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Venezuela: Notes for a Post Chavez Agenda Part II

By Francisco Toro, caracaschronicles.blogspot.com

Fiscal and social reform. It might seem like an odd choice to pair up for an essay, but in fact fiscal and social policies are two sides of the same coin. Public services are financed out of the public purse, so looking after the solvency of the public finances is not a bad idea if you intend to institute a serious, long term social policy plan.

Because social policy is expensive business. The state is years behind on its social commitments, on its commitment to build enough schools, houses, and courthouses. The state is years behind in terms of instituting all kinds of social services, and a good part of this is down to the fact that the Venezuelan state is, more often than not, broke.

There are really two problems here: the state is too small a part of the economy, and the economy itself is too small. On the one hand, state revenue for 2004 is projected to total about 16 of GDP in the budget - including almost 8% of GDP in oil income. Aside from this "free money" coming from the oil industry, the Venezuelan state only captures 8.4% of the economy as tax revenue.

Compare that to the situation in most of the first world, where public sectors generally tax and spend at least 25% of GDP, and more like 35-45% in Europe. Those are, of course, much richer countries - but they also have substantially larger public sectors. That's what it takes to finance the large welfare states their electorates demand.

So the challenge is twofold. First, the next government needs a credible strategy to grow the economy substantially over 20 or 30 years. But at the same time they expand the economy, they also need to expand the public sector's share of that economy.

The alternative is to squabble over a shrinking pool of resources. Venezuela's experience over the last 6 years powerfully illustrates this. Even though the government has made a huge effort to raise spending from 24.8% of GDP to 28.4% of GDP from 1999 to 2002, real public spending barely budged. The overall contraction of the economy overwhelmed their efforts to expand public spending. After adjusting for inflation, public spending is a bit lower now than it was in 1998. That's without taking into account population growth.

And that's to say nothing of the huge burden of domestic debt the government has taken on over these five years.

With the government trying to milk more and more money out of a smaller and smaller economy, pressure grows to turn to short-sighted, damaging methods of financing. Stunts like the "millardito" pick the pockets of the most economically vulnerable by feeding inflationary pressures and crowding out the private sector. The upshot is that private household consumption is pinched - and the pinch falls hardest on the lowest income people, who are least able to afford price rises.

Those are the rules of the negative sum game that is Chavez-era Venezuela. The government has great social sensibility, but left to squabble over a rapidly shrinking cake, its thirst for cash to spend comes to the detriment of the rest of society. The question is how to go from this lose-lose situation to a positive-sum game, one where a growing economy and a reformed and strengthened state can start delivering quality social services for the first time.

Imagine

It doesn't have to be this way. If the country can find a path to strong and sustained economic growth, the government would be able to capture larger and larger shares of national income without having to pick the pockets of Venezuelans via the inflation tax. In just six years, public spending could double in real terms, growing from its current 20-something share of GDP to 40% of GDP at the same time as household consumption and gross fixed capital formation (investment) grow substantially.

The figures are a lot more meaningful in per-capita, constant dollar terms.

This is not to suggests that the Venezuelan state will be cash flush by 2010, even in the best of scenarios. Paying for all of the nation's public schools, hospitals, armed forces, bureaucrats, pensions, unemployment benefits, cultural activities, sports, housing, training, research and development, cops, judges, court houses, prosecutors, roads, ports, bridges, firefighters, social workers and more out of just $1,930 per person per year is still a stretch. But you go a hell of a lot farther with $1,930 than you do with $880. Similarly, trying to get by on $2,560 per person is not easy for any family - but it's a hell of a lot easier than getting by on $1,660.

It takes thinking in these terms to take stock of the real scale of the problems facing Venezuela, and to set out serious, inclusive plans for a post-Chavez future that's worth striving for.

Take the shantytowns

About half of Venezuelas live in what's sometimes euphemistically called "self-built housing." Many people in Venezuela's barrios lack access to the basics of urban living like garbage collection, police protection, sanitation, transport, electricity and access to cooking fuel. Moreover many shanties are built on dangerous sites, like the unstable hillsides around Caracas that sporadically give way to mudslides. Being forced to live in such dangerous places is one of the bitterest inequalities poor Venezuelans endure today.

A team of architects and urban planners linked to UCV, Alemo, has studied the problem carefully to try to determine the minimum public investment necessary to upgrade all shantytowns, nationwide, to minimum acceptable standards of crowding, health, safety, and access to urban services as well as to build enough decent new low-income housing to keep up with population growth. They conclude a project like that would cost $60 billion over the next 10 years.

Now, how realistic is that? Today, that's about a third of all public revenue - way more than the country can afford.

But what would happen if the state could get into a position by 2010 where it has $50 billion to play with each year. Well, then a figure like the one Alemo suggests becomes far more feasable. $6 billion would still be a large outlay, but it could imaginably be accommodated. As matters stand now, though, with a government that has less than $25 billion to spend each year, investments on that order of magnitude are just not feasible. The government might attempt some specific urban regeneration projects in a few areas, but it simply can't finance an infrastructure project on the scale needed to meet Venezuela's massive urban housing problem.

Instead, the government finds itself picking winners and losers again. At present, ministers boast of building 40,000 new homes a year - though, like most government figures, this one is impossible to audit or confirm.

The problem is that that figure covers just a third of the new housing needed to meet the growth of population. Venezuela has a young population, and 120,000 houses a year are needed just to stay even. So for every family that got its hands on a government-built house last year, two others were forced to either build themselves homes - often in dangerous areas with no basic services - or to stay in unacceptably crowded housing with relatives. The government extends basic social provision only to a (relatively) privileged few instead of putting in place a serious program to help all citizens in need equally.

These problems are all connected

The reasons the government can't put together a decent housing policy are the same reasons it can't make decent policy in general. The state is broken down and broke. No one part of the system can't change unless all the others change. And the whole system can't change unless each part of it changes. A competent, stakeholder-centered, tech-savvy state that helps foster economic growth is needed to spur rapid economic growth. Rapid economic growth is necessary to finance a state strong enough to finance solutions to the very serious social problems the country faces.

If you actually care about the living conditions of the poor you have every reason to advocate fast economic growth. Growth is very well documented to be the best remedy for poverty out there, not only due to the jobs it generates, but also because it gets the government the money it needs to make effective social policy. It doesn't do poor people any good for the government to be really really concerned about them if it's is too broke to help them.

What's true of the housing crisis is true of every other social problem. If crime is out of control right now, this is at least partially due to the fact that the government simply can't afford to hire enough cops, prosecutors, judges, public defenders, prison guards and court clerks. If the poorest 25% of Venezuelans go to school for an average of just 4 years, that's at least partially because the state can't afford to hire enough teachers and build enough schools. If there's no gauze in the hospitals, that has more than a little bit to do with the fact that the state is broke. Every problem Venezuela has is made worse by the public sector's never-ending money crunch.

Once the state has the resources it needs, the organizational culture it needs, the technical dexterity it needs and the understanding of itself as a consensus-builder it needs, then it can start to implement serious policies for development. Building that state will not be easy or quick, but I think it's worth a try.

* Original article can be read at Interesting Blog III.



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