Nationalization, Scarcity and Economic Decline

Venezuela's Economy - Towards State Socialism

November 22, 2010

Cuba 2.0 - Owners of property, large or small, sleep uneasily in Venezuela these days. After the opposition narrowly won a majority of the vote in a legislative election in September, Hugo Chávez, the country’s leftist president, has been on a nationalisation spree, seizing everything from steel companies and bottle makers to housing schemes. When workers have protested, he has deployed the national guard against them.

The government has justified the confiscations by saying that it was breaking up monopolies or stopping breaches of labour or environmental rules. But the aim appears to be to move decisively against what Mr Chávez calls "the oligarchy" before the new parliament, which has a sizeable opposition minority, comes into session in January.

On October 25th the Venezuelan subsidiary of Owens-Illinois, an American glass maker, became the 200th business nationalised so far this year. As usual, managers and workers learned of their fate during a live television broadcast by the president. He accused the company of exploiting its workers and laying waste to forests. But the expropriation decree, published the next day, made no mention of these alleged crimes, accusing the company instead of exploiting its dominant market position.

By the government’s own reckoning, it has confiscated some 3m hectares (7.4m acres) of farmland, and plans to seize another 450,000 hectares next year. Although the 1999 constitution guarantees property rights, successive changes to the land law have given the government the right to seize any farm it takes a fancy to, in most cases with little or no compensation.

Industrial and commercial firms have fared no better. According to the employers’ organisation, Fedecamaras, since Mr Chávez became president in 1999 almost 400 companies have been nationalised, the vast majority in the past two years. The Venezuelan-American Chamber of Commerce says that compensation was paid to the owners of only nine out of the 44 of its member-firms that have been taken over this year. The constitution states that no expropriation can take place without a final verdict from the courts and fair compensation. In practice, a stroke of the president’s pen is all that is required.

Over the years the official rationale for nationalisation has changed. The earliest takeovers were justified on the grounds that the company (or farm) was unproductive. The government then decided that "strategic" areas of the economy should pass into state hands. So in 2007-08 it took over private-sector oil and electricity businesses, as well as telecommunications, the cement industry and Sidor, an iron and steel firm privatised in the 1990s.

The government also now controls a quarter of the banking system. Mr Chávez said recently that any bank which declined to "co-operate with national development" by assigning credit according to government priorities would also be taken over. Nowadays officials openly state that their aim is to implant a socialist economy.

Paradoxically, despite the takeovers, the state’s share of GDP seems still to be around 30%, the same as it was in 1998. That is partly because the private sector expanded rapidly during the 2004-08 oil boom. But it is also because many nationalised companies now produce less than when they were in private hands. Much of the food industry has been confiscated in order to "ensure food sovereignty". But the result has been a sharp increase in imports. Earlier this year, more than 130,000 tonnes of decomposing food imported by PDVAL, an arm of the state oil company, was found in ports and on wasteland.

There are one or two exceptions. Officials say that output at Enlandes, a nationalised milk firm, has risen by 50% in two years. The science minister said recently that CANTV, the main telecoms firm, had 65% more customers since its nationalisation, though he provided no details. But more typically, once companies are in state hands their staffing levels rise, prices fall and they become dependent on government subsidies, according to Richard Obuchi of IESA, a business school in Caracas. In addition, they tend to make a smaller range of products.

The construction industry has been badly hurt by nationalisation. Cement and steel rods have become scarcer (there is a thriving black market in both). Sidor produced 4.3m tonnes of steel in its last year in private ownership; this year it hopes to make 2m tonnes. Another reason that housing schemes have slowed or halted is that the government has banned developers from adjusting prices in line with inflation, which is running at over 30%. Earlier this month Mr Chávez expropriated six new estates under construction, to the horror of most buyers. Developers, the president says, are "bandits" who will not be compensated for the seizure.

The story is repeated in almost every area the government has moved into. Electricity nationalisation contributed to power shortages that saw severe rationing earlier this year and continuing unscheduled blackouts across the country. The oil industry, the bulk of which was already state-owned, has seen production of both crude and refined products fall (by how much is a matter of dispute).

Polls suggest that most Venezuelans disapprove of the nationalisations and firmly support private property. But Mr Chávez seems to be following the advice of Alan Woods, a Welsh Trotskyist who has become an informal adviser. Mr Woods, who is better known in Caracas than Cardiff, publicly urged the president to respond to his electoral setback by "accelerating the revolutionary process", expropriating land, banks and the main industries. Venezuelans had better brace themselves for more nationalisation, scarcity and economic decline.

What Socialism? Private Sector Still Dominates Venezuelan Economy Despite Chavez Crusade

July 18, 2010

Associated Press — It's President Hugo Chavez's biggest economic battle cry, and it's getting louder as Venezuela suffers a recession:

"We're going to bury Venezuelan capitalism."

Yet creating a socialist economy is one of Chavez's most elusive goals — a stark example of the disconnect between the president's rhetoric and the reality on the ground. In fact, the private sector still controls two-thirds of Venezuela's economy — the same as when Chavez was elected in 1998, according to estimates by the Central Bank.

The reasons are political and practical: Chavez knows most Venezuelans recoil from the idea of Cuban-style state control, and his government is far from being capable of taking over and running a majority of the economy.

"Basically he recognizes that in this day and age in a global economy ... complete state control would just doom the country," said Michael Shifter, an analyst at the Washington-based Inter-American Dialogue.

So his strategy has been to selectively nationalize companies, set up state-run supermarkets and promote worker-managed businesses, while trying to convince Venezuelans to accept his vaguely defined brand of "21st Century Socialism."

It is a hard sell for a country hooked on consumerism.

Shopping malls are filled with middle- and upper-class Venezuelans browsing through Lacoste shirts, Guess jeans and Montblanc pens. Sales have declined in the recession, but just about everyone who can afford it seems to own a BlackBerry, and Scotch whisky flows liberally in upscale restaurants at the equivalent of $110 a bottle.

Just as Chavez has ramped up his anti-capitalism tirades, he finds himself facing one of the biggest scandals of his tenure involving a state-run food distributor. The company, PDVAL, left more than 2,700 shipping containers of rice, flour, milk, chicken, beef and other foods in a port rotting or beyond their expiration dates.

Its former chief and two others have been arrested, and some Venezuelans have begun to mockingly call the state company "Pudre-val," using the Spanish word for rotting. One newspaper cartoon depicted Karl Marx wearing a gas mask to ward off the stench.

It's a glaring example of the problems and delays that regularly plague Venezuela's government-run operations. In a review of 15 state-run companies, economist Richard Obuchi found that all "were producing well below goals or production capacity." The vast majority — some of which were nationalized by Chavez — now rely on government subsidies, said Obuchi, a professor at the Institute of Higher Administration Studies, or IESA, in Caracas.

One of the expropriated companies, industrial valve maker Industria Venezolana Endogena de Valvulas SA, or INVEVAL, has been limited to refurbishing old oil industry and water valves for years — instead of producing them as it once did.

Port workers in Puerto Cabello, where much of the rotten food was found, say six of the port's eight cranes are out of order and the pace of importing cargo has slowed since the government took over management last year.

The country's food imports have grown as the government has seized farmland, and periodic shortages of foods such as milk, beef and sugar have emerged in recent years.

People at a state-supported farming commune on the outskirts of Caracas say they have been waiting for a new well to water crops for more than a year since the first one went dry.

While production has declined, the public sector has swelled from about 1.4 million workers in 1999 to about 2.4 million in 2010, according to government figures.

"They don't have the capacity to manage any company," said Rafael Davila Guaricuco, a 34-year-old port crane operator. "They're destroying everything."

That is precisely the perception Chavez tries to fight in his speeches.

"The bourgeoisie is trying to convince Venezuelans that the path to socialism isn't viable, that all businesses in socialism go bust. It's the opposite," Chavez said.

He pitches cut-rate prices at subsidized state-run supermarkets like a salesman, and touts a successful state-run dairy factory, cooking oil plant and the nationalized telephone company. State-run markets are part of Chavez's attempts to counter 31-percent inflation that has been battering the country, alongside a recession that shrank the economy 5.8 percent in the first quarter. Venezuela is now the only South American country with a shrinking economy, according to the latest figures available.

Tensions are growing between Chavez and business leaders, who blame his policies for prompting a sharp drop in investment.

Chavez's finance and communication ministers didn't respond to e-mails seeking comment about his efforts toward socialism.

Since 2007, Chavez has nationalized and expropriated companies in sectors he deems strategic, including the oil industry, cement, telecommunications, electricity, steel and food. But economists note that those businesses make up a relatively modest share of the economy. And the balance between public and private sectors remains nearly identical to when Chavez took office in part because the private sector grew faster than the government between 2003 and 2006, when the economy was booming. Last year the private sector accounted for 70 percent of gross domestic product, including 11 percent in taxes paid on products, according to Central Bank estimates. The public sector was 30 percent, a slightly smaller share than when Chavez was elected in 2008.

By international standards, Venezuela has long had a large public sector because it includes the oil industry. By comparison, the public sector in Sweden accounts for 25 percent of GDP, and in United States less than 14 percent.

Chavez could have moved more quickly toward bigger state control while the economy was growing, but he had other priorities, including consolidating his political power after a 2002 coup that ousted him for two days. He now has a favorable congress and judges. But just as he turned to his socialist economic agenda, lower oil prices and the global economic crisis cut into the money he had to take over and run companies.

Polls have repeatedly shown Venezuelans oppose expropriations. Chavez now is focused on maintaining his majority in September congressional elections and on his own re-election in 2012. He has repeatedly said he would not use Cuba or the collapsed Soviet Union as an economic model, noting that even his mentor Fidel Castro has advised him:

"Chavez, remember this isn't 1960."

Victor Alvarez, an economist and former mining minister for Chavez, said the aim is to build a new sort of "social economy" sector made up of worker-managed companies, farming cooperatives and other community-run businesses.

"The objective isn't for the state to have the greatest weight in the economy, because that would be simply repeating the experience of 20th century socialism," said Alvarez, who has been studying the transition to socialism at a government-sponsored research institution.

A plan prepared in 2007 by the government projected that such "social economy" businesses and the public sector would together become larger than the private sector by 2013. Chavez knows he is still very far from that goal. But he says he won't give up, using one of his favorite mantras:

"We invent or we fail."

Venezuela's Hugo Chavez Tightens State Control of Food Amid Rocketing Inflation and Food Shortages

President Hugo Chavez is tightening state control over Venezuela's food supply, setting quotas for food staples which are to be sold at government-imposed prices.

March 4, 2009

Telegraph - Venezuela's public finances are unravelling, with oil prices at $40 a barrel, while the national budget is calculated at $60 a barrel [Venezuela remains highly dependent on oil and gas earnings, which account for approximately 90 per cent of export revenues, approximately 50 per cent of the federal budget earnings, and around 30 per cent of Gross Domestic Product (GDP).]. Inflation is running at over 30 per cent, yet with the new measures Mr Chavez is seeking to ensure that his core support, the poor, can still fill their shopping baskets with food.

"If any industry wants to ride roughshod over the consumers, with a view to getting better dividends, we are going to act," said Carlos Osorio, the national superintendent of silos and storage. "For the government, access to food is a matter of national security."

Production quotas and prices have now been set for cooking oil, white rice, sugar, coffee, flour, margarine, pasta, cheeses and tomato sauce.

White rice, the staple for many Venezuelans, can now only be sold at a price of 2.15 bolivares (.07p) per kilo. Private companies insist that production of that kilo costs 4.41 bolivares (.14p) and that government regulations are impossible to fulfill and companies will quickly go broke. Companies that are dedicated to rice production must ensure that 80 per cent of their efforts are dedicated to white rice. The new regulations set production percentages, as companies were rebranding their products to avoid the government controls, like flavouring the rice, as the price restrictions apply only to white rice.

"Forcing companies to produce rice at a loss will not resolve the situation, simply make it worse," said Luis Carmona of Polar, a rice company that has been singled out by the government for trying to sidestep restrictions.

Government price controls on basic goods have been in place, in various forms, since 2003. But the restrictions have forced Venezuela to become increasingly reliant on imports of these products as local farmers will not supply the selected food staples at government prices.

Mr Chavez last month won a referendum allowing him to stand indefinitely for re-election. With that now achieved, the Venezuelan leader, who has vowed to turn his South American nation into a model Socialist state, is now taking some unpopular decisions needed to stabilise his floundering economy.

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