Venezuela Shows The World How To Practice GDP Fraud

I have noted multiple times (for example here) that the universal practice of counting government spending at 100 cents on the dollar in GDP turns fraudulent when governments start to manipulate their spending in order to manipulate the GDP numbers.  Does it matter?  Let us consider the extreme case of Venezuela. 

For readers not following events in that troubled Latin American country, the last about 15 years of its history have been dominated by a guy named Hugo Chavez.  Chavez was first elected President in 1998, and re-elected in 2000, 2006 and 2012.  He spent his nearly 15 years in power imposing what he called the "Bolivarian Revolution," along with a personal form of socialism/authoritarianism.  At the time of his final re-election in October 2012 he was critically ill with late-stage cancer, and he died in March 2013, leaving Venezuela to his personally-selected successor Nicolas Madura.

How has Venezuela been doing during the last 5 or so years of Chavista rule?  If you believe the official economic statistics, just fine.  Yes, Venezuela  is rather dependent on oil as its chief export, so that when oil prices took a big tumble from mid 2008 to early 2009 from about $140/bbl to $65/bbl, Venezuela's economy took a dip in 2009 and into 2010, which they admit. Here is official Venezuela GDP data from the Central Bank. But putting aside the 2009-10 event, the official statistics show fairly impressive GDP growth in 2008 (6+%), 2011 (4.2%), 2012 (5.5%), and into 2013 (0.5% in Q1 and 2.6% in Q2).  It would be great if the U.S. could match those kinds of numbers! 

Well, let's try to see what kind of information we can get about the real economy.  The Wall Street Journal had a big article on the front page in the August 18 edition titled "U.S. Rice Farmers Cash In On Venezuelan Socialism"  (unfortunately behind pay wall except for the first few paragraphs).  Even in those few paragraphs, we learn that Chavez's policy of nationalizing large farms has turned Venezuela from an exporter to an importer of rice.  The remainder of the article covers how production of many other items, including steel, has declined with nationalization and government control.  

For a longer non-pay-walled treatment of the real Venezuela economy, try this from Foreign Policy on May 10.    Here's an excerpt:

 [I]t is getting harder to find items such as sugar, cooking oil, and corn flour -- an essential part of any Venezuelans' diet. According to latest figures from the Central Bank, scarcity peaked in April to reach a historic record of 21.4 percent. This means that roughly 1 of every 5 products consumers want to purchase is missing from the shelves. Not surprisingly, Venezuelan consumers are being forced to queue for basic staples, sometimes in an undignified manner. The photo above shows shoppers noting their place in line while shopping for corn flour.
Rolling electricity blackouts continue to be yet another thorn in the government's side. They've been the norm following the complete state takeover of the electricity industry in 2007.

Well, how could GDP possibly be growing at those impressive rates if production of everything that counts is going down?  Perhaps the price of oil is going up?  Turns out that the price of oil has been fairly stable since the beginning of 2011, fluctuating between about $80 and $110/bbl.   (Chart of NYMEX prices here.)  That's not the answer.  Also, Venezuelan oil production has declined since the start of the Chavez years, going from about 3.2 million barrels per day in 1998 to about 2.3 million in 2012, and the decline has mostly continued in recent years.  According to a chart here, Venezuelan oil production declined in 2008, 2009 and 2010, had a slight 3.8% increase in 2011, and was completely flat in 2012.

The answer can only be one thing -- an explosion of government spending, dishonestly counted at 100 cents on the dollar in GDP as if it were real wealth-generation.  According to this from Bloomberg last September 13, Venezuela had a 67% increase in government spending in the run-up to the 2012 election.  That's one way to get a 5% increase in GDP!  The problem is, it's not real.  The Bloomberg article reports that the biggest piece of the increased spending was for subsidized housing -- one of those destructive government programs that actually decreases real wealth and income.  But of course they count the spending at 100 cents on the dollar positive.  And thus you can see how a country can report 5% GDP increase when in fact its economy is in serious decline.

But of course, everybody who counts takes the fraudulent numbers without the slightest skepticism.  For example, the CIA in its 2012 World Factbook here reports the official government numbers of 5.5% GDP growth in 2012 and 4.2% in 2011 as if they were real (although it does say as to 2011 that "record government spending" helped to produce the result).  The World Bank also takes up the official fraudulent numbers and passes them on without comment here. 

Again, does it matter?  Believe me, the United States is doing the same thing, just, so far, on a smaller scale as a percent of GDP.  But with U.S. GDP growth running under 2% per year, could government spending increases result in positive GDP growth figures when honest accounting would show negative?  It is absolutely possible, and becoming more likely all the time.