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Venezuela: Mismanagement Creates Recession

President Hugo Chavez' mismanagement of Venezuela's economy has produced recession and sky-high inflation.

Inter-American Dialogue   

As Latin America as a whole begins recovering from the global economic crisis, Venezuela appears to be slipping deeper into recession. The country's central bank said March 2 that GDP unexpectedly contracted 5.8 percent in last year's fourth quarter. The economy is expected to grow 0.3 percent this year, compared to 4 percent for the rest of the region, according to Morgan Stanley. Why is Venezuela lagging the rest of Latin America? What does its economy need to recover? How are economic factors affecting the standing of President Hugo Chávez?

Gustavo Roosen, chairman of Envases Venezolanos in Caracas and former president of Venezuelan telecom CANTV: Venezuela is lagging behind for the following reasons: a lack of a coherent macroeconomic policy, constant attacks on private property rights, an unpredictable and unreliable exchange control system, excessive legal and governmental controls over the economy, political insistence in constructing a so-called a socialist economy modeled after the failed Cuban system, frequent government-sponsored interruptions of labor activities and a critical deterioration of the country's infrastructure, including power generation and water supply. The combined effect of these factors has resulted in the shutdown of 50 percent of the manufacturing companies in Venezuela, thus eliminating 350,000 productive jobs in 10 years. Furthermore, non-traditional exports, which stood at 20 percent of total exports in 1999, are now only 5.5 percent. The country is now totally dependent on oil exports which make it difficult to escape the 'resource curse.' In order for the economy to rebound, Venezuela must recover rule of law, respect the separation of powers, promote private initiative and define stable macroeconomic policies including real interest rates to generate internal savings. The latest polls indicate that Chávez has lost the 'Teflon effect.' The disenchantment with his management capabilities has resulted in a new political category that now exceeds 50 percent of undecided voters. It is paramount to the future of democracy to excite this segment of the population with attractive and viable proposals in order to promote their participation in the forthcoming electoral events.

Daniel Hellinger, professor of political science at Webster University in St. Louis: Things are simultaneously better and worse in Venezuela than the statistics suggest: worse, because the economic figures for the last quarter measured the economy before devaluation of the bolívar in January; better, because the figures reflect both weak export prices and Venezuela's decision to cut oil exports for 2009 by 3 percent in cooperation with OPEC. Venezuela's economy always looks more robust that it really is when oil prices are high, and it always looks worse than reality when oil prices are low. There is some truth in the government's claim that conventional measures of GDP ignore many of the free social programs, but that matters little if those programs are squeezed by lack of revenues. The government seems committed to maintaining them, which makes political sense with elections approaching, but this is likely to ratchet up pressure from the middle class and from businesses squeezed in the formal economy. The government may benefit as well from the recent rise in crude prices, which are hovering now around $80 after averaging less than $60 per barrel in 2009. This bodes well for Chávez's ability to maintain the programs that shield the poor, his core supporters, from the worst economic consequences. However, continued electrical shortages hit everyone, rich or poor, and the government has no fast or easy fix. As Chávez himself is not on the ballot, many urban chavistas (the countryside is solidly behind the president's party) may decide a 'voto castigo' is in order.

Juan Pablo Fuentes, economist at Moody's Economy.com: Venezuela is currently seeing the consequences of years of macroeconomic mismanagement by the Chávez government. Record high oil prices allowed the government to create a bogus prosperity between 2006 and 2008. The economy grew at a robust pace in those years on the back of massive public spending. Such an old formula was destined to fail, however. The government did not save any money for the lean times, which arrived, predictably, sooner rather than later. Meanwhile the government intensified its economic interventions. Strict capital controls, price regulation, an anti-business tax policy and the nationalization of key industries such as utilities, oil, mining and food distribution have become the cornerstone of the government's policy. The result has been devastating: Venezuela is currently experiencing a vicious stagflation. Inflation might reach 40 percent by the end of the year, while the economy is not expected to exit recession until the third quarter, at best. The country is also suffering the worst energy crisis in its history, a consequence of the government's short-sighted economic policies. A recent increase in oil prices will not give the government enough resources to jump-start the economy, but might prevent a full-blown economic and financial crisis in the near term. For Venezuela to achieve sustainable growth and macroeconomic stability, the government must radically change its policy. Institutionally, the government must guarantee the central bank's independence and respect the separation of powers. Beyond that it needs to change its attitude toward the private sector and welcome businesses that can create quality jobs. Chávez's mishandling of the country's natural resources and economy has begun to erode his popularity. Results from the upcoming legislative elections will likely reflect increasing discontent with the Chávez government.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.


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