latin America’s overall current account balance has been
inconsistent and mostly a deficit, Venezuela has still relentlessly fallen below par in GDP
per capita measures and inflation, which are key indications of a country’s health. Table 2.2
provides a comparison chart of these measures.
Table 2.2 Venezuela Falling Behind, 1990-2005
GDP/capita
Current Account Balance
units, PPP current int'l $
(tens of millions
YEAR
Venezuela
LAC
Venezuela
LAC
1990
4702
4925
828
-102
1991
5222
5215
174
-1736
1992
5539
5427
-375
-3348
1993
5558
5666
-199
-4554
1994
5423
5981
254
-5120
1995
5632
6070
201
-3781
1996
5611
6310
891
-3893
1997
5947
6646
373
-6582
1998
5914
6767
-443
-8966
1999
5534
6789
211
-5567
2000
5756
7102
1185
-4756
2001
5983
7204
198
-5312
2002
5449
7217
760
-1604
2003
5040
7414
1145
769
2004
5990
7929
1383
1899
2005
6632
8410
2536
3315
Inflation
Venezuela
42
21
28
32
63
52
116
38
19
26
30
8
33
35
31
29
LAC
22
22
12
11
13
11
7
5
5
4
7
4
5
6
7
6
Source: World Bank (2007)
It is also evident that investors perceive Venezuela’s economy unfavorably with
negative expectations, thus deterring foreign direct investment, which would help economic
development if present or more substantial (Weisbrot and Sandoval 2007). In 1990,
foreign direct investment accounted for only 1% of GDP. Although foreign investment
rose and peaked at 7.2% of GDP in 1997, it dropped back down to a mere 2.1% of GDP
by 2005 (World Development Indicators 2007). Kentor (2001) notes that foreign capital
6|Page
dependence has a positive effect on income inequality; however, some level of income
inequality, if not too severe, is healthy for growth and poverty alleviation.
III. Venezuela’s Rejection of Globalization
Although there have been general increases in GDP per capita measures and the current
account balance has (generally) maintained a surplus, the high government spending has
forced its public sector borrowing requirement (PSBR) to be higher than the 3% target
specified by the Washington Consensus. Table 3.1 shows that the PSBR in Venezuela has
consistently been above this 3% target and has remained above 11% since 1997 indicating a
lack of fiscal discipline. Inflation continues to be a problem along with the country’s
overall openness (or lack there of) to trade, which mostly depends on oil exports.
Openness, measured as net exports divided by real GDP, has staggered over the last fifteen
years but remains relatively low compared to the rest of Latin America. Table 3.1 provides
the trend of openness from 1990-2005.
Table 3.1 Openness, 1990-2005
YEAR
PSBR 1
1990
8.4
1991
9.7
1992
9.2
1993
8.5
1994
7.2
1995
7.1
1996
5.0
1997
13.5
1998
13.5
1999
12.3
2000
12.4
2001
14.2
2002
13.0
2003
12.9
2004
12.6
2005
11.3
Openness2
0.2
0.05
-0.03
0
0.08
0.05
0.15
0.07
-0.02
0.04
0.11
0.03
0.11
0.17
0.16
0.2
Source: World Bank (2007) and author's calculations
Notes 1. PSBR expressed as a percentage 2. Openness is
computed by dividing net exports by real GDP
7|Page
Figure 3.1 illustrates the trend of openness from 1990-2005. Although Venezuela’s
openness was somewhat sporadic from 1990-1998 and it appears that the economy was
actually becoming less open, there has been a general upward trend since 1998, indicating
that although the progress has been slow, Venezuela has been moving toward a more open
economy.
Considering Venezuela’s high, inconsistent inflation rates and its fixed exchange
rate, it is evident that the Bolivar has been repeatedly revalued in an economically
inefficient manner providing a noncompetitive exchange rate.
After calculating the
devaluation based on the changes of the real exchange rate and calculating the appropriate
exchange rate based on domestic and world inflation rates, it is evident that the Bolivar has
been consistently overvalued. Table 3.2 provides the nominal devaluation of the Bolivar,
the change in the real exchange rate, and the inflation differential from 1991 to 2005. It is
evident that the Bolivar has not been appropriately valued as shown by the differential.
Figure 3.2 illustrates all three trends, demonstrating the differences between the real
exchange rate and the nominal devaluation.
Table 3.2 Exchange Rate, 1991 to 2005
8|Page
YEAR
Nominal Devaluation
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
0.174
0.170
0.247
0.389
0.160
0.576
0.146
0.108
0.096
0.109
0.060
0.377
0.278
0.150
0.095
Change in Real
Exchange Rate
0.050
-0.032
0.011
-0.140
-0.268
-0.509
-0.188
-0.031
-0.126
-0.136
0.020
0.087
-0.031
-0.112
-0.146
Inflation Differential
0.124
0.202
0.236
0.529
0.428
1.085
0.334
0.139
0.222
0.245
0.040
0.290
0.309
0.262
0.241
Source: World Bank (2007) and author's calculations
A simple indication of a country’s acceptance of globalization can be witnessed in
its capacity to import and export. As previously seen in Table 2.1, Venezuela’s tendency to
import and export has been relatively sporadic, although export growth has been more
consistent than import growth. Since 1985, annual export growth has maintained positive
figures with just a few exceptions and the import growth has been positive since 2003.
Figure 3.3 provides a visual of the trade growth patterns since 1985.
9|Page
Although there is some evidence of Venezuela opening its economy to join the
game of globalization, it has played the game poorly and is now retracting any progress it
did make in the 1990s. The country’s inconsistency, political instability, and corruption
have proven to be risky for foreign investors. Foreign direct investment has increased
slightly over the past twenty years, but it peaked in 1997 at only 7.2% of GDP. Since then,
it has drastically fallen and has failed to maintain a level higher than 4% of GDP since
2000. Figure 3.4 provides the trend of foreign direct investment as a percentage of GDP
since 1985.
10 | P a g e
Not only has Venezuela started to move away from globalization after reaching its
most open period in the late 1990s, but it has also failed to privatize its domestic affairs.
According to the World Bank Indicators (2007), it took 141 days in 2005 to start a
business in Venezuela when on average in Latin America and the World it required only
67 days and 47 days, respectively. With a process that requires significant amounts of time
and work, individuals are less likely to have the incentive to open private businesses and to
therefore diversify income resources. Accordingly, the state owns the most prominent
corporation in Venezuela: Petroleos de Venezuela, S.A. As a stated-owned petroleum
company, it is the world’s third-largest oil company generating about 80 percent of the
country’s total export revenue, half of the central government’s income, and one-third of
the country’s GDP (Alvarez 2008). Venezuela’s oil dependence and its implications are
further discussed in section V, but it is important to note here that this lack of
diversification provides great risk for the economy and also monopolizes most of the
country’s wealth. Any monopolization of power as seen in Venezuela is a rejection of the
Washington Consensus and fails to diversify the country’s economy.
IV. Model and Theory
This research follows the Mundell-Fleming growth model to analyze poverty and
development in Venezuela. Although Venezuela has been sporadic in liberalizing its
economy and still fails to follow an open-economy framework, I use 1990 as the base year
in this case study due to the change in political leadership. The aggregate demand balance
for Venezuela is written as
X = a1X + C + I + G + E - epmMc
where X is the gross value of production, a1 is the input-output coefficient, C is the
household consumption supplied by domestic firms, I is investment demand supplied by
11 | P a g e
domestic firms, and G is the government demand for goods and services. Net imports is
given by (E - epmMc) where E denotes demand for exports, e refers to the nominal
exchange rate (which is equal to 1 in the base year), pm refers to price of imports (which is
also 1 in the base year), and Mc represents competitive imports.
Only the input-output coefficient, the nominal exchange rate, and the import price
are previously determined parameters. The following consumption function is used to
determine C:
C = Cbar + cYd
where Cbar is autonomous consumption, c is the marginal propensity to consume, and Y d
is household disposable income. Autonomous consumption and the marginal propensity
to consume are parameters, but disposable income can be determined with this equation:
Yd = Yh(1-th)
In the previous function, Yh is household income and th represents direct taxes on
households. Direct taxes on households are already given for my model, but the following
equation can be used to find household income:
Yh = (1-tπ)πX + ∑iwiliX + Tr + T* + ∑wg
The parameters of this equation include: X, tπ (profit tax rate of direct taxes on firms) and li
(the labor coefficient which is defined as the amount of labor of type i used to produce one
unit of X). Now, I will first provide the functions to determine each variable, and then
move on to detail the equations needed for variables within those equations. To solve for π,
the profits per unit of output, we can use the following function:
π = τB
where τ is the mark-up on unit costs (a parameter) and B denotes unit costs. The wage rate
(wi) can be found with a wage adjustment equation where t represents time (year):
12 | P a g e
wit = (1 + gwi)wit-1
here, there are two parameters: gwi is the growth in nominal wages (according to the strength
of labor unions and other distortions that may affect the labor market) and wit-1 is the lagged
wage rate (or the wage rate from the year before the base year). Trt (the government
transfers to households) are evaluated with the following government transfer equation:
Trt = (1 + gTr)Trt-1
The growth rate of government transfers (gTr) and the lagged government transfers (from
one year before the base year) (Trt-1) are calibrated from my base SAM. The following
equation is used to determine the foreign transfers to households (T*t) in year t:
T*t = (1 + gT*)T*t-1
where (gT*) is the growth rate of foreign transfers and (T*t-1) represents lagged foreign
transfers (both calibrated from base SAM). The last variable from the household income
equation is the government wage equation:
Wgt = (1 + gwg)wgt-1
where (gwg) is the growth of government wages and (w gt-1) denotes lagged government wages.
The only variable from the household income equation left to define is for unit costs (B)
which are needed to solve for profits per unit of output:
B = pa1 + ∑iwili + ep*a*
where p* and a* are parameters for the price of imported intermediates and the inputoutput coefficient for imported intermediates, respectively. Now, we must go back to our
original aggregate demand balance and solve for I, investment:
I = (I0 + I1u)K
where I0 is the autonomous investment and I1 is the sensitivity of investment to capacity
utilization (u). Capacity utilization can be found with the following function:
13 | P a g e
u = X/Q
where Q is capacity. We define K, the capital stock from our investment function, as
follows:
Kt = It-1 – δKt-1
where It-1 is the lagged autonomous investment and δ is the depreciation rate. Now we must
address the unknown variable Q from our capacity utilization function:
Q = AKβL(1-β)
where β is the share of profits in value added (calibrated from the base SAM) and A is the
calibration parameter for capacity. Employment, L, can be defined as:
L= (1-β)Q / (w/p)
The price, p, is equal to one in the base year and can be found from the following:
p = (1 + t)(1 + τ)B
To return to the original aggregate demand balance, the government demand for goods
and services, (G,) can be determined:
Gt = (1 + gG)Gt-1
where both inputs are parameters: gG is the growth of demand by the government and Gt-1 is
the lagged government expenditure. To find exports demanded, the following function is
used:
E = E0 + E1er
where E0 represents autonomous exports and E1 is the parameter for the sensitivity of
exports to the real exchange rate. To further this equation, we calculate the real exchange
rate:
er = (ep*) / p
14 | P a g e
The final variable from the aggregate demand balance still to be addressed is for
competitive imports (Mc):
Mc = mcX
where mc is the competitive import coefficient and can be found for year t with the
following function:
mct = (1 + gmc)mct-1
Here, gmc is the growth rate of competitive imports and mct-1 are both previously calibrated
parameters.
Based on the previous 21 equations, 21 variables, and 32 parameters, I am able to
use my calibrated SAM from the base year of 1990 and data collected by the World Bank
to create a growth model for Venezuela. This is a dynamic Mundell-Fleming model with
five income classes (quintiles) that can be illustrated with an IS-LM-BP diagram (but since
Venezuela maintains a fixed exchange rate, the money supply floats and only the IS and
BP curves are relevant). The only static variable in this model is the capital stock which
depends on investment and depreciation. By running simulations I am able to judge
whether Venezuela would have been better off without globalizing (the counterfactual),
focusing the analysis on the Gini coefficient, Poverty Headcount, Poverty Gap, and
Squared Poverty Gap, which are calibrated to match the historical data in the base year
1990. Although the country still maintains some aspects of a closed economy such as a
fixed exchange rate, it did open up for trade and thus the counterfactual can still be
considered as a closed economy (which may be where Venezuela is now heading).
Figure 4.1 shows the counterfactual (relative autarky) versus the actual GDP
measured in constant local currency units (LCUs). Based on this analysis, real GDP grew
an average of 38.32% annually in the simulation and 38.35% historically. Although these
15 | P a g e
average growth rates are close, the actual growth rate still exceeds the simulation, suggesting
that Venezuela’s economy would not have developed as much as it did if the economy was
closed. Figure 4.1 illustrates the simulated counterfactual versus the actual data from 19902004 as a base run with the simulation passing through many of the actual data points.
However, as further noted later in this paper, this does not necessarily imply human
development or poverty alleviation.
Venezuela’s government deficit has been volatile. Although the actual data provides
an average growth rate of 36%, this is not representative of its inconsistent nature. As seen
in Figure 4.2, the government deficit has been significantly negative for most of the years
presented, but its recent (random) improvement has offset the average. Overall, the growth
of the government deficit in the counterfactual is more consistent, but it is a growing deficit,
so the actual data portrays an economy that is better off with a smaller deficit. Venezuela’s
government deficit would be more severe if it had continued with a closed economy.
16 | P a g e
Venezuela’s current account balance has also been somewhat sporadic; however,
with the exception of 1992, 1993, and 1998, it has remained a surplus. As seen in Figure
4.3, the simulated model represents the overall negative trend in the current account
balance. Although it still provides evidence that the balance decreased between 1990 and
2004, it is much more persistent than the historical data, and it remains a surplus over the
entire time period. Figure 4.3 illustrates that the simulation trend is much better than what
Venezuela actually faced.
17 | P a g e
Figure 4.4 shows the trend of consumption from 1990-2004. Based on the figure
below we can see that the counterfactual reveals lower levels of consumption from 1995 to
2001, but since 2001, the actual consumption level has been lower than the counterfactual
with an increasing gap between the two. Although both trends reveal significant growth, the
trend under autarky projects higher levels of consumption and we can conclude that since
liberalization, the growth of the counterfactual has been more substantial.
Since consumption is consistently one of the largest parts of aggregate demand,
increasing levels of household consumption imply enough demand for there to be high
levels of investment, as well. Figure 4.5 demonstrates this.
18 | P a g e
There is significant growth in investment in both the counterfactual and actual
trends, but the average growth rate of the actual trend is higher than the growth rate of the
counterfactual.
From this we can conclude that the aggregate demand also grew
significantly in this time period, which was previously shown to be evident in Figure 4.1.
The last variable to address that influences the aggregate demand is net exports.
Figure 4.6 shows the counterfactual and actual trends from 1990-2004 revealing that
Venezuela’s trade balance would have been significantly better under relative autarky. The
counterfactual illustrates a positive trend since 1990 while the actual data reveal a negative
trend. The increasing disparity can be seen in Figure 4.6.
19 | P a g e
V. Human Development and Poverty Analysis
An increasing level of real GDP can indicate that an economy is growing, but that does not
necessarily reflect the living conditions and human development within that country.
Diverse perceptions of Venezuela’s economy are conceptualized depending on the data
chosen to analyze. Venezuela’s GDP per capita in PPP international dollars has grown
from 4702 in 1990 to 6632 in 2005 while its current account balance has improved from
828 current LCUs to 2536 LCUs (tens of millions) according to the 2007 World
Development Indicators.
However, this fails to reveal the poverty devastating large
portions of the country. Table 5.1 provides a more realistic picture of how Venezuelan
citizens fit into the profile of this “growing” economy. The poorest 20% of the population
held only 5.5% of total income in 1993 and that decreased even more to 3.3% in 2003. In
the same time period, the richest 20% of the population increased its income share from
47.5% to 52.1%. Accordingly, the poverty gap (at $2 a day) increased from 5.1 to 19.1 in
that decade.
Table 5.1 Income Distribution, 1993-2003
YEAR
Poorest
20% 1
Second
Poorest
20%
Middle
20%
Second
Richest
20%
Richest
20%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
5.5
..
..
3.7
..
3.0
..
4.6
..
..
3.3
10.0
..
..
8.4
..
8.2
..
9.4
..
..
8.7
15.0
..
..
13.6
..
13.8
..
14.8
..
..
13.9
22.1
..
..
21.3
..
21.8
..
22.4
..
..
22.0
47.5
..
..
53.0
..
53.2
..
48.9
..
..
52.1
Source: World Bank (2007)
Notes 1. Measured as income shares and indicated as percentages
20 | P a g e
Despite overall GDP increases, economic disparities within Venezuela are
worsening as the poverty gap widens (almost quadrupling over the 10 year period) and the
difference in shares of income become even more apparent. Four main measures are used
to analyze poverty and inequality including the poverty headcount (the percentage of the
population with incomes below the poverty line), the poverty gap (the shortfall from the
poverty line expressed as a percentage reflecting both the depth and incidence of poverty),
the squared poverty gap, and the Gini coefficient (the difference between exact equality and
the level of income inequality at the given time).
Table 5.2 provides this data and clarifies the worsening condition of Venezuela’s
poverty since the early 1990s. Since 1987, the best condition Venezuela experienced was
in 1989 when the poverty headcount level below the $2/day poverty line was 14.5% of the
population. This is also when the poverty gap was lowest at 4.6, the squared poverty gap
was 21.2, and the GINI coefficient was 0.60 (second lowest in the time period).
Table 5.2 Poverty Analysis, 1987-2005
Headcount (% Poverty Gap (at Squared Gap (at
GINI
YEAR
below $2/day)
$2/day)
$2/day)
Coefficient
1987
24.7
8.5
72.3
0.63
1988
1989
14.5
4.6
21.2
0.60
1990
1991
1992
1993
17.9
5.1
26.0
0.59
1994
1995
1996
36.4
15.7
246.5
0.61
1997
1998
30.6
14.5
210.3
0.61
1999
2000
27.8
10.3
106.1
0.60
2001
2002
2003
40.1
19.2
368.6
0.61
21 | P a g e
Source: World Bank (2007) and author's calculations
When analyzing the growth of a developing country, Ray (1998) notes that
indicators about the population can provide a deeper look at how the economy might
prosper in the future and where the growth may lead. Indications of an economy that is
actually developing include decreasing fertility rates, low population growth rates, and a
falling percentage of the labor force in the agricultural sector (Ray 1998). According to
these indicators, Venezuela’s prospects for future development appear positive. Venezuela
is improving on all three measures however it still falls behind the Latin American average
for population growth. See Table 5.3 for a more detailed analysis.
Table 5.3 Labor Force, Fertility, and Population Growth, 1990-2003
YEAR
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Agriculture (%
of labor force)
Venezuela
13.4
12.6
11.8
11.3
13.8
13.5
13.5
10.8
10
10.2
10.2
9.5
9.8
10.7
Population
Growth
Fertility
LAC
18
Venezuela
3.4
LAC
3
18
19
3.3
3
19
18
18
17
3.1
3
3
2.9
2.9
2.8
2.8
2.8
2.7
3
17
17
16
3
3
Venezuela
2.3
2.2
2.3
2.2
2.2
2.1
2.1
2
2
1.9
1.8
1.9
1.8
1.8
LAC
2
2
2
2
2
2
2
2
2
2
2
1
1
1
Source: World Bank (2007)
Lastly, Ray (1998) notes the universal acceptance in development economics that
we cannot define growth with merely the level or growth of per capita income. It is
generally accepted that income (wealth) has a lot do with the overall development of a
22 | P a g e
nation and provides the stability necessary to make vital changes, but development is also
the “removal of poverty and undernutrition” (Ray 1998). This can be measured by an
increase in life expectancy, access to sanitation, clean drinking water and health services,
the reduction of infant mortality, increased access to school (which serves as an investment
to human capital), and literacy. These fare as human development indicators showing how
the citizens of a country are actually benefitting (or hurting) as a result of an economy’s
development (Ray 1998).
Table 5.4 shows that the life expectancy, malnutrition, infant mortality, and school
enrollment rates improved from 1990-2005 in Venezuela and the country fares better than
the overall average in Latin America on all measures except primary school enrollment
rates. See Table 5.4 for a more detailed comparison.
Table 5.4 Human Development Indicators, 1990-2005
YEAR
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Life
Expectancy
Venezuela
71.2
71.7
71.8
72.1
72.2
72.4
72.6
72.7
72.9
73.3
73.4
73.6
73.8
74
74.2
Infant
Mortality
(per 1000)
Malnutrion
(under 5)
LAC
68
..
69
..
..
70
..
71
..
..
71
..
72
..
..
72
Venezuela
13.8
13.5
13.6
12.8
13.2
14.1
14.4
14.9
14.3
13.6
12.8
..
..
..
..
..
LAC
..
..
..
..
..
..
19
..
..
..
..
..
..
..
..
..
Venezuela
26.9
..
..
..
..
23.6
..
..
..
..
20.7
..
..
..
..
18.1
Primary
School
Enrollment
LAC
43
..
..
..
..
36
..
..
..
..
30
..
..
..
..
26
Venezuela
..
87.5
..
..
..
..
..
..
..
85.6
87.8
90.1
93
91.7
92
91.3
LAC
..
85
..
..
..
..
..
..
..
93
94
95
96
96
95
..
Source: World Bank (2007)
Venezuela is indeed improving according to these human development measures, but
perhaps not fast enough, and the country still falls behind the rest of Latin America in
23 | P a g e
some regards. Venezuela lags in education: in 2004, the primary school enrollment rate
was 92% in Venezuela but 95% on average in Latin America. Also, in 2004, only 68% and
83% of Venezuela’s population had access to improved sanitary and water resources,
respectively, while those percentages were 77% and 91% in Latin America overall (World
Bank 2007). Although Venezuela falls short when measured by these indicators, the
country is still showing improvements, nonetheless.
Simulations comparing the counterfactual (autarky) and the actual data can be used
to analyze the effects of globalization on poverty and income distribution. Figure 5.1
reveals that the Gini Coefficient is much more ideal than what is historically true. With
such an unequal income distribution, Venezuela has maintained a Gini coefficient around
0.6 since 1993 (actual data is scarce). However, in the counterfactual, it hovers around 0.3,
which would be preferred relative to reality. Globalization therefore has had negative
effects on the income distribution in Venezuela.
Due to complications with data accessibility, this research does not use actual
published data for the poverty gap and heacount at a national poverty level (only at $2/day
measures as provided in Table 5.2) to compare to the counterfactual simulations. Instead,
24 | P a g e
we can only assume that similar trends in the poverty headcount and gap were felt at the
national level as they were at the given levels in Table 5.2. As previously noted, both
measures significantly worsened from 1990-2004: the headcount increased from 24.7% of
the population in 1987 to 40.1% in 2003. The simulation indicates a similar trend with an
increasing poverty heacount; however, it is not nearly as drastic, implying that poverty
worsened when Venezuela liberalized. Figure 5.2 demonstrates the poverty headcount
from 1990 to 2004, increasing from 800 to 1056 in that time frame.
Contrasting conclusions can be made from the simulated poverty gap. Again,
plotting the counterfactual with the provided historical data is irrelevant since different
poverty lines are used; however, Table 5.2 provides an increasing trend in the actual
poverty gap since 1987. The counterfactual also indicates that the poverty gap would have
worsened even more if the economy had not liberalized. Figure 5.3 illustrates that under
autarky, the poverty gap would have grown from 9 in 1990 to 601 in 2004, significantly
worse than the actual increase from 4.6 in 1989 to 19.2 in 2003.
25 | P a g e
Based on the simulations provided and the historical data, it is evident that
globalization has had adverse effects on the income distribution and poverty headcount in
Venezuela; however, although the poverty gap increases both historically and in the
counterfactual, the poverty gap conditions would have been worse under autarky.
VI. Policy Implications: Oil Dependence, Social Spending, and Corruption
Venezuela derives a large proportion of its revenue from external rents, specifically, oil
rents. In the last three decades, oil rent has accounted for more than 80% of total exports,
90% of total foreign assets income and 50% of total fiscal income (Puente et al. 2007).
When countries rely heavily on oil rents, they tend to tax their population less, or not at all,
and spend resources inefficiently. Accordingly, Venezuela has charged the lowest tax rates
in Latin America while maintaining some of the highest profits, wages, price controls and
subsidies (Puente et al. 2007). Citizens, therefore, lack the incentive to demand budgetary
transparency and accountability from their governments.
The tax policy in a given country can have serious implications for its globalization
prospects. Overall, tariffs should be decreasing while direct taxes are increasing. Table 6.1
provides a historical perspective on Venezuela’s tax composition. From the provided data it
26 | P a g e
is evident that although taxes on firms and households make up the majority of tax
revenue, the rates that firms are taxed have significantly decreased while those on
households have steadily increased. Tariffs have been inconsistent, peaking at 11.3% of the
revenue composition in 1992 and then again rising to 10.9% in 1998, but it seems as
though the recent trends have pushed taxes on international trade to fall, hovering around
4-5% of the total tax revenue, consistent with the Washington Consensus.
This is
illustrated in Table 6.1.
Table 6.1 Tax Composition by Percentage, 1990-2005
YEAR
Firms
Households
Tariffs
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
63.9
63
53.7
51.4
40.8
37.6
38.2
38.8
17.4
20.5
26.7
19.6
12
13.4
15.2
21.5
3.2
3.5
7.5
12.4
20.9
32.7
27.8
30.2
38.1
33.6
24.9
25.2
22.5
23.5
28
24.9
6.8
8
11.3
11
9
9.2
6.9
6.8
10.9
9.4
7.1
7
5.5
3.5
4.7
4.9
Source: World Bank (2007)
Venezuela’s oil dependence has led to overall growth while veiling the country’s
inefficiencies, particularly institutional weaknesses of the public administration. Oil was a
main factor allowing Venezuela to create social conditions required for a cohesive party
system (Karl 1986). Without oil, there will be little chance for democracy (Monaldi et al.
2004).
27 | P a g e
Despite the risk of oil price volatility, Weisbrot and Sandoval (2007) argue that the
government has planned conservatively with respect to oil prices and a “bust” would not
injure the economy as severely as most expect: “a decline in oil prices of 20% or more
could be absorbed from international reserves” (Weisbrot and Sandoval 2007). However,
based on econometric analysis, Puente et al. (2007) note that oil shocks and unexpected
increases have a significant impact on the fiscal balance and the dependence on oil revenue
negatively affects the allocation of public resources due to the monopolization of economic
power. Governance and corruption can partly explain these skewed allocations, which are
further investigated later in this section.
The allocation of resources tends to reflect the preferences of interest groups in
Venezuela, and in the first part of 1999, the budget suffered seven different adjustments
equivalent to 1.5% of GDP (Puente et al. 2007).
“The bases of Venezuelan budgets have become encumbered with programmes
which are unsustainable, non-adaptable, inefficient (they divert resources from high
to low value uses) and inequitable/regressive (they distribute income from lower to
higher income groups)” (Puente et al. 2007).
For example, the education sector (which receives one of the larger shares of social
expenditures), only allocated 11% of the total budget for education in 1999 to pre-school
and elementary education, which accounted for 80.0% of all enrolled students. This can
be generalized to the inequity of resource allocation in the public sector overall: public
goods and services attain goals set out by the government as opposed to focusing on
improving living conditions (Puente et al. 2007).
Although Venezuela’s economy (in GDP terms) has expanded as provided earlier
in this research, Venezeula’s debt growth has been one of the highest in Latin America
(Puente et al. 2007), which is mostly due to the increased public financing for social
programs as previously described. The sustainability of such public financing for social
28 | P a g e
programs is seemingly doomed to fail as the government refrains from increasing domestic
tax and depends on oil rents to finance such programs. Central government spending has
increased from 21.4% of GDP in 1998 to 30% in 2006 (Weisbrot and Sandoval 2007),
most of which was intended to be allocated to social spending on healthcare, food, and
education. The state oil company was responsible for 13.3 billion dollars allocated toward
social spending in 2006 (Weisbrot and Sandoval 2007). With central government social
spending increasing from 3.2% of GDP in 1998 to 13.6% of GDP in 2006, significant
improvements in human development (such as in the poverty gap and in the income
distribution) should be apparent. But they are not.
How can this increasing disparity be explained? As previously noted, the allocation
of resources seems to be slightly skewed toward interest group demands and government
interests. One of these avenues could possibly be explained by the impeding corruption
that continues to disrupt efficiency in Venezuela. As shown in Table 6.2, Venezuela’s
percentile rank determined by the World Bank Governance indicators measuring control
of corruption has worsened between 1996 and 2007, along with regulatory quality, rule of
law, political stability, and voice and accountability, each of which can contribute to the
failed efficiency of the government.
Table 6.2 Governance,
1996-2007
Voice and
YEAR
Accountability
1996
51.2
1997
1998
50.5
1999
2000
46.2
2001
2002
32.7
2003
35.1
2004
32.2
2005
30.3
2006
32.7
Political
Stability
18.8
Government
Effectiveness
15.6
Regulatory
Quality
36.1
Rule of
Law
28.1
Control of
Corruption
23.8
30.8
35.1
43.9
27.1
20.4
28.8
26.1
33.7
26.2
30.1
12.5
12
11.5
13.5
14.4
15.6
15.2
15.6
22.7
26.5
28.3
13.7
12.2
11.2
9.8
13.3
9
9
9.5
6.2
10.7
10.2
15.5
15
16
29 | P a g e
2007
30.8
12
16.6
4.9
3.3
10.1
Source: World Bank (2007)
It is evident that Venezuela falls consistently low when ranked by percentile on all
six indicators of “good governance”. The rankings have drastically gotten worse since 1996
with the exception of its position in government effectiveness (which has remained low the
entire time period, but also mostly reflects the government’s ability to mobilize the populist
rather than necessarily pursue open, liberalizing policies).
In a cross-country study of more than 150 countries, Kaufmann, Krayy, & ZoidoLobatón (1999) provide evidence of a strong causal relationship from better governance to
better development outcomes such as higher per capita incomes, lower infant mortality,
and higher literacy.
Indeed, “of particular relevance to developing countries is the
possibility that corruption might reduce the effectiveness of aid flows, through the diversion
of funds from their intended projects” (Maura 1997).
When corruption affects the
composition of government expenditure, as was previously shown to be evident in
Venezuela with increasing government expenditures on (ineffective) social programs,
inferior public infrastructures are maintained.
Despite the quantitative evidence of increased social spending in Venezuela, this is
not translated into human development improvements. It has been accepted among
scholars that merely allocating funds or increasing public spending for goods and services
does not necessarily lead to outcome changes; however, “no serious empirical work has
been carried out to support it” (Rajkumar & Swaroop 2002). Financial assistance to
developing countries is not sufficient to ensure improvements in actual service delivery.
Rajkumar & Swaroop (2002) conclude that the link between public spending and desirable
30 | P a g e
outcomes may be severed without an incentive mechanism in the public sector to use funds
for productive purposes. With poor governance, simply increasing expenditures on social
programs will continue to be futile.
VII. Conclusion
Based on my model and analysis, it is evident that if Venezuela continues to maintain its
current economic policies which do not adhere to the Washington Consensus, it will only
face globalization with fierce opposition. The simulations illustrate that the counterfactual
(relative autarky) suggests a less sporadic and more consistent current account balance and
government deficit. The current account balances in both the counterfactual and in the
historical data are decreasing; however, the declines are less substantial under relative
autarky. On the contrary, the counterfactual presents a consistently increasing government
deficit, and although the government deficit increases on average historically as well, there
were at least some periods of decline instead of incessant worsening.
The Gini coefficient and poverty headcount were more ideal in the counterfactual
suggesting that Venezuela has failed in the game of globalization; however, the poverty gap
increased at a faster rate in the counterfactual than it did historically in a globalizing world
economy. Although the country has opened its economy for trade and foreign investment,
political instability and market monopolization create a volatile and risky environment for
foreign investors.
On the surface, increased government expenditures on social programs seemingly
intend to benefit the development of health and education, but corruption and poor
governance in Venezuela redirect these funds and create inefficiencies in public spending.
The programs aim to benefit the poor, yet they fail to be properly implemented and
Venezuela’s income distribution has continued to worsen, consistently falling behind the
31 | P a g e
rest of Latin America when considering many human development indicators. If the
administration wishes to maintain high government expenditures on these programs, the
corruption devastating the economy’s efficiency must first be negated. Only then will the
efforts prove to be effective.
For now, however, the rest of the world is not stopping to wait for Venezuela to
catch up. It continues to grow and globalize and become more and more interdependent
as Venezuela retracts from adhering to the Washington Consensus. Facing this reality,
Venezuela must diversify its economy and privatize businesses. With two thirds of GDP
dependent on the state owned oil company, the health of the economy is too dependent on
one sole source. Venezuela must cut back on government spending and allocate the
resources to more efficient uses, such as investing in new businesses or creating smaller
social programs with more oversight and accountability. And this spending must come
from resources generated domestically as well as foreign investment. With a persistently
unequal income distribution, Venezuela must reconsider its tax policies to more adequately
redistribute the wealth. As long as the government is not transparent and held accountable
for its actions, its spending will remain inefficient.References
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