Purchasing power in Venezuela is the same as back in 1966

A long look back reveals that from 1950 to 1978 Venezuela went through a stellar phase in which most families managed to reach unimaginable living standards, but then it all came crushing down, and prolonged decadence began.

Using statistics compiled by Asdrúbal Baptista in his book Quantitative Bases of the Venezuelan Economy and data provided by the Central Bank of Venezuela, IESA professor Miguel Ángel Santos focuses on the loss of wellbeing at all levels and claims that the purchasing power of the average salary of 2011 is the same as in 1966.

These 45 years of stagnation are the result of atrophied productivity because, as indicated by Paul Krugman, winner of the Nobel Prize in Economics, at a long term the possibility of a country reaching greater prosperity relies almost entirely in its capacity to increase production per employee.

When employees produce more, companies raise the number of hirings and, if this process takes place throughout the economy, greater demand for employees boosts salaries and purchasing power strengthens as a result.

Why has Venezuela's productivity stalled? Basically, capital, i.e. machinery and equipment, owned by companies for production purposes stopped growing along with the number of employees.

"The ratio of capital per employee has fallen drastically and, as a result, productivity is very low; the capital per employee is similar to the one in 1966; therefore, it is perfectly logical that the actual salary is also at the same level," explains Miguel Ángel Santos.

When a country loses the cycle of investment that leads to greater productivity and better salaries, it falls into a different type of dynamics. "More employees are added to old infrastructure; a greater number of employees replaces investment, and return grows because companies distribute nearly all benefits in profits," adds Miguel Ángel Santos.

Venezuela is a particular case. Research performed by Hubert Scaith evaluated productivity in nine Latin American countries from 1960 to 2003, and painful results were found.

In 1960, Venezuela was first in productivity, but from 1970 to 2003, it plummeted by 35%, the biggest debacle amongst the countries in the research project.

An upheaval

Economists José Manuel Puente, Pavel Gómez and Leonardo Vera address the causes that may explain the fall of investment per employee in a study titled "The Loss of Productivity."

They claim that "a fall in investment may be partially due to factors related to political decisions, exogenous clashes that negatively affect the profitability expected from capital and institutional factors, such as inability to enforce laws and property rights and a highly distorted labor market."

As a developing country gains ground in the industrialization process, excess skilled labor in less productive sectors is shifts toward more productive sector, and the result is higher productivity like the one that took place in the 1950's and 1960's.

But in the mid seventies, the country experienced a change in employment from a highly productive sector, such as manufacturing, toward one with less productivity, like services.

José Manuel Puente, Pavel Gómez and Leonardo Vera point out that economic decisions that led to overvalued currency, unconditional subsidies, price controls, administrative controls and tax exemptions "usually explain the reallocation of resources from the trading sectors to non-trading sectors, resulting in consequent damage to the growth in productivity."

They add that the decline and volatility of oil revenues brought about a short-term vision, and "the country passively accepted a systematic disintegration of the political and economic cooperation," which hit productivity hard.

There are no reasons to expect a change. Private investments, according to data published by the central bank, plummeted 43.6% from 2007 to 2010, while overvaluation of currency has rise, thus decreasing the influence of manufacturing on the GDP.

Translated by Félix Rojas Alva