Venezuela's economic contraction continues to worsen

Posted: Friday, May 23, 2003 By: <a href=www.vheadline.com>Jose Gregorio Pineda & Jose Gabriel Angarita

VenAmCham's Jose Gregorio Pineda (chief economist) and Jose Gabriel Angarita (economist) write: With the first half of this controversial year 2003 coming to a close, qualified analysts using all the available information have made their estimates of what may be the deepest contraction in the history of Venezuelan economic activity in the first quarter of the year; estimates are in the neighborhood of 30% of Gross Domestic Product (GDP).

These figures reflect the tremendous crisis through which productive activity is passing, which threatens job stability for enormous numbers of workers; unemployment already exceeded 20% in February, according to official figures. Unquestionably this performance was caused by bad economic management influenced by political rather than economic objectives, among other factors. The upshot is the massive social deterioration we are now experiencing, and all signs appear to indicate that it will get worse in the coming months.

Figures from Central Bank experts, though preliminary and unofficial, indicate that the principal engines of productive activity -construction, manufacturing industry, and commerce- suffered contractions of 64%, 35.1%, and 33.5%, respectively. These figures make it easy to understand why a large number of workers in the Economically Active Population (EAP) have lost their jobs or cannot find employment; their numbers are reported to be in the neighborhood of 2.4 million.

• There is no magic formula that will produce an immediate effect, but there needs to be a short and long-term economic adjustment plan that will allow us to reverse course and stimulate a recovery of national productive activity.

The current administration needs to begin by increasing the supply of foreign exchange to the market and truly relaxing the controls as a step toward their subsequent elimination. Unfortunately, all signs indicate that these changes are not among the government's short-term plans. On the contrary, the authorities are talking about a series of policies that have yielded adverse results in the past, such as substitution of imports.

The outcome will depend on the changes that may come in CADIVI's management, to improve on current conditions. Otherwise, the consequence for economic activity and unemployment may be a continuation of the historic contraction we have experienced in the last several months.