Thursday, November 1, 2007

Changing Income Distribution in Venezuela: sorting out the data and the bias

This article of mine just appeared on Venezuela Analysis on November 1, 2007, and it´s easier to read there because the tables of numbers are displayed properly, something I can´t seem to manage yet with the blogger format. Venezuela Analysis also has a number of current, well-informed articles on the Constitutional Reforms that will be voted on in December, and others concerning the political demonstrations for and against.
(Also note: the comments section just opened with the Dia de la Semilla Campesina article. Oliver Woods of New Zealand was the first to send a comment. Feel free to join him.)

The rich have become richer, and nearly everyone else has become poorer in the USA during the Bush years.

Is it possible to go in the other direction?

Venezuela, a country where income disparities have been immense for many decades, has been trying to redistribute income more fairly.

Is the Chavez government succeeding?

(Illustration for Robbing US Blind by Matt Wuerker)

All statistics, including economic statistics, can be manipulated, or only partially revealed, so that they demonstrate a foregone ideological conclusion rather than reality. For instance, from 2004 until the beginning of 2006, the United States State Department and the Venezuelan political opposition claimed that the Venezuelan economy was being destroyed by President Chavez and his policies. As evidence, they kept showing the disastrous results for 2003, a year when economic production plunged and the number of people in poverty climbed.

The enemies of Chavez chose not to reveal that the Venezuelan economy was growing by leaps and bounds in 2004 and 2005, and that more people were employed and enjoying significantly higher incomes. And, of course, they did not mention their part in causing the economic disaster of 2003, which was not a result of government policies, but of the opposition’s effort to sabotage and shut down the oil industry and other business enterprises while the U.S. government cheered from the sidelines.

By 2006 and 2007, it was impossible to hide the evidence that the Venezuelan economy had been growing at a tremendous rate for four years running, and that income was being redistributed to the poorer classes in an unprecedented fashion. Some of the relevant economic numbers appeared in a 2007 report generated by two private consulting firms, AC Nielson and Datos, for VenAmCham (The Venezuelan American Chamber of Commerce and Industry). They showed that the poorest economic class, Level E, had more than doubled its income in three years, but their interpretation was still tinged with an anti-government bias.

For example, the title over the table of figures provided in the AC Nielsen/Datos report sounded discouraging, “In the last three years, only the income of Level E has grown in real terms.” Since there are 6 household income levels customarily used in Venezuela -- A,B,C+, C-, D, and E -- this doesn’t sound like much of an achievement. That is, until the reader learns that level E consisted of a solid majority, or 58% of the population in 2003. Level E’s income grew by a whopping 130%, after being corrected for inflation. This in itself should have been reported as extraordinarily good economic news. [1]

But was there bad news?
The same report from AC Nielsen/Datos showed that the next two income classes, Level D and Level C-minus, which comprised 23% and 15% of the population respectively, were doing poorly by comparison. Level D average incomes declined by 6% and Level C-minus declined by 16% between 2003 and 2006. Since these two groups made up nearly 40% of the population, it certainly appeared as if sizable numbers of Venezuelans were being left out of the economic boom.

But not really. Those who prepared the report made a poor decision, or perhaps, a biased decision. They began their calculations in a really poor economic year, 2003, when the shutdown of the state oil company, instigated by its former management and the economic elite, threw the nation into a mini-depression. It would have been better analytical practice if the report had begun with a relatively stable year such as, when solid economic growth was putting Venezuela on a more even footing. If we look at the numbers for 2004-2006 that were cited by AC Nielsen/Datos (see below), they don’t show a huge single-year jump in the incomes of the poorest citizens, but they do reflect a very impressive picture of movement toward a more egalitarian society where the vast majority is improving its economic status.

From 2004 to 2006, there was growth (after adjusting for inflation) in average incomes for all three income groups, E, D. and C-minu (97.6% of the population).

Level C-minus grew 2.2% from 1,888,000B to 1,930,000B

Level D grew 14.3% from 1,025,000B to 1,172,000B

Level E grew 42.1% from 584,000B to 830,000B
(*income adjusted for inflation in 2006 bolívares; the official exchange rate is 2,150 bolívares to the dollar, so, roughly speaking, 1000 bolívares equal about 50 cents, and 1,000,000 bolívares equal about 500 dollars.)

Add another bit of information, things look even better
But there was more to cheer about that was not included in that particular report. Another study, prepared for the Venezuelan Chamber of Commerce in 2007, showed that people at Level E were doing so well that many of them had moved into higher income classes. When 2004 was compared to 2007, the percentage of the population at Level E had shrunk dramatically, from 58% to 45.7%, while the level above, D, had grown 23% to 33.6%. And at Level C-minus, which roughly consists of the lower-middle and middle classes, the percentage also grew, from 15% to 18.3%.[2]

In the table above, level D showed a healthy increase in its average household income of 14.3%, but this doesn’t appear very significant compared to the average household increase at the lower level E of 42.3%. This perception changes, however, if we note that a great many people, more than 10% of the total population, moved up to level D from level E between 2004 and 2007.

This suggests that there’s another way to look at the social impact of incomes earned by those at level D. Instead of looking solely at the increase in average income, one should also consider the aggregate increase in household income at this level. That is, if the total income earned by everyone at level D in 2006 is compared with the total income in 2004, the change is outstanding. The income growth for level D as a whole jumps to 67%.

Increases in aggregate income at the lower income levels in Venezuela, 2004-2006

Level C-minus aggregate income increased 24.8% as its percentage of the population increased from 15% to 18.3%.

Level D aggregate income increased 67% as its percentage of the population increased from 23% to 33.6%.

Level E aggregate income increased 12.2% as its percentage of the population decreased from 58% to 45.7%.

Discouraging news for a few
A truly discouraging number, at least for the political opposition and the big business class, was the one that demonstrated that the small, high-income classes -- Levels A,B, and C-plus -- were shrinking. Together they comprised 4% of the population in 2004, but only 2.4% by 2007. While it is difficult to assess exactly why this happened, we can speculate that at least two factors were probably at work. First, a considerable number of well-off Venezuelans have been moving to the U.S., Colombia, and Europe in recent years, where they either reinvested their capital or pursued high-salaried professions. Secondly, the high rate of inflation in Venezuela has taken a toll on some higher-income people who have fixed earnings derived from interest, rents and domestic investments.

For this reason, the status of the citizens at income level C-minus might not be as rosy as it appears in the table above. Since the number of households at this level increased from 15% to18.3% of the population in just two years, the aggregate income earned by all the households at level C-minus (that is, all of their incomes added together) grew by 22%.

However, there’s a catch here – obviously some people that moved to Level C-minus are not doing as well as they once did. As the percentage people inhabiting the three high-income levels shrank from 4% to 2.4% of the population, many of the missing 1.6% (those who did not fly off to Miami) ended up living a Level C-minus existence. Because of this factor, it would probably be a mistake to overemphasize the aggregate income growth at this level.

The overall picture looks rosy
Obviously, some people who belong to, or used to belong to, the tiny high-income groups are feeling some discomfort. Perhaps their future looks grim. But otherwise, there are three more ways of measuring economic progress in Venezuela that make things look rosy for the huge majority.

First of all, by combining all of the people in all three bottom income groups, which comprised 96% of the households in Venezuela in 2004, and 97.6% at the beginning of 2007, it’s possible to show their overall average income gain from 2004 to 2006.

Growth of the average income for 96% to 97.6% of households*
For the three bottom levels, C-minus, D, and E combined, monthly income in bolívares

From 2004 to 2006 average houshold income increased from 893,000B to 1,154,000B, an increase of 29.2%

(*these levels constituted 96% of the population in 2004, and 97.6% of the population by early 2007. Income adjusted for inflation in 2006 bolívares)

Second, there is a significant way to measure the egalitarian effects of recent income changes in Venezuela. The rapid growth in the incomes of poor and working class incomes is having a rapid leveling effect. In two years, not only did many from level E and level D move up to higher levels, but those who remained within those two classifications, nearly 80% of the Venezuelan population, made gains in relation to level C above them.

The leveling effect of changes in average monthly incomes in Venezuela

Average income at Level D was 54% of Level C-minus in 2004, and 61% in 2006

Average income at Level E was 31% of Level C-minus in 2004, and 43% in 2006

Third, an October 2007 article in one of the dominant opposition newspapers, El Universal, provides some long-term evidence that confirms the rosy picture above. In an article titled “Consumption grows 16% for the fourth consecutive year,” reporter Mariela Leon quoted experts who work for the business establishment. José Antonio Gil Yepes, director of the consulting firm Datanálisis and featured speaker at the annual convention of the National Association of Advertisers, said that “Level D has increased its real income by 60 percentage points in eight years, and Level E by 100 percentage points.”[3]

There is no particular reason to be alarmed by this increased consumption, since the whole country is simply consuming at roughly the same rate that lower class incomes are increasing. The 16% percent annual increases in consumption, compounded over four years, are equal to 81%, about halfway between the long-term gains in income for Levels D and E (60% and 100%.)

Not all business representatives are upset by the consumption boom. The remarks of Eduardo Hernandez, the president of the National Association of Advertisers, indicated that those in the publicity business are simply adapting to the new economic realities. He said that companies have begun to tailor their messages and their products to a different and larger clientele: “There is an orientation of products and services directed much more toward the families with fewer resources.”

Information needed for future analysis
It would be helpful to have more information about what’s happening at the top of the income scale, at Levels A, B, and C+, which together comprise 2.4% of the population. It is quite possible that their high incomes have gone up at least as fast as everyone else’s, especially since they represent a smaller percentage of the whole population than they did previously, and because many of them are business owners. There has been significant growth in banking and the local stock market, and a big boom in the construction of housing, roads, rail lines, hospitals, schools and other public facilities, and almost all of it is contracted out to private businesses.

An even more interesting number would be an estimate of the value of all the government benefits that are now reaching a majority of the population through the social missions: for example, the 40% discounts on food at Mercal stores, free medical care at Barrio Adentro, free community sports and cultural programs, and free education classes for people studying at all levels. All of these things amount to significant “extra income” that is not included in the calculations above. Perhaps more important than their monetary value is something incalculable. These programs give a sense of full citizenship to a great many people who were previously marginalized in Venezuelan society.

In Conclusion
Under the Chavez government, most Venezuelans, particularly the lower classes, are receiving a much larger piece of the economic pie. No wonder this rattles Bush and the ultra-conservatives in the United States, whose political project is causing exactly the opposite effect: the economic status and social well-being of most U.S. citizens have been deteriorating for decades.

(For more on that score, see Steve Brouwer, Sharing the Pie: A Citizen’s Guide to Wealth and Power in the United States (Henry Holt, 1998) and Robbing Us Blind: the Return of the Bush Gang (Common Courage Press, 2004.)

(A word of thanks to Oil Wars, the valuable website that posted many of the economic numbers that I have used in this article.)

[1] “Rebuilding the middle class, bit by bit,” Oil Wars , August 2, 2007
[2] Ibid.
[3] Mariela Leon, “Consumption grows 16% for the fourth consecutive year,” El Universal, October 17, 2007.


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