ONE of the accusations often made against the regime of Hugo Chávez is that the oil boom of the 2000s was squandered. Chavistas bristle at this idea, arguing that Venezuela achieved striking gains in inequality and poverty over the past decade and a bit. Perhaps, but if the result of all that extra spending is an oil industry that doesn’t invest and an economy with pervasive shortages of basic goods, the risk of social gains being reversed is high. What would it have taken for Venezuela to build up a meaningful oil-stabilisation fund?
Venezuela has toyed with the idea of an oil-stabilisation fund before. In 1998, the year before Chávez came to power, the then government set up the Fondo de Estabilizacion Macroeconomico (FEM). Money went in for a few years, but was soon drawn down again; the FEM has been dormant since 2003 (its website is a poignant reminder of what might have been).
What would have happened if Chávez had rethought, and started squirrelling money away again? The back-of-the-envelope calculations below provide some guidance. The first table shows the amount of money (in dollars) that PDVSA, the state oil firm, paid out in income taxes, production royalties and social-development contributions in the six years between 2007 and 2012. (These numbers come from PDVSA’s annual reports; the 2013 numbers are not available yet.)
Now let’s assume that the government put 10% of this amount into a reconstituted oil fund (call it the Hugo Chávez revolutionary fund). This would have been doable. Venezuela sprays huge amounts of subsidised oil around the region, for example; it also subsidises domestic petrol prices. By increasing the amount of income that PDVSA earns at market prices, the tax take from oil could have risen to offset this bit of precautionary saving.
Let’s assume too that Venezuela achieved a nominal return of 5% a year on its investments. By investing wisely and topping up the fund with extra cash every year, the pot would have built quickly, as the second table shows: from $4.3 billion at the end of the first year of saving to $26 billion in 2012.
Once set up, a fund can gather real pace even if the size of the annual transfers then drops (see the third table). With an annual allocation of just $1 billion after 2012, plus the same 5% nominal return, the fund would stand at almost $50 billion in 2020 and $92 billion in 2030. An annual allocation of $3 billion would mean those numbers go up to $70 billion and $150 billion respectively. Assume $5 billion a year and pretty soon you're talking serious money--enough to counter the economic cycle without losing control of the public finances.
Expecting Venezuela to behave like Norway, which has the world’s largest sovereign-wealth fund, is clearly unrealistic. Nor has Venezuela been uniquely remiss in failing to save its oil revenues. The rough-and-ready assumptions above echo a 2009 analysis by the Scottish government of how much money the UK government could have saved with a North Sea oil fund. But the country has so far wasted an affordable opportunity to build up a large fund for use by future generations. The silver lining is that it is not too late to set one up. The country has the largest proven oil reserves in the world. If it can get out of its current mess and attract the investment needed to raise output, it still has the chance to put things right.
