CC BY
5
УДК 330.4
Bochkov T.I.
First-year master student International Finance Faculty Scientific advisor: Tregub I.V.
Financial University under the Government of Russian Federation
Russia, Moscow 2017 BLACK UNDERPINNING OF THE RED DREAM: AN ECONOMETRIC
STUDY OF VENEZUELA'S EXPOSURE TO DUTCH DISEASE
Abstract
Being one the largest in the world and the largest one in Americas in terms of oil exports, Venezuela has undergone a profound economic downturn following an abrupt decline in the world oil prices occurred in 2014. But it can be claimed for sure that such an explosion of this continuously expanding oil bubble could have never come as a surprise. During the long-lasting observation period covered in this paper, which ended right before the threshold of the nowadays distress, the petroleum factor of Venezuela's economic growth and well-being was becoming increasingly pronounced. This enables to argue that quasi-disastrous situation of today in both political and economic sectors of the Bolivarian Republic is nothing more, but the agony stage of the "drug-addicted" with volumes of medical record.
Key words
Dutch disease, Venezuela, GDP, econometrics, petroleum exports, oil prices, natural resources, industries, exchange rate, economic downturn
Introduction
There is little doubt that the outbreak of economic crisis in the Bolivarian Republic of Venezuela is the direct result of the long story of socialist republic overreliance on the hydrocarbon supplies. The situation was further aggravated by the fact that it was the Washington, the main purchaser of Venezuelan oil that reversed its economic policy towards considerable energy imports reduction thereby contributing to cutting oil prices. Up until 2014 the appreciating energy multiplied by charismatic nature of the former state leader Ugo Chavez was bringing remarkable success to the stable prosperity of his overwhelmingly populist political regime. Furthermore, it was the triumph of Chavez policy that pre-determined his successor Nicholas Maduro took office in 2013, signifying the continuation of revolutionary-populist trend legitimate together with stable extracting sector proceeds. According to the Observatory of Economic Complexity dataset, in that year crude and refined petroleum supplies amounted to $139 billion out of $143 billion of Venezuela's total export earnings, (circa 98%), whilst in the late 1990-s (before Chavez came to power in 1999) a contribution of petroleum sector to the national exports accounted for a mere 63%. Venezuela's hydrocarbon exports share totals 40% and 12% of the budget revenues and GDP
respectively.5 Consequently, there is no wonder, that after the world oil prices plummeted, the annual rate of inflation for 2014 reached 65% (downgrading the country to the 225-th place in world rankings by this parameter and 220-th by real GDP growth) and more than doubled in the following year (141%).6 IMF expects the inflation even to overcome 200% in 2016.7 The currency is devaluing, with the exchange rate of $0.0011 against the bolivar.8 This year Venezuela is expected to default on its national debt. Perhaps, the most concerning for the average citizen is the fact that the government is underfunded to such an extent that they have difficulties with importing basic food and healthcare items. As queues become longer, and supplies get shorter. The economic downturn can no longer be detached from serious implications on the political realm. "The voters in Venezuela ushered in political change at the end of last year, with the opposition winning significant electoral gains, launching campaigns on anti-Maduro and anti-Chavismo messages". 9 Millions of people participate in strikes and manifestations aimed at political change. As a result Maduro's government was forced to shift from passionate anti-American populism towards the greater pragmatism and willingness to cooperate with the formerly hostile "imperialistic" giant.
That being said, it can be hypothesized that since the early 2000-s unprecedented gains from a drastic upsurge of oil prices cemented and further reinforced the one-dimensional character of Venezuela's economy entailing a profound degradation of the back-up real sector industries because of the ever-toughening competition with imported goods penetrating increasingly powerful consumer market. Moreover, the communist ideology of Chavez government presumed shrinking market mechanisms and thus competitiveness of national output. This research is aimed at illustrating that the symptoms Dutch disease were particularly triggered by the market exchange rate effect and further aggravated by poor currency policy highly contradictory to market forces.
Dutch Disease and problem-related exchange rate effect in academic literature.
The phenomenon of Dutch Disease also known as the "resource curse," is far from being a novelty. The term was coined in 1977 in order to describe a sharp decline in the economic system of the Netherlands in the aftermath of new natural gas reserves discovery in 1959, which led to the excessive focus on raw materials exports and a consequent overvaluation of the national currency to the detriment of developing domestic industries. As a result, the Netherlands found themselves in trouble, because new export earnings and inflation processes resulting from
5 Venezuela // Observatory of Economic Complexity URL: http://atlas.media.mit.edu/en/profile/country/ven/
6 Venezuela // The CIA World Factbook URL: https://www.cia.gov/library/publications/the-world-factbo ok/geo s/ve. html
7 Venezuela's Case of Dutch Disease: Cursed by Oil // Panoramas. Schoralry Platform. URL: http://www.panoramas.pitt.edu/economy-and-technology/venezuelas-case-dutch-disease-cursed-oil
8 Gillespie, Patrick 5 Reasons why Venezuela's Economy is in a Meltdown // CNN Money. - 2016. - 20 Jan.
9 Venezuela's Case of Dutch Disease: Cursed by Oil // Panoramas. Schoralry Platform. URL: http://www.panoramas.pitt.edu/economy-and-technology/venezuelas-case-dutch-disease-cursed-oil
their redistribution favored only those industries, which were not subject to the competition with imports, for instance raw materials extraction, service sector and housing. Other domestic producers could not have benefited from the inflation because otherwise they would have lost their competitiveness with foreign goods thanks to the appreciation of national currency accelerated by the engagement with European Economic Community, (which hindered the opportunities for the trade barriers) and transport infrastructure development. Such a growing discrepancy of gains for different forms of economic activity led to the redistribution of resources, in other words, the outflow of production factors from the lagging industries to the booming, (primarily the extracting) ones. This, in turn, provided the powerful incentive for the latter to further expand their activities. Another case of Dutch Disease was experienced in the USSR in late 1970-s and 1980-s. Two oil shocks occurred in 1973 and 1979 coinciding with active exploration of new hydrocarbon reserves in West Siberia deprived the Communist party of the Soviet Union from political will to exercise brewing reforms of the economic system. New budget proceeds discouraged the continuation and further development of Prime Minister Kosygin's initiatives to improve the business activities modernization and introducing new managerial techniques. By the time of subsequent oil depreciation took place in late 1980-s the share of petroleum sector in the Soviet economy considerably increased so as the USSR ended up in structural economic contributed to the eventual collapse of the state. Alternatively, China was not exposed to the "oil curse" and thus the pre-conditions for a profound reform of economic system, which was successfully implemented by Deng Xiaoping's, were appeared to be much more powerful. All in all, Dutch Disease taught economists that a large commodity boom from a natural resource can cause extreme economic distress, cursing the economy for years to come.10 However, since 1959 various case-dependent symptoms of the same illness could have been observed in such countries as Russia (in 2000-s), Nigeria, Indonesia, Philippines, Norway etc. Using data on 118 countries over the period 1970-2007, a study by economists at the University of Cambridge provides evidence that the Dutch Disease does not operate in primary commodity-abundant countries.11 Nowadays, along with the development of economic science methodology and ever-increasing complexity of the World economy the notion of Dutch disease is subject to amplification and theoretical reconsideration comprising an increasing number of cases modestly relevant to its original meaning annexed with the dependence on raw materials. For instance, noble American economist Paul Krugman has written about the impact of a strong Financial Sector on UK manufacturing termed as Dutch Disease and a subsequent readjustment following the Brexit referendum. 12
10 What Dutch disease is, and why it's bad // The Economist URL: http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2
11 Cavalcanti, Tiago; Mohaddes, Kamiar & Raissi, Mehdi Commodity Price Volatility and the Sources of Growth // Applied Econometrics. - 2015. - №30. - C. 857-873.
12 Notes on Brexit and the Pound // The New York Times URL: https://mobile.nytimes.com/blogs/krugman/2016/10/11/notes-on-brexit-and-the-pound/
Theoretical framework for modelling and case-specific adjustments
In order to prove the hypothesis that it was the Dutch Disease to predetermine actual economic downturn in Venezuela I took into consideration theoretical constituents of the original sense of this notion formulated in the Economist of 1977 and further developed by W. M. Corden and J. P. Neary in 1980s. The core model they used was named Spending Effect and Resource Movement Effect. They pioneered at the quantitative modelling the adverse impact of the natural gas discoveries on Dutch manufacturing (in nineteen sixties), essentially through subsequent appreciation of the Dutch real exchange rate.13 Afterwards, the model was specified for the econometric analysis in the article "Economic and Econometric Analysis of the Dutch Disease", 14 which (the analysis) was processed in order to investigate the same case in Netherlands. In this model the total output (GDP) was explained in terms of gas prices (PGAS), the value of its exports (XGAS), exchange rate (EXCH), inflation (INFL) and (LABOR), (which stands for the population between the age 20 and 65) in order to cover both Spending effect (industry-specific price inflation as a result of spending extra gas proceeds) and Resource Movement effect (outflow of production factors, namely, labor, from lagging sector to the booming one and those, which are not exposed to competition with other countries). All in all, the formula: GDP* = XGAS + INFL + EX + EXCH + INFL + LABOR regressed employing simple OLS method proved stable and adequately representing phenomenon under discussion.15
Basically, in this analysis, the formula of the same concept was applied, however to better estimate the input of labor force to total output, absolute figures accounting for the labor force were substituted to the level of employment. Furthermore I've paid particular attention to the exchange rate effect, which is fixed in Venezuela. Therefore, I explained GDP in terms of real effective exchange rate, but the nominal (official) one was also taken into account (against the dollar) adjusted by the ratio of Venezuelan CPI to the US one for the same period. The timespan of 65 observations embraces the period from the first quarter of 1997 (capturing last years before the socialist revolution) up to the third quarter of 2013 in order to illustrate continuously aggravating sickness of Venezuela's economy during the seemingly prosperous age of Chavez's presidency. Furthermore, as I use the real GDP in the formula, the inflation rate was excluded as an explanatory variable of GDP. Instead, the rate of inflation (expressed in CPI) is necessary to estimate the real exchange rate provided the fixed nominal one, which matters, but highly misrepresentative of economic realities. All in all, I came to the system of equation regressed by TSLS method, where REAL_GDP_BOL stands for real GDP in Bolivars, "REER" for real exchange
13 Coden W. M. Booming Sector and Dutch Disease Economics: Survey and Consolidation // Oxford Economic Papers (pre-1986). - 1984. - №36, 3. - C. 359 - 380.
14 Economic and Econometric Analysis of the Dutch Disease // URL: http://www.flang.keio.ac.jp/webfile/AWC/AWC2007/UG2_YM.pdf
15 Ibid.
rate, "employment" for the ratio of employed people in economically active population, "FOREIGN_RES" for the amount of foreign reserves (fulfilled mainly by proceeds from petroleum exports). "VEN_US" is the ratio of CPI of Venezuela to that of the US taking the 1997 as 100% in order to juxtapose variables in US dollars and bolivars in the equation. "TOTAL_EX" represents the value of total exports in US dollars. As for the regressors for real exchange rate, "Petr_tot" stands for the share of oil in total exports and "NOM_CPI" signifies the result of multiplying nominal exchange rate of bolivar as against the US Dollar by the relation between CPIs of both countries. The total value of non-petroleum imports of goods extracted from the Venezuelan balance of payments, (which compete with the output of lagging industries) is coded as "NP_IMP(+1)", where "(+1)" means that the indicator is leading, in other words, relates to the following quarter. The same rule is applicable for "NOM_CPI" All, in all, the equation was obtained as follows.
REAL_ GDPBOL = c(1) + c(2)*reer + c(3)*employment + C(4)*FOREIGN_RES + c(5)*VEN_US + c(6)*TOTAL_EX @ oil_prices employment petrtot VEN US TOTALEX NOM_CPI(+1) FOREIGNRES NP_IMP(+1)
reer = c(7) + c(8)*petr_tot + c(9)*oil_prices + c(10)*NOM_CPI(+1) + C(11)*NP_IMP(+1) @ oil_prices employment petr tot VEN US TOTAL EX NOM_CPI(+1) FOREIGN RESNP_IMP(+1)
The dataset under analysis was retrieved from both Venezuelan central bank official website16 and the main statistical center of the state - National Institute of Statistics (Instituto Nacional de Estadística) 17. Besides, some of the data was collected from the US and international databanks including Federal Reserve System webpage,18 and the database of the Bank for International Settlements.19 System: Venezuela Dutch Desease Estimation Method: Weighted Two-Stage Least Squares Date: 02/24/17 Time: 22:58 Sample: 1997Q1 2013Q2 Included observations: 66 Total system (balanced) observations 132 Linear estimation after one-step weighting matrix
16 Informacion Estadística // Banco Central de Venezuela URL: http://www.bcv.org.ve/c2/indicadores.asp
17 Instituto Nacional de Estadistica URL: http://www.ine.gov.ve
18 Economic Research & Data // Board of Governors of the Federal Reserve System URL: https://www.federalreserve.gov/
19 BIS Statistics Explorer // Bank for International Settlements URL: http://stats.bis.org/statx/toc/LBS.html
Coefficient Std. Error t-Statistic Prob.
C(1) C(2)
-18621027 2361896. -7.883933 0.0000 8148.298 3919.559 2.078881 0.0397
C(3) 304039.2 30063.71 10.11317 0.0000
C(4) 68.31734 15.24382 4.481643 0.0000
C(5) 116033.1 23582.57 4.920293 0.0000
C(6) 39.90763 20.12356 1.983130 0.0496
C(7) 109.8596 33.94694 3.236216 0.0016
C(8) 151.2686 40.97835 3.691427 0.0003
C(9) -0.283040 0.140555 -2.013737 0.0463
C(10) -238.8409 22.56229 -10.58585 0.0000
c(11) 0.002621 0.001111 2.358613 0.0199
Determinant residual covariance3.29E+13
Equation: REAL_GDP_BOL = C(1) + C(2)*REER + C(3)*EMPLOYMENT +
C(4)*FOREIGN_RES + C(5)*VEN_US + C(6)*TOTAL_EX Instruments: OIL_PRICES EMPLOYMENT PETR_TOT VEN_US TOTAL_EX NOM_CPI(+1) FOREIGN_RE S NP_IMP(+1) C
Observations: 66
R-squared 0.950357
Adjusted R-
squared 0.946221
Durbin-Watson stat 2.008454
Mean dependent var 12072117
S.D. dependentvar 2242723. Sum squared resid 1.62E+13
Equation: REER = C(7) + C(8)*PETR_TOT + C(9)*OIL_PRICES + C(10) *NOM_CPI(+1) + C(11)*NP_IMP(+1)
Instruments: OIL_PRICES EMPLOYMENT PETR_TOT VEN_US TOTAL_EX
NOM_CPI(+1) FOREIGN_RES NP_IMP(+1) C Observations: 66
R-squared 0.723486
Adjusted R-
squared 0.705354
Durbin-Watson stat 1.416397
Mean dependent var 111.7312
S.D. dependent var 22.23200 Sum squared resid 8883.564
What we can see above is that most of the total deviation of both depended variables in the simultaneous equation is explained by the variation of all the regressors due to the high values of determination coefficients: 0,95 and 0,72 respectively. Durbin-Watson statistics equal to 2,01 in the first equation allows to firmly reject the autocorrelation, whereas the value of 1,41 in the second one is located right in the middle of the "grey zone" in accordance with the respective test. The probability of null-hypothesis acceptance coded as "Prob" in the table above for each of the coefficients C(1) - C(11) (less than 0,05) is rather low, which represents a significant linear dependence between the variables and, thus, proves that our model is correctly specified.
Conclusion
According to the coefficients preceding each of the explanatory variables, the argument regarding the exposure of Venezuelan economy to the Dutch Disease during the pre-crisis decade and a half proved correct.
First and foremost, it was confirmed that the correlation between GDP and Real effective exchange rate is pretty high. The exchange rate, in turn, is somewhat determined by the fluctuations of world oil prices. Also the rise of GDP was fostered by the increase of total exports, provided that the share of petroleum therein, as mentioned above, was, on average, more than 90% throughout the entire period, which was accompanied by the rise of income and thus, employment in booming sectors. The economic growth was also interrelated with fulfilling foreign currency reserves from oil exportations, which also enabled the government to maintain the Bolivar artificially overvalued.
Secondly, appreciating national currency (as a factor of trending GDP) was explained by growing petroleum share in total exports, rendering the economy increasingly dependent upon natural resources market situation. Furthermore, such a dependency detrimental to the structure of national economy was proven by the fact of correlated dynamics of Real effective exchange (largely determined by petroleum exports earnings) with the change of total non-petroleum imports. As it was already mentioned, by 2015 the country faced the deficit even the shortage of essentials (drugs, food), which used to be purchased from abroad in the pre-crisis era.
All in all, the effect of Dutch Disease inflicted a severe damage to the apparently stable economic system of Venezuela and rendered the state highly vulnerable to world Commodity Market Trends. Thus, a dramatic downturn therein taken place in 2014 collapsed the Venezuelan standards of living throwing the country to the brink of economic catastrophe, which is expected to come in the nearest future. This had a dramatic impact on social and political domains, which is expressed in an unprecedentedly high level of criminality (Caracas is now already recognized being one of the most dangerous city in the world) together with the illegitimacy of the incumbent government and "Chavizmo" ideology.
References:
1. BIS Statistics Explorer // Bank for International Settlements URL: http:// stats.bis.org/ statx/toc/LB S.html
2. Cavalcanti, Tiago; Mohaddes, Kamiar & Raissi, Mehdi Commodity Price Volatility and the Sources of Growth // Applied Econometrics. - 2015. - №30. - C. 857-873.
3. Coden W. M. Booming Sector and Dutch Disease Economics: Survey and Consolidation // Oxford Economic Papers (pre-1986). - 1984. - №36, 3. - C. 359 -380.
4. Economic and Econometric Analysis of the Dutch Disease // URL: http://www.flang.keio.ac.jp/webfile/AWC/AWC2007/UG2_YM.pdf
5. Economic Research & Data // Board of Governors of the Federal Reserve System URL: https://www.federalreserve.gov/
6. Gillespie, Patrick 5 Reasons why Venezuela's Economy is in a Meltdown // CNN Money. - 2016. - 20 Jan.
7. Informacion Estadistica // Banco Central de Venezuela URL: http://www.bcv.org.ve/c2/indicadores.asp
8. Instituto Nacional de Estadistica URL: http://www.ine.gov.ve
9. Notes on Brexit and the Pound // The New York Times URL: https://mobile.nytimes.com/blogs/krugman/2016/10/11/notes-on-brexit-and-the-pound/
10. Tregub I.V. Econometrics. Model of real system - монография, М.: 2016. 166 р.
11. Venezuela // Observatory of Economic Complexity URL: http://atlas.media.mit.edu/en/profile/country/ven/
12. Venezuela // The CIA World Factbook URL: https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html
13. Venezuela's Case of Dutch Disease: Cursed by Oil // Panoramas. Schoralry Platform. URL: http://www.panoramas.pitt.edu/economy-and-technology/venezuelas-case-dutch-disease-cursed-oil
14. What Dutch disease is, and why it's bad // The Economist URL: http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2
УДК 338.23
Maria Demidova International Finance Faculty Financial University under the Government of the Russian Federation
Moscow, Russia Scientific Supervisor: I. V. Tregub THE INFLUENCE OF OIL PRICES ON ECONOMIC GROWTH. THE CASE OF UNITED ARAB EMIRATES
Absract
The relationship between oil prices and economic development has been studied for a long time, however, still there are several views on this problem. In my article I will examine the historical data of oil prices, and then I will use the data from the World Bank database in order to construct econometrical model, which will include variables connected with oil prices and economic growth in United Arab Emirates for a period from 1995 to 2015 in order to establish the relationship between them.
Key words: crude oil, economic growth, econometrical model, t-statistic, probability of mistake
Информация о себе: Телефон: 8-906- 717-16-29 Е-mail: [email protected]
Literature review of this problem and historical path of oil prices
Crude oil is the most important commodity for oil-exporting countries,
