Características

In 1989 the economy faced four major problems. First, the external imbalance; principally expressed in the form of a large current account deficit, a very low level of international reserves and a large and rapidly growing gap between the official and the free-market exchange rates. Second, the fiscal deficit which was expected to rise due to the impact of rising subsidies on goods. Third, repressed inflation due to the price control system, and fourth, financial repression generated by inflationary expectations in the context of controlled interest rates (Hausmann, 1990).

i) The econ om ic policies

To resolve these major problems the government launched a rather radical policy package at the beginning of 1989, under agreement for financial support with both the IMF and the World Bank. The new strategy assigned the main role in stimulating domestic supply and improving resource allocation in the economy to market forces. The main elements of the associated economic reform programme which was aimed at strengthening domestic savings, attract foreign capital, and diversify the economy through a process of adjustment and liberalisation were: 1) a unified floating exchange rate system, 2) trade liberalisation measures which included the elimination of 75 percent of imports prohibitions, 70 percent of import licenses, and reduction by half of the average tariff rate, 3) price liberalisation for all goods except for those on some ten "basic products", 4) public sector prices, including those for gasoline, electricity, and telephone service, were increased, 5) interest rates were raised, and 6) a phased reduction of commercial debt and an increase in borrowing from multilateral agencies. The economy was also to be opened up to foreign investment in all sectors -except petroleum and iron ore. The incentives offered to foreign investment included the removal of restriction on the transfer o f dividends and profits

M ost o f the information provided in the description o f this period has been taken from the annual reports o f both the lA D B and the Central Bank o f V enezuela (BCV: Banco Central de Venezuela) for the years 1989-1997.

abroad. Along with these short-term measures, a medium -and long- term structural reform programme promised privatisation, tax reform and the administrative reform of the state’l

This major shift of the economy towards economic liberalisation might have had relevant effects on the distribution of income that deserve some discussion, since these possible effects can help in explaining income inequality changes during this period, which is actually the main focus of the present research.

Economic liberalisation implies a significant reduction of government intervention in the domestic market, with this being one of the most important features of this economic model, since it would produce a more efficient allocation of productive factors through the market forces. Thus, in order to create a more competitive economy (in terms of labour costs), wage indexation (according to the inflation) has to be removed. In this context, cost pressures coming from either a higher exchange rate or a higher interest rate usually lead to price increases which might yield changes in the income distribution against the working class, since the indexation has been removed. Therefore, the economic liberalisation measures might imply a burden that is not equally distributed among the population, since individuals who have only labour earnings as an income source will see their economic position in the income distribution seriously deteriorated. A particularly vulnerable group is that formed by workers in agricultural activities who, although they can benefit from price changes, might be the group with the lowest real wage and also have to face a removal of subsidies from which they used to benefit.

Also, the exchange rate adjustment induces additional inflationary pressures in economies that are highly dependent on imports, as is the case of Venezuela. These pressures lead to a further deterioration in the economic position of those groups, who either possess fewer quantities of assets (or nothing at all), or are not able to keep foreign exchange what would allow them to take advantage of the situation.

H ow ever, a few w eeks later, follow ing the announcement o f this econom ic reform programme, unprecedented riots took place delaying the application o f som e measures such as the increase in

Another factor potentially relevant in explaining a likely negative impact of these economic reforms on the distribution of income is the interest rate increases. In fact, those groups less endowed with wealth face greater restrictions for accessing the financial market, which prevents them from benefiting from the reforms. In addition, higher interest rates might have a deeper negative impact on small and medium size industries, since they rely more on the domestic financial market. Therefore, in a context of financial restrictions, individuals working for either small or medium industries are more likely to face a dramatic real wage deterioration, as well as being more vulnerable to experience redundancy. As a consequence, only those groups better endowed with wealth are in a better position for benefiting from the economic reforms launched during this period, while the others, apart from facing the financial restrictions mentioned earlier, would have to support the burden of even higher prices coming from successive interests rate increases.

Likewise, price increases, as a result of these economic reforms, might have a stronger impact on urban dwellers than on the rural ones, since the latter are more likely to buy goods directly from the producer, or they are producers themselves. Also, urban dwellers use public services (schools and hospitals) more intensively, as well as privately provided services such as transport, electricity, gas and water. In addition, the exchange rate adjustment might also have a greater impact on urban dwellers given their greater consumption of imported goods.

ii) The social policies

The government was fully aware of the likely social impact of these economic measures and introduced a policy of targeted subsidies to the lowest income group, allied to an across the board increase in monthly wages. This policy of subsidies formed part of the social programmes, some of which were actually launched for the first time in 1984, when the debt crisis deeply affected the economy, and has been applied also during the decade of the 1990s. Thus, what the government did this year was to update some of the social measures included in these programmes, as well as adding a few new ones. Similarly, in 1994 when the country suffered from a deep

recession, as will be discussed later on, and again in 1996 when the economy returned to liberalisation, the government gave more emphasis to these programmes that were aimed at counteracting the likely negative impact of economic changes on the distribution of income.

Therefore, it is useful to provide some details about these policies in this section, since they were reintroduced in both 1994 and 1996 on the basis of the same social programmes. Also, such a description is helpful in understanding their ineffectiveness, which is stated in the hypothesis of the present research‘d

19

The fo o d subsidy

There are two ways in which the food subsidy is provided to low-income households. One is implemented and applied through the Ministry of Education to take advantage of the wide education net spread over the whole country as a distribution channel. This “advantage” also places a limitation on the subsidy coverage. Indeed, this is a direct subsidy applied only to households located in poor areas, both urban and rural, with children enrolled and regularly attending school at the primary level of education. The subsidy consists of both an amount of money (500 bolivares in 1989) for each child attending school with a maximum of three children per household, and a monthly bonus to be changed for cereals (rice and cornflour) and milk. There are some weaknesses of this subsidy that must be highlighted, relating to the population it should cover and, as a consequence, to its effectiveness. First, the household is not selected according to its income level, but rather the area in which it is located. This means that households with quite different levels of income might be benefiting from this subsidy. Second, CONASSEPS admits that schools located in the poorest areas of the country are difficult to access, implying that households located in these areas do not benefit properly from this subsidy. This is a serious contradiction with the

I do not com m ent on the potential effects o f minimum wages in this section, since this has been already discussed in Chapter 1.

The information provided in this sub-section has been taken from C O NA SSEPS (1993) and CORDIPLAN (1991). CO NASSEPS (Consejo Nacional de Seguim iento y Supervision de los Programas Sociales) is a government office aimed at supervising and assessing the social programmes, while CORDIPLAN (Coordinacion de Planificacion) is also a government institution o f planning aimed at designing the National Plan which contains the main econom ic and social policies to be

objective of this subsidy, since it was implemented to target the lowest-income group of the population. Third, CONASSEPS also admits that the subsidy leaves out of its coverage, according to its definition, those households with children who are not able to attend school given their resource restrictions, which is the case of the poorest households of the population. Even more, many of these children might be already incorporated in the labour market working in informal activities. CONASSEPS reports that efforts have been made to incorporate these households, but that 73 percent of these households are still outside the coverage. This is again a serious weakness of this subsidy, since these types of households are the most vulnerable to economic changes and who urgently require the subsidy.

The other way through which a food subsidy is provided to low-income households is called the “the household basket”. In this way the government provides some foods that constitute what is called “the basic basket” (usually rice, cornflour, pasta, milk, and beans) at subsidised prices through either neighbourhood organisations or workers who are members of savings banks at the enterprises for which they work. In this way the subsidy also faces limitations in terms of the population it should cover according to its objective. On one side, the lowest-income households rarely constitute neighbour organisations and they are located in areas that are difficult to access, which prevents them from benefiting from the subsidy. On the other side, the self-employed and employees in micro-enterprises are less likely to be members of savings banks, which leaves a relevant proportion of the population outside of the coverage of this subsidy, with this population being part of the informal sector of the economy.

,20 The transport subsidy

This subsidy was initially created for all students in the country, with low-wage workers later being included. The subsidy is paid to transport organisations that use units that are legally registered as public transport. The mechanism consists of personalised tickets that individuals who apply for this subsidy can buy at cheaper

launched by the government currently in office.

prices. The tickets are given to the bus driver who then can claim the full price for each ticket. There are some aspects that are important to highlight about the effective population that this subsidy might actually be covering. First, all students in the country are entitled to receive this subsidy, but the programme assumes that students belonging to high-income households exclude themselves from benefiting from it. As students who attend public schools at the primary and secondary levels (who usually belong to lower-income households) are allocated by the government to schools that are close to their area of residence, it is expected that the majority of this population does not use public transport to access school. Therefore, the subsidy would benefit mainly those students who are in higher education levels. So, taking into account that students belonging to low-income households are less likely to reach the higher level of education, this subsidy might not be benefiting the student population for which it was created.

Second, it is important to point out that a relevant proportion of the transport service offered in poor urban areas (especially in the capital region) is provided by self- employed drivers who use their own automobiles, with them neither belonging to any transport organisation nor being legally registered as public transport. Therefore, the student population who use this informal service are prevented from benefiting from this subsidy. This means that growing informal activities in transport services might seriously affect the effectiveness of this policy.

Finally, the low-wage workers can benefit from this subsidy through their worker unions. Obviously, this excludes the self-employed, while workers in micro­ enterprises might also be excluded, since they are less likely to be members of unions.

Pensions

Along with the policy of increasing the minimum wage, the government usually increases the monthly amount of pension as part of the social programmes aimed at protecting the low- income groups from the adverse impact of economic reforms.

Pensions are regarded as a means through which an important amount of resources can be transferred to the individuals who benefit from the social security system and, as a consequence, the distribution of income can be improved. However, looking at the coverage of the system and the structure of the labour market^^ a quite different result can be expected.

The coverage of the social security system is the result of a labour market structure that explicitly excludes certain groups of the population. Accessing to the social security system involves significant costs for the enterprises. Therefore, given the lack of controls, it is reasonable to admit that only workers in the modem private sector and the public sector are potential beneficiaries of the system. This excludes workers in the micro-enterprises and self-employees. In fact, the social security system in Venezuela only covers one third of the labour force (Marquez, 1993).

Marquez (1993) shows that the employment structure by decile in the income distribution suggests that the structure of the labour market is a determinant of who are the beneficiaries of the social security system in Venezuela. The author shows that the proportion of workers affiliated to the system significantly increases as one moves up the distribution of incomes. Marquez argues that the low coverage at the lower end of the distribution is the result of both evasion of affiliation by micro­ enterprises and lack of regulation for self-employees. In other words, this is the result of a higher proportion of informal workers, who are not covered by the system, at the lower end of the income distribution. Marquez concludes that the Venezuelan system of pensions does not have a progressive impact on the income distribution.

iii) The effects on m acroeconom ic indicators

Let us now turn to the actual effects of the economic liberalisation policies launched during this period on the macroeconomic indicators, while 1 will return to the effects on the distribution of income in Chapters 8 and 9.

The immediate economic effect of this package saw the current account moving quickly into surplus in 1989, after three consecutive years of deficit. However, GDP fell by 8.5 percent that year, the most affected sectors being the manufacturing and construction industries (Table 5A. 1.4). There was a sharp increase in inflation -to 81 percent- as subsidies were removed (Table 5A. 1.3), whilst real wages (despite the wage increases awarded) fell by 14.4 percent and unemployment rose to stand at 10.4 percent by the year’s end.

By 1990 most quantitative import restrictions on manufactured goods had been eliminated. The subsidy to the non-petroleum exports was cut from 30 percent of export value to 5 percent for manufactures (6 percent for agricultural products) and GDP grew at 6.5 percent in a recovery spearheaded by increased oil exports as the oil sector grew by 13.9 percent (Table 5A. 1.4)^^. The agricultural sector was adversely affected by the removal of the quantitative import restrictions however, and decreased by 1.8 percent (Table 5A. 1.4).

A significant achievement in 1990 was the external debt reduction agreement between Venezuela and the commercial banks which covered almost 65 percent of the country’s external debt. The agreement was expected to reduce capital outflows and to give access to new external financing and was an important step towards reducing the debt burden for the economy^^.

In 1991 Venezuela achieved one of the highest growth rates among all the Latin American countries, despite the adverse effects resulting from the drop in oil prices (Tables 5A. 1.8-9). This decline in prices was offset by another rapid increase in oil production and, allied to the impact of public investment upon the domestic economy, created the necessary conditions for the highest growth rate of the country’s GDP since 1959. The increase in public investment in the oil sector induced growth in other sectors. Higher investment demand from the oil industry stimulated the

This was in response to the higher oil prices resulting from the econom ic embargo im posed on Iraq and the temporary lifting o f the OPEC (Organisation o f Petroleum Exporting Countries) quota system.

This was a debt agreement under the "Brady Plan" which was launched in March 1989 and was designed to allow debtor countries to take the advantages o f low market prices for their debt, subject to conditions such as p olicy reforms acceptable to Washington (For details about the Brady Plan, see Bulmer-Thomas, 1994, Chapter 11).

construction activity, which in turn induced growth in manufacturing and in associated activities such as electricity. The construction sector grew at the impressive rate of 30.8 percent in 1991 and at 34.6 in 1992, while manufacturing grew at 9.7 percent in 1991 (Table 5A. 1.4).

It is important to highlight that growth in these two sectors might have had an equalising impact on income distribution, counteracting the likely negative impact of the liberalisation measures discussed earlier. Both construction and manufacturing have a relevant contribution to total employment, mainly formed by manual workers. In fact, these two sectors, taken together, concentrated 23.2 percent of total employment by 1990 (see Table 6.7, Chapter 6). Also, my calculations revealed that, in 1992, 77 percent of households’ heads working in the manufacturing sector were manual workers, while this figure was 86 percent for the construction sector^'^. Therefore, taking into account that households headed by manual workers are more likely to be found at the lower end of the income distribution (see Table 7.12, Chapter 7), it is expected that this growth in the manufacturing and construction