Cadivi dies, and so does the middle class

(Since Cadivi is gasping its final breaths surrounded by controversy and not a minute too soon, this guest post by Iesa professor Pedro Luis Rodríguez could not be better timed. Rodríguez takes on Javier Corrales’ assertion that we’re mostly middle class, and concludes that it was all a mirage. Take a read and let us know how you view this debate)

Venezuela’s Middle Ground: now you see it, now you don’t

In a recent article in Foreign Policy, Javier Corrales argues that Venezuela today is a country of “mostly middle-class people”. Following the World Bank’s income thresholds for determining class membership, Corrales classifies each income decile in Venezuela into their respective class.

I’ve replicated his table following the guidelines in the appendix to his article (see Table 1). It is evident, as Corrales highlights, that by this measure in 2012 the majority of Venezuelans belonged to the middle class. Moreover, the distribution differs markedly from 1990 as a result of a large portion of the poor crossing the middle class threshold during the recent windfall (especially post 2005).

Corrales

Corrales correctly points out that once we agree that Venezuela is a middle class country, then deriding the recent wave of protests as “too middle class” is absurd and, in the case of the government, a political blunder. What else would one expect in a middle class country but middle class demands, including demands for better governance outcomes and representation?

The other half of the story

Yet Corrales’ table shows only half the story. In a country highly dependent on oil revenues, defining social progress solely in terms of income is problematic as we run the risk of confusing a temporary increase in consumption, financed with oil revenues, with a permanent increase in welfare. The only way the latter can be achieved is through sustained increases in productivity.

There is little doubt that the oil bonanza of the past decade and the government’s (re)distributive policies increased the income of the poor in Venezuela, swelling the middle class, at least as defined by the World Bank’s income thresholds. But to the extent that these outcomes are not the reflection of increased productivity but rather of increased consumption financed by high oil revenues, they are highly dependent on the incremental (not just continued) flow of this revenue. Once this flow becomes strained, as has been occurring since 2013, the model not only becomes unviable, but its apparent achievements can quickly be wiped out.

To get a sense of what this would entail, I reconstructed Corrales’ table using the World Bank data on GNI in local currency, converting it at the black-market exchange rate and applying the same PPP and inflation adjustment as in table 1 (see Table 2). While at the official exchange rate, Venezuelans’ incomes are indeed those of a middle-income country, at the black-market exchange rate this no longer holds. In this picture the majority of Venezuelans are poor.

Which picture is right? This depends on the capacity of the government to maintain its distributive policies including an overvalued exchange rate, which in turn depends on sustaining a steady supply of dollars. While Table 1 is likely a more accurate representation of income distribution in Venezuela between 2004 and 2012, I would argue reality is rapidly converging towards the second picture (Table 2), as the supply of dollars shrinks and becomes erratic.

Rodriguez

Some will correctly point out that the black-market exchange rate is not a proper measure of the market exchange rate one would see if it were allowed to float. In reality, it would be somewhere in between the official rate and the black market one (estimating this is not straightforward).

This deserves two comments: first, at this moment, as the government prevaricates in its economic policy, it is forcing the picture to look much more like Table 2 than need be, as goods are priced at the black-market rate for lack of access to dollars, or are simply non-existent. Second, Table 1 is but an illusion that is unraveling, with the trend nowadays clearly in the direction of the second picture. Whether we ever reach it or not is inconsequential for the argument that follows.

Yes, many Venezuelans, and most particularly the poor, managed to climb up the income ladder as a result of the government’s distribution of the oil bonanza. In particular, as has also been common in previous governments, through the use of an overvalued exchange rate. Yet, as dollars have become scarce for reasons that are beyond the scope of this article, the precariousness of these outcomes becomes manifest.

The income ladder has not only been withdrawn, but those that had climbed up are being pulled back down. I would posit that this, rather than middle class demands, explains the growing discontent, part of which (although far from its entirety) has expressed itself on the streets in recent weeks. Whether the “new” middle class identifies itself with traditional middle class demands of better governance and representation remains to be seen. The speed and means through which this change in incomes occurred – distribution of rents rather than productivity – arguably suggest the contrary.

That is not to say however, that the focus of the opposition’s discourse should lie on unsatisfied basic needs rather than demands for accountability, representation and political and economic freedoms. The challenge lies in explaining how the scarcity of the latter explains the abundance of the former.

Is this really so different from 1989?

Unfortunately the data on income distribution is not readily available, yet we can still look at mean income (in constant 2005 international $) measured at the official and black market exchange rates (see Figure 1). The widening gap between these two measures is evident since 2004. Yet we see exactly the same pattern in the period preceding 1989. As in 1989, what we are observing today is the confrontation of inflated expectations, formed over a period of bonanza and grand promises, with an increasingly grim reality.

In 1989 the consequences of this confrontation were traumatic. This time around, the gap between expectations and reality is I arguably much larger, and hence the potential for an explosive outcome much greater. A lot depends on how the government confronts its economic demons, although it might already be too late. If this narrative is correct, we have only seen the tip of the iceberg when it comes to discontent taking over the streets. Are the paramilitary groups known as colectivos enough to contain this?

Rodriguez 2

Mirages in the desert

To be clear, the proposed narrative is not inconsistent with Corrales’. It could very well be that the swelling of the middle class observed over the past oil boom led to the emergence of middle class demands for governance and representation. It should be possible to see this in surveys such as Latinobarómetro.  The narrative above however does claim that the main source of discontent brewing today is the result of the confrontation of inflated expectations with a dismal reality. This discontent is not so different from that which led to social unrest in 1989.  Venezuelans are once again at that point when the mirages created by the bonanza disappear, leaving them in the same desolation they found themselves in over twenty years ago.

The question that remains is whether the opposition is able to offer a way out of this vicious cycle. To do so, it must explain why we are where we are, and provide a credible vision of how we are going pull ourselves up by our bootstraps rather than hold on to vain hopes of a new bonanza. We all want the first picture to be true (Table 1). Indeed we want all blocks to be colored red or grey.  Yet the only way for this to be sustainable is via a continued increase in productivity. Our oil income can be an instrument in this endeavor but it can never substitute for our effort. Whether we’ve understood this remains to be seen, otherwise we will keep grasping at mirages in the desert.

04/26/2014

Pedro Luis Rodríguez

Assistant Professor – IESA/UCAB

@prodriguezsosa

25 thoughts on “Cadivi dies, and so does the middle class

  1. I don’t get it. Why do you economists in Venezuela keep trying to gauge Venezuelans’ social class distribution by trying to convert Bolivares to dollars, whether it is with rate A, B, C, D, E, F or G, when Venezuela has such a distorted economy and every product or salary depends on another rate at a certain point in time?

    What can tell us something and is also used by economists, at least in continental Europe, time after time
    when comparing very different countries or times: how much time do you need to work to buy a pair of shoes, a kilogram of meat, a cinema ticket, rent a small flat?

    And that is what counts and that is not rocket science.

    Now, about the relationship to protests, this is, I think, bad logic:

    “Venezuela is middle class”, “protests are middle class”, “guarimbas are a kind of protest”
    ergo “guarimbas are supported by most” OR “protests are supported by most”

    We have already discussed this. Guarimbas are just one form of protest, one that many believe to be counter-productive, a dead-end. On the other hand: the absence of marches (which is not even the same as “guarimba” – at all) in one area does not mean lack of support in that area.

    As far as I see, most Venezuelans are fed up with the government. Most Venezuelans don’t see any point in guarimbas, though. Most Venezuelans in areas where they feel “only” half of them or only 60% of them
    are against the government are afraid to march in those areas for obvious reasons: they are more likely to get shot.

    The difference with 1989 is that now most of the top leaders of the opposition at least in Caracas and Valencia are linked to the upper class, whether they are de facto as rich or less rich than Diosdado Cabello or Cilia Flores is another matter, and that some extremist “left” groups searching for confrontation won’t
    move the socially more unstable among the poorest to riot as was the case when people such as Alvero Carrera, Carlos Antonio Herrera Falcón and Vanessa Davies (smaller fish but there were many) helped in promoting the riots of El Caracazo.

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    • It is difficult to understand Venezuelan economics specially its exchange rate policy. The reason why in Venezuela everything is measured in a different currency rather than bolivares is because most of the products that people consume here (more 80%) are imported, thus if we want to measure welfare in terms of “pair of shoes that people can buy” or “food”, we need to make the change to understand, everybody does not just economists. Then yes Venezuela has such a distorted economy and every product or salary depends on another rate!
      Moreover, Venezuela has a system of capital control, this means that the government has the monopoly of dollars, in theory no one can buy dollars from a different source. What happened during the last year was that this monopoly was not changing enough currency and a black market was developed, the exchange rate of the black market is 10 times higher than the “official exange rate”, and most of the imported goods were bought from such black market. That is the real reason of the shortage and high inflation.

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  2. Sometimes it is a matter of telling a complete story.

    If a person arrives to the Middle class, through his own endeavors, and not through wealth distribution his Middle class status is more real because the person has created it through his work, his savings, his investments, and most of all through his values.This is so much so that I can say I personally know many people whose income is poverty level in the US but whose lifestyle, and values systems are largely Middle class, while on the other hand I personally know others whose incomes are high enough to be considered Middle Class but who are totally Not Middle Class in lifestyle and or values and who act like and consider themselves’ poor’ .

    A false Middle class through endowment rather than through hard work and planning does not require that the person develop sustainable efforts, and I am not just referring to Venezuela here.

    Of course we want to have a society that is fair enough to allow a person the freedom and possibilities on which to learn to sustain himself, but I would never call a person who has inherited this status through welfare or special treatment a true Middle Class citizen.

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  3. Fun!

    Though I always thought the weakness with Corrales’s piece was a little bit different. Calling the places where protests have broken out “middle class” is a bit of journalistic shorthand/euphemism. Protests have broken out not in say, Caricuao, or in San Martín, places in the middle of the income distribution. They’ve broken out in the Sifrino enclave municipalities in the bigger cities. There’s something silly about calling Altamira/San Diego/Lecherías “middle class” -> they’re way to the top of the income distribution.

    The World Bank’s definition of world bank doesn’t map onto this way of using the term “middle class” in any meaningful sense. When we say the protests are “too middle class” what we really mean is that they reflect the concerns of privilege.

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    • Well, I think the situation outside Caracas is a wee bit different.
      Take Greater Valencia.

      This
      is a map of Carabobo, a blue dot equals 1000 votes for Capriles, a red one 1000 for Maduro

      San Diego is better off than the average and it is ultra-oppo but curiously it is not really sifrino, rather professionals who couldn’t find a place in sifrino areas in Northern Valencia (thus: would-like to be sifrino).
      El Trigal-Manongo is definitely sifrino area or former sifrino. The most sifrino areas of Valencia are now elsewhere, only that there are lots of roads, streets connecting to them. The guarimbas in El Trigral and San Diego could in part be more easily kept because both locations are greatly surrounded by the (uninhabited) mountain (and in the case of El Trigal the motorway and Cabriales), so people inside could better control who was coming in.

      Now we have had a lot of protests in Naguanagua, which is mostly “middle class” (some poor, some better-off) and above all Isabelica, which is definitely lower middle class or even poor.

      Of course: in Naguanagua and above all in La Isabelica several protesters have been killed whereas only one in the outskirts of San Diego was killed and none in El Trigal (but there two GNs were killed)

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    • ‘what we really mean is that they reflect the concerns of privilege’…

      Makes it sound like a bunch of stockbrokers in three-piece suits waving placards and complaining that they can’t afford a second Ferrari.

      If by ‘privilege’, we mean the privilege of being able to walk down the street without being shot by a mugger, or the privilege of being able to buy cooking oil whenever you need to, or the privilege of having a reasonable expectation that when you finish your education you’ll be able to get the job you trained for, then yes .. the protests reflect the concerns of privilege.

      They often take place in what the purveyors of class hatred like to call ‘sifrino’ areas, partly because those areas have opposition mayors and police forces, not to mention neighbours, and offer a slightly better chance of protection. But the kids on the barricades don’t necessarily come from those areas.

      When we saw students and the middle class on the streets of Cairo or Tunis fighting for democracy and a better future, we didn’t dismiss them as a bunch of spoiled rich kids out of touch with the concerns of ordinary people. Most of us applauded their courage and celebrated their victories.

      The government goes to great lengths, on the streets and in its propaganda messages, to convey the impression that this is a ‘revolt of the privileged’. I for one don’t buy it. I agree with Rodriguez that this is a crisis of rising expectations that affects all classes. No hay que confundir el rabano con las hojas.

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  4. Quite out of reality that people should state that the protests reflect the concerns of privilege when it is the ‘enchufados’ and rich Chavistas who are the most privileged and against whom those who protest are fighting.

    Adding: To be more correct ,protests have broken out in the barrios of Catia, of Las Minas, and Petare, but the areas are far more controlled by Tupamaros than areas in more Middle class neioghborhoods.The Centers of protests are in Middle class neighborhoods, but these are hardly neighborhoods of privilege. Caricuao at best is lower middle class, and by western standards( pitifully poor).

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  5. I’m more entangled than an octopus playing dominoes.

    After the first post about this stuff, I did a quick read on the Wikipedia article on the PPP and it seemed to me that it is simply a correction factor you apply to exchange rates so that a certain amount of money always buys you the same amount of stuff anywhere in the world. If that’s the case, then why should I get a different picture using a different exchange rate? Shouldn’t any discrepancy between conflicting exchange rates disappear once I adjust using the PPP criterion? If it acted like a correction factor, each exchange rate (CADIVI; SICAD, Black market, etc.) would have a PPP coefficient associated to it so in the end you always get the “real” exchange rate… isn’t that the case? I know this is basic stuff for economists, but I just don’t get it.

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    • That’s a good point. My best answer to it is that PPP adjusts taking into account distorted exchange rates and distorted domestic prices. Using the black market basically does away with all of that – in a way, what you end up doing is assuming every domestic price is ruled by the black market. In a way it *over*adjusts. (I think I’m right about this, but I may well not be)

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      • So, the validity of the second approach seems more than dubious. In fact, it would also be nice to know how those distortions are actually considered in the PPP calculation. I doubt the conversion is trivial.

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      • Actually you are ‘almost” right about this. Since we don’t have the exact/realistic figures of MOF’s and BCV’s disbursements at the preferential rate for imports, break-downed by product or family of products, neither we have a detailed information of how much preferential US$ were assigned from the “hidden” FONDEN for certain imports…then it’s almost impossible to conclusively have the exact and real exchange rate to be used for the calculation of GNI per capita, PPP. Nevertheless, your figure of US$4,000 is certainly a better reflection of our realities. This simply means that the real income for Venezuelans is close to US$ 330/month or US$ 1.92/hour. For your reference, Colombia’s GNI is US$10,110 & Peru’s is US$ 10,240, non distorted.

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    • In an economy where a 500 mg. ibuprofen tablet costs 35 times as much as a (price-controlled) 200 mg. ibuprofen tablet, there ain’t no simple conversion factor that’s going save you from the craziness…

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      • In that case, isn’t any rigid comparison of the Venezuelan economic dynamics with that elsewhere an exercise in futility? Does it make sense to define the middle class as “those making X dollars a month” when there’s no clear picture of X? It seems more meaningful to compare Venezuela today with Venezuela in the past. Someone could simply plot the income distribution in BF to avoid any exchange rate nonsense and make all the comparisons in the same reference system… right?

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        • I don’t know that that works either. Venezuela-15-years-ago is a lot like abroad: without the crazy relative price distortions, Venezuela-then isn’t meaningfully more like Venezuela-now than Venezuela-now is to Colombia.

          I’m sort of skeptical of data journalism of this type precisely for this reason. When so much of the problem isn’t that you can’t afford the things you can find, but that you can’t find the things you can afford, income variables stop capturing the gist of economic well-being. I don’t think there’s really a settled way around this problem…

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          • The question then becomes, are people concerning themselves with matters of survival, comfort, luxury, or principle. The fact that most of the complaints on the street are related to survival matters, we can defend the position that the nation is not out of poverty.

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    • I am no economist but anyway: the problem is that it is extremely difficult to calculate what goods and services are influenced by what goods coming from abroad.

      Then there is another thing: what about flats, houses? They are not even taken into the formula for Venezuela, which shows how screwed the country is. It’s taken as a given you have to live with your parents, inherit the house or live in a rancho.

      And this is something apparently economists don’t take into their computation. How much money from your salary goes into paying your house or your rent?

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  6. I’d like to see the UM class in its own color on the tables. That would help, for example, compare the amount of change between P and LM against the amount of change between M and UM.

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  7. I think Venezuela is the only country in the world where those who are tutored and put in jail are called ” the privileged”?

    It is also stunning that the states of Tachira and Merida are mostly inhabited by the privileged(* lol)

    I would have thought that their income was significantly lower than that of Caracas/Venezuela.

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  8. FINALLY, someone who tells it like it really is, very well-written and explained, including the question of if/for how long Govt.-armed Colectivos/paramilitaries can contain the popular discontent. El Que Tenga Ojos, Que Los Abre, Y Que Vea.

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  9. Clearly the size and virulence of oppo feeling rises as you climb the social and educational ladder , (regardless of how we define the middle class) to the extent people are surrounded with like minded persons ( living in the same area) the strenght and resolve of the protest will manifest itself with greatest force , there is also a kind of contagion effect that inflames collective passions once you pass a certain numerical threshold . this of course explains why there are more protests arround areas where the opposition is propportionately larger in size than where its relative size is less large. add to that the fact that these areas are ruled by municipal authorities which provide a kind of virtual umbrella of ‘security´’ for protesters making them feel safe from direct armed harrasment .All the harrasment is imported from outside the neighborhood .

    If in contrast your live in an area where the chavistas followers represent a large size of the population , ( even if not a clear mayority ) where there are bands of armed chavista gangs making intimidating gestures then you will do well not to make your discontent too visible to avoid becoming the victim of attacks to your life and limb from your ferociously fanatized neighbors . Stands to reason that here the protests will be either absent or more on the timid side.

    What amazes me is that had we experienced the current price increases , high inflation , booming insecurity , deep shortages etc 20 odd years ago we very likely would have been witness to very violent protests in the worse off areas so some factor is apparently operating which in part lessens the discontent or at least the will to manifest it with too great an enthusiasm .

    What are these factors ??: I suggest three, first : a part of the population have been so deeply fanatized and brainwashed that theyve become blind to any critical view of the regimes many abuses , blunders and failures , moreover they are now programmed to respond with violence to any perceived opposition to the regimes rule , second : the govt is much more adept and thorough at using methodical misinformation and media manipulation to shower people with messages that dampen their negative response to govt failures , it isnt that they are not unhappy about those failures , they do feel a deep growing discontent, but they are not yet too sold on the idea of engaging in a protest sponsored by govt enemies ( which the govt has long made efforts to discredit and demonize) , specially as the govt tries to keep up as much as possible programs that lessen the effects of these failures as much as it can . third , the repressive machinery of govt is much more aggresive and better equiped that it was in the past including both the official repressive apparatus and that made up of unofficial armed paramilitary goon squads.

    Question is, if you took out the coercive element which wasnt there before would we see more protests in poor areas ?? probably yes but they probably would not be as violent as those in Caracazo times because of the other two factors mentioned above.

    Understand that the protests are made up not only of middle class people ( including people living on the far edge of the middle class ) but of lots of disgruntled people from the barrios who dont dare stage protests where they live because of the threat of menacing goon squads and fanatized neighbors.

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  10. Jolly good work Pedro! some in-depth political soul searching needs to quickly happen within the opposition camp for yielding a viable governing plan; or otherwise we´ll be doomed forever.

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