Red Hugo

May 29, 2009 Topic: Economics Region: Americas

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.

During the first years of Mr. Chávez's presidency, Venezuela received roughly $4 billion in foreign investment, largely limited to the petroleum and telecommunications industries. However, acting on the totally wrong premise that the country can subsist without foreign capital, the regime's nationalization offensive during the past four to five years has virtually eliminated Caracas's ability to attract badly needed foreign capital.

Today, multinational petroleum and oil services firms consider Venezuela a high-risk, volatile environment, and are proving slow if not totally unwilling to respond to government offers to invest in developing the nation's huge untapped petroleum reserves. The negligible trickle of foreign investment is compounded by the alarming, steadily growing outflow of domestic private capital, estimated at $20 billion in 2008 alone.

One of the regime's unfortunately successful efforts has been the creation of government-controlled labor organizations, designed to undermine traditional labor unions and further sabotage private-enterprise activities. Virtually every important company in the country must now deal with two different, competing labor organizations, with the government-sponsored groups focused on promoting corporate havoc, a precursor to the companies' eventual nationalization under the pretext of bringing order to the contrived chaotic conditions.

Similarly, a daunting array of banking regulations, a corollary of the government's latest package of economic measures, appears to be a preparatory step to nationalization of the banking sector. A recent tactical move has been renewal of one-sided negotiations to buy the Banco de Venezuela-majority-owned by Spain's Banco Santander. If completed, the government would control the country's premier banking network, a critical step to controlling the entire financial system.

The macroeconomic future is bleak indeed. The private sector decline has increased the traditionally high dependence of Venezuela's economy on oil income to dangerous levels. While oil exports more than tripled from nearly $28 billion in 2000 to more than $87 billion in 2008; non-oil exports increased just 10 percent from $5.6 to $6.1 billion during the same period. Leading Venezuelan economist Pedro Palma, president of the National Academy of Economic Sciences, recently predicted GDP contraction of 2 percent in 2009 and estimated the inflation rate could surge to 40 percent in 2009.

On the oil side, daily output has fallen by 24 percent from 2.9 million barrels per day in 1998 to 2.2 million currently, as reported by OPEC. Although precise figures are unknown, probably even to PDVSA staff, independent analysts estimate up to four hundred thousands barrels daily are delivered at deep discounts to Chávez's regional friends and allies, with Cuba receiving ninety thousand barrels in exchange for security, administrative and medical support. Just half of total production-1.1 to 1.2 million barrels per day-is sold to the United States, Venezuela's only genuine oil customer.

At home, oil prices are ridiculously low, presenting the government with a particularly difficult economic and political issue. Gasoline sells for 16.7 cents per gallon throughout the nation, which equates to seven dollars per barrel, a fraction of its production cost. Mr. Chávez is clearly loath to stanch the huge loss of revenue by raising fuel prices, which would likely cause massive popular protests. Even worse, limited refining capacity forces the government to import fifty thousand barrels of gasoline components per day at existing market prices. The monetary hemorrhaging in the domestic petroleum subsector makes the projected losses from the new mobile phone venture seem miniscule.

The fiscal situation is no better. After recently drawing down $12 billion from the national reserves, the government has announced domestic borrowing totaling more than $5 billion via auction of national-debt bonds. This will even further reduce investment capital available to the private sector.

Moreover, the government's recently adopted economic measures will have significant inflationary repercussions, while simultaneously creating deflationary effects and very possibly causing a prolonged period of stagflation.

In short, the Chávez regime is not interested in promoting production and efficiency, let alone competitiveness. The goal is to achieve as much control as possible of all economic activities. To try to explain the government's plight, Planning Minister Jorge Giordani openly acknowledged in April "socialism can only be achieved through scarcity."