Venezuela on Top of the World, for Misery


EspañolThis past week, the Cato Institute released the first edition of the International Misery Index, and Venezuela — Hugo Chávez’s socialist experiment — heads the list with the world’s highest level of misery. The index formula, applied to 90 nations worldwide, sums the unemployment rate, the lending rate, and the inflation rate, less the percentage change in real GDP per capita, and it finds Japan to be the least miserable.

Aside from measuring misery, this index has proved to have a high correlation with a president’s approval rating. That is according to Steve Hanke, professor of applied economics at Johns Hopkins University and senior fellow at the Cato Institute in Washington, D.C.

“If the economy is doing poorly during a president’s term, the likelihood for this president to have a low approval rate is high,” Hanke explains.

Originally this index, first developed by Arthur Okun — a prominent economist who worked on the US President’s Council of Economic Advisers under Lyndon Johnson — was equal to just the sum of the inflation and unemployment rates, and used to measure misery in the United States.

Years later, however, Harvard Professor Robert Barro amended the index. He included the 30-year government bond yield and the output gap for real GDP as additional variables that could improve the results and make them more accurate.

Now Hanke has built upon this same misery index, but applied it beyond the United States. Therefore, this is the first time this instrument has been applied beyond US borders, including countries where all four data series were available from the Economist Intelligence Unit.


Misery in the Americas

The Chavista experiment comes in first, with an index value of 79.4, and is followed by Kirchner’s Argentina (43.1), which ranks fourth place worldwide. Both countries hold such high scores on account of their volatile inflation rates.

Hanke — who also worked as an adviser for former Venezuelan President Rafael Caldera (1995-96) — notes that Venezuela’s index value actually understates the level of misery. It only takes into consideration the official inflation rate (56.2 percent), rather than the unofficial value. If the formula were to adopt the unofficial rate, or implied inflation rate (169 percent), then the index value would jump to 192, “indicating that Venezuela is in much worse shape than suggested by the official data,” Hanke says.

Jamaica holds fifth place with an index value of 42.3, and Brazil is ninth with 37.3 — both mostly due to their high interest rates. Unemployment rates in the Dominican Republic place the island nation in 16th, while interest rates push Nicaragua and Honduras to 18th and 19th spots, respectively.

On the other end of the spectrum for the Americas, Mexico places 61st and Ecuador 64th. Even better, at the bottom of the list are El Salvador at 65th, United States 71st, Canada 74th, and Panama 81st.

Empty Pockets, Low Approval Ratings: The Case of Venezuela

The high correlation between misery and a president’s approval ratings suggests further challenges in Venezuela. With a correlation value of -0.54, it’s evident that the citizens’ economic well-being will directly influence the president’s levels of approval.

“For most people, their quality of life is important. Constituents prefer lower inflation rates, lower unemployment rates, lower lending rates, and higher GDP per capita,” Hanke explains.

By combining poll rankings and the misery index, Hanke shows a standardized ranking between presidents from the United States, and he explains how this type of analysis can be applied to any country where suitable data exist. Regarding the case of Venezuela, Hanke notes that Venezuela’s President Nicolás Maduro’s popularity’s has fallen by 16 percentage points since he took office in April 2013, and Hanke is not surprised.

Venezuela’s levels of shortages — 29.4 percent of basic goods are unavailable according to Venezuela’s Central Bank — high inflation rates, and politically-motivated street violence could pave the way for an eventual political collapse, according to this index correlation. However, Hanke believes this sinking could take a while:

“While Maduro may think of himself as modern-day Robin Hood, he has a lot more in common with Edward John Smith, captain of the RMS Titanic.… Short of $50 per barrel oil, the Titanic called Venezuela might stay afloat for longer than you think, before it inevitably sinks.”

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