Caracas Chronicles

To save or to consume? It’s the most fundamental economic choice of them all. If you have $10 in your pocket you can buy beer or put it in a savings account. If you have a multi-billion dollar oil windfall you can hand it out to your political supporters or you can build infrastructure. Choices of this kind face economic agents up and down the line: Households face them, firms face them, governments face them, the rich face them, the poor face them, even Robinson Crusoe on his island would face them – everyone faces them.

But save…why would you save? Well, to invest. By investing, you can consume more later than you can consume today. The invest/consume decision is really about whether you’d rather consume a little bit less now or a little bit more later.

In terms of development, the reasoning is intuitively obvious and the empirical evidence is pretty well established. Poor countries that choose to invest less grow more slowly. Poor countries that manage to invest more grow more quickly.

In a sense, it’s a tautology – just a fancy way of saying “countries that choose to consume less now and more in the future consume more in the future”…and it really is that simple…

Different countries at different times have found different institutional mechanisms to boost investment and each time the result has been a spurt of economic growth. Holland in the 17th century invented the stock market, which allowed far more efficient allocation of savings than ever before, boosting returns on investment and growth, and allowing this tiny sliver of northwestern Europe to become an authentic world hegemon for fifty years or so.

The Soviet Union in the 1950s invented crash-industrialization, where dictatorial violence was applied to force a massive reallocation of resources from current consumption to investment. In human terms, the results were terrible – in economic terms, Stalin’s crash-industrialization drive led to one of the fastest episodes of economic growth in history.

My point here is obviously not to urge stalinist economic tactics, just to point out that the invest/consume decision is not limited to capitalist economies. Every economic decision-maker has to make it at every moment. And if the task is to launch a poor country on the road to self-sustaining growth, boosting the level of investment seems to be the trick.

This is a point that Harvard economist Dani Rodrik has made again and again in a series of very lucid recent papers.

Rodrik, a darling of the anti-WTO left, emphasizes that many different policies can achieve the ultimate goal of boosting investment. He stresses that there is no one-size-fits-all solution to the boosting-investment conundrum, that IMF-style policies often don’t help, and that some of the most successful solutions out there (such as China’s state owned Town and Village Enterprises) are very far removed from Western economic orthodoxies. And in this highly influential paper (co-authored with Venezuela’s very own Francisco Rodríguez) – he argues that increased international trade (as well as trade openness) are consequences rather than causes of economic growth, which ultimately has to be sparked by an investment boom.

However much he may dissent from IMF orthodoxy, Rodrik’s stress is always on investment as the key to unleashing a growth dynamic. (But only as a start-up mechanism, Rodrik doesn’t dissent from the widespread consensus that launching a country into growth is a very different challenge from sustaining that growth.)

To my mind, Rodrik is perhaps the most lucid development economist out there today. I’m convinced by most of what he has to say…and I think any serious critique of chavista economics has to start with the simple realization that development policies succeed or fail depending on how they affect investment.

As I noted above, this is not a critique of socialism per se – socialism had an answer to the problem of how to boost investment (i.e. just decree it by dictatorial fiat.) But it is a critique of Chavez style populism – an economic “strategy” based entirely around handing out the state’s revenue stream to sustain his supporters’ current consumption. With even PDVSA, the state’s cash cow, suicidally starved of investment, it’s clear chavismo has no long-term vision for investing Venezuela’s way to development.

In the end, though, investment means growth and growth means jobs. And it’s a proper job with a proper income that allows people to make their way out of poverty. Chavez-style populism can offer people misiones, but only a concerted effort to boost investment can generate the jobs that people really need to stop being poor.

Which is why the best way to make the case against chavista populism is to put the consume/invest decision in the starkest possible terms. Ask people whether they’d rather have a job or a misión, and they’ll choose the job every time…