A benchmark for our troubles

This has been a gruesome year for Venezuela. But as our economy collapses, economists are finding it hard to assess just how screwed up we are, since Venezuela’s Central Bank refuses to publish economic data. It’s also becoming very hard to forecast how clusterfucked we’ll be in 2015.

In this context, economists have to come up with whatever they can. Enter Nomura, a Japanese financial group, which has introduced in one of its latest reports a soon-to-be-notorious “Venezuela screwed-up index.”

Source: Nomura

Source: Nomura

This is an interesting proxy for gauging Venezuela’s macro imbalances (how distant we are from macroeconomic equilibrium) and its relative price distortions.

The index is actually quite simple: roughly, it’s a ratio that puts the dollars generated from the export of a single barrel at the official exchange rate of 6.3 BsF/USD on the numerator, and the minimum wage on the denominator. So in simple terms the numerator is the amount of money we’re getting from our export sector vis-a-vis the minimum wage in the denominator. Think of it as an indicator of the number of barrels per oil a minimum wage buys (it’s not exactly that – it is an index, and therefore the units don’t matter, what matters is the trend).

Think of this in terms of income and expense. The numerator is our income. The denominator is our expenses – the money we have to spend on labor costs. As Nomura’s analysts reveal, the lower the index, the more screwed-up Venezuela is. This is in part because if the index reaches new lows (as it did in the 2009-2010 recession), our purchasing power as Venezuelans has diminished.

For 2014 the index is experiencing new lows (we’re more screwed up), as if you didn’t know that already. Surely, Venezuela has a fixed-exchange rate, which means that the numerator fluctuates only on the most important variable that the Revolution can’t control: the oil price.

If you take a look on the graph, we’re way past being screwed-up, and the Government is not engaging reality because they’re so darn scared of how its megapopulism will cost them (and us) dearly.

Whether the index is a good proxy or not for overhauling the world’s most mismanaged economy, Nomura has to take credit on what we as economists do: maximize an objective function subject to an array of constraints. In plain vanilla, what this means is examine how screwed up we are, subject to the dearth of data, lack of credibility from policymakers and uncertainty among other factors.

6 thoughts on “A benchmark for our troubles

  1. We had a similar challenge when Chavez was ill. The basic relevant information, as was eventually disclosed out of necessity, was not good.

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  2. “En Venezuela no parece haber Buenos o malos presidentes sino Buenos o malos precios del petróleo. 15 años de revolucion parece demostrarlo”
    twitter de Francisco Urreiztieta

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  3. the graph doesn’t seem to include the latest increase in minimum wage, so when we see an updated version a couple of months from now we can expect to see another sharp drop to ~70-60 units, or perhaps even less if the price of oil continues to slip.

    I understand that economists have their hands sort of tied in using an exchange rate of 6.3 BsF/USD, but it would be interesting to see a version of this chart that factors in the loss of value of the BsF beyond the annual adjustments to the minimum wage.

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  4. Comparing the chart with what I lived, for a middle class professional like me, Chavismo’s best year was in 2006, were you could find imported cars at bargain prices, parallel rate was not high, and there were no shortages. After that, Communicational hegemony started with the closure of RCTV, restrictions worsens and shortages came to stay forever.

    I don’t believe 2011 was the best time of the revolution, but it is obvious that the present is the worst in Venezuela’s history.

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