Tuesday, April 15, 2008

By George, I think he's got it.

There is an interesting blog called Oil Wars that I have criticized in the past for getting things wrong about development. But now I gotta give credit, because they are getting it right on Venezuela's nationalization program (all the interesting formatting is in the original post):

"But what is important to note is what Venezuela will NOT get through any of these nationalizations; new steel mills or cement factories or new telephone systems – those already existed and simply changed hands. There won’t be any new jobs as all the jobs working for those firms already existed. There won’t be any new economic output as the goods and services produced after nationalization were already being produced before it.

In sum, the only benefit that Venezuela gets from nationalizing these companies is it now controls their profits and it only even gets that if it ensures the companies are well run and remain profitable.

Now let’s turn to an alternative use of that money. Instead of buying existing steel mills or cement factories suppose the government built new ones.

By contrast if the government built a new steel mill with the same $2 billion it would create thousands of NEW jobs, it would generate NEW economic activity, it would generate NEW tax revenue and, if the company is run well, it would even get NEW profits.

In summary, if the Venezuelan government uses its oil revenues to purchase an existing company its Venezuela’s only gain is whatever the profits of that company are. But if it instead uses those resources to build NEW industries it gets far more as much new wealth is created, economic output increases, and the standard of living of Venezuelan’s increases. This is not to even count other tangential benefits that may accrue such as increasing the skill level of your work force, obtaining new technologies, reducing the economies dependence on oil, etc.

It is more than clear that from an economic point of view it would be better not to nationalize Sidor and the other companies and instead invest the money in building up new industries. These nationalizations are therefore a misguided and a wrong policy for Venezuela to be pursuing.

The fact that the Venezuelan government is pursuing this type of policy is evidence that it is fighting the wrong battles. Yes, Venezuelan’s are generally underpaid and have a low standard of living.

The reason for that, however, is not that they are exploited by foreign companies who take vast sums of wealth out of the country. The principle reason is that the country is underdeveloped and simply doesn’t generate enough wealth for Venezuelans to live well, even if all of that wealth remains in the country. Hence, the central issue facing Venezuela isn’t how to distribute the countries economic output more equitably (though that too can be worked on in various ways) but how to INCREASE its economic output.

Putting this in terms that would be familiar to Marxists, Venezuela’s problem isn’t who OWNS the means of production; it is that it doesn’t have ENOUGH means of production."

Awesome!! If this guy gets it right, how can anyone NOT?? Phone call for Hugo Chavez on line 7!!

1 comment:

Shawn said...

...and here's the capitalists, drinking tea at the end of the race, waving hello at this person who took the roundabout way to get to the finish line.