Red Hugo

Hugo Chávez is destroying Venezuela’s economy. If he continues to strangle private enterprise, his “Bolivarian revolution” will collapse.

Facing an unprecedented and potentially disastrous drop in the country's vital oil income, Venezuelan President Hugo Chávez should be trying to keep private enterprise alive, to weather what will potentially be a national and worldwide economic crisis. However, against virtually unanimous professional judgment, he continues doing his utmost to cripple the commercial, agriculture and industrial sectors, which his actions had already gravely hobbled during his first decade in power.

To make matters worse, every move the red-shirted autocrat has made to socialize the nation has only worsened Venezuela's economic malaise. Mr. Chávez chose Mother's Day to launch the locally assembled Vergatario mobile phone, making a call to his mother during his weekly Alo Presidente television performance. Produced in an 85-15 percent joint venture with China from Chinese-manufactured parts, the phone retails for $15, less than a quarter of its cost. If the Vergatario sells six hundred thousand phones during 2009, as he predicts, the Chávez regime will lose more than $7 million. What's more, if his sales projection of 2 million units in 2011 is correct, annual losses will mushroom to $24 million.

Every government action in the economic sphere has been devised to progressively undermine private economic activity, with a view to installing Hugo Chávez's "Twenty-First Century Socialism." Convinced his brand of state control and ownership is only possible after effectively erasing virtually all private-sector activity, he has followed a policy of price controls, punitive tax schemes and discretionary legal changes since becoming president in 1999.

When coupled with his nationalization of numerous manufacturing and commercial operations-typically paying a fraction of a company's worth, or nothing at all-there has been a catastrophic shrinkage of Venezuela's private sector. The industrial base has been halved from more than fourteen thousand factories ten years ago to some seven thousand today.

In the last two weeks, PDVSA, the state oil monopoly, has seized sixty oil-service companies. In Maracaibo, the country's petroleum center, Mr. Chávez personally inaugurated the confiscation of a dozen oil rigs, thirty terminals and three hundred boats. With armed troops positioned in pacifying positions, the president intoned "To God what is God's, and to Caesar what is Caesar's," adding, "Today we also say: to the people what is the people's." 

He did not point out the immediate reason for the seizures: to avoid paying some $10 billion owed the companies. The financial situation is so bad that it has been necessary to negotiate a $4.3 billion loan from Brazil to complete a number of major projects. To add to the bad publicity and worse business situation, the loan stipulates using Brazilian contractors and related companies.

Mr. Chávez's behavior is not caused solely by ideological blinders or economic ignorance. Rather, it is propelled by his lifelong dream of turning Venezuela into a Cuban or Soviet-like dictatorial socialist state. This clearly precludes adopting the globally proven free-enterprise path to solve Venezuela's endemic economic and social problems, which have been seriously aggravated by the global financial crisis and the fall of petroleum prices.

Having established direct and total control over PDVSA, as well as telecommunication companies, electric utilities and cement factories, the regime is moving to take over key elements of the food production and distribution system. The resulting chaos in this vital sector is proving an especially effective way to tighten the economic noose around consumers' necks.

Small farmers have watched their produce costs become uncompetitive to imports as a result of countless complicated government regulations. Large-scale cattle operations have been stymied by government land seizures in some cases, and by invading chavista peasants in others. Food imports have escalated to an estimated 70 percent of total consumption as a result of diminishing production levels. This astonishing increase has been caused by over-regulation. Oddly, PDVSA's unprofessional and bloated staff has been assigned the task of growing, importing and distributing food, in a desperate effort to reduce the huge and costly imports, one that will surely exacerbate the problem. Further exacerbating Venezuela's food problem, the government was involved in a recent dispute over a number of rice-processing factories. The president's verbal attacks on Empresas Polar, the largest beer producer and food distributor in the country, are further proofs-if more were needed-of private entrepreneurship's grim future as long as Hugo Chávez remains in power.

At the same time, another crucial element of Chávez's plan has been systematically to discourage private foreign investment through both subtle and not so discreet methods, further suffocating free-market development and expansion and thereby paving the way for state-owned "capitalism" in Venezuela. Foreign investment has diminished to negligible amounts during the Chávez regime, resulting from a frontal assault on foreign corporate interests, which have included propaganda attacks, obstacles to dividend repatriation, whimsical nationalizations and physical intimidation of expatriate executives.

The government simultaneously talks about billions of dollars of investment China, Russia and Iran, mostly intended for oil production and refining rather than general industry. Unfortunately, in the event all or part of these proposed investments actually happen, they will exaggerate even more Venezuela's lopsided dependence on its petroleum resources, which has impeded the country's balanced growth for more than fifty years.