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Expropriations Hurt Venezuela

Hugo Chávez's nationalizations are hurting Venezuela's chances of economic recovery, experts warn.

Inter-American Dialogue 

Venezuelan President Hugo Chávez on Oct. 31 announced the nationalization of Sidetur, which was among the latest in a series of nationalizations by the socialist president. In recent weeks, Chávez has also announced nationalizations of the local operations of six Venezuelan construction companies, a U.S. bottle manufacturer, a fertilizer plant, a farm supplies company and a motor lubricants maker. How will the latest nationalizations affect Venezuela's economy and Chávez's grip on power? To what extent are foreign companies shying away from investing in Venezuela and how big a threat does that pose to the country's economy?

Juan Pablo Fuentes, economist at Moody's Analytics: Since suffering a setback in September's congressional election, President Chávez has radicalized his socialist agenda with a new wave of nationalizations. The government's objective is clear: to take control of the country's key productive sectors. The government has targeted building materials and construction, food (including distribution), retail and financial sectors. The government already controls energy, media, and telecommunications. No group or industry seems safe from government expropriation. As a result, foreign investors will continue to shy away despite excellent opportunities in Venezuela's energy sector. Private investment will continue to decline, hurting job creation and growth potential. Private investment made up only about 35 percent of total investment in the first half of 2010, sharply down from 70 percent in the early 2000s. Most nationalized companies have seen efficiency decline shortly after being taken over. This has been the case since the nationalization of the Orinoco heavy oil projects and the country's major utilities. The result has been negative for the economy; Venezuela's oil production continues to fall despite record high prices and blackouts have become the norm in the country, to cite only two examples. Similar declines in the country's productive capacity can be expected from the recent wave of nationalizations. While nationalization seemed to have some support among unions and the low-income population, recent protests and strikes suggest public opinion has started to change. Unions and workers now realize that government ownership does not necessarily imply better benefits or more job stability. On the contrary, most companies taken over by the government in recent years have seen their output drop and finances weaken. Workers' compensation has suffered as a result. More worrisome, workers at nationalized companies have lost political freedom; they must participate in pro-government activities or risk losing their jobs.

Daniel Hellinger, professor of political science at Webster University in St. Louis: The recent nationalizations in Venezuela represent a significant shift away from the strategy of economic development through 'endogenous development' (a phrase one does not hear often any more) toward an emphasis upon state ownership and mobilization of the organized working class and rural workers. Chávez also hopes to speed up land reform and encourage formation of workers councils as new forms of participatory democracy. Strategic political considerations are at work, too. External observers may dismiss the problem of coping with hoarding and economic sabotage, but these are cards that the business sectors have played before, even in the era before Chávez. Some of the nationalizations have followed occupations of factories and land. Some, such as the nationalization of a distributor of refrigerated products, are aimed at prosperous enterprises that have raised prices significantly. Others are aimed at factories that are already closed, such as the heavily indebted Silka textile plants. Obviously, this is a major political gamble on the part of Chávez, now two years away from a presidential election and facing an energized opposition. The state has yet to show the administrative capacity to run ministries efficiently, and the government does not envision a radical leap to worker democracy either. The worker councils have limited managerial authority. Most of the workforce is not employed on farms or fields; the strategy of endogenous development was to incorporate them into a new economic model. Chávez has to show that this new course is more promising than the earlier economic experiments.

Francisco J. Gonzalez, chair of the International Services Group at Adorno & Yoss in Miami: Mr. Chávez's nationalizations seemed to be aimed at controlling key portions of the economy and to slowly increase the government's grip on those few private-sector players that remain operational and are not already burdened with extreme red tape and reduced raw material supply. More tragically, Chávez does not seem to pay attention or even care about the talent required to manage those enterprises—largely nonexistent in Venezuela's public sector or already living abroad—or the technical knowledge to run highly complex industrial enterprises. There is no doubt that owning—however illegitimate that ownership may be—an increasingly larger portion of Venezuela's productive sector increases Chávez' grip on power but will, without a doubt, decrease the country's total output and its chances of recovering from its current economic morass. Foreign companies have long decided to indefinitely postpone any investment or reinvestment projects in Venezuela. A combination of reduced demand; personal, legal and asset-ownership security have been cited as main reasons for those decisions. More important, and perhaps more costly for the country's economy and viability, is the fact that many companies, both locally and foreign owned, are joining the large numbers of Venezuelans who are leaving the country for greener, safer and certainly more profitable pastures."

Alejandro Grisanti, director of Latin America research at Barclays Capital: In recent days, we have seen a new wave of nationalization announcements in Venezuela that, contrary to what would have been rational after the adverse results the government received in the September legislative election, show that giving signs of moderation do not seem so easy for President Chávez. He does not seem to want to make any move that could be interpreted as being in a weak position. However, this nationalization policy is expected to increase the difficulty for the government to deliver economic and social results. Therefore, it could end up working against Chávez's own aspirations of being re-elected in 2012. In economic terms, despite our expectation of a modest recovery for 2011 with a GDP growth of 2 percent, we consider that Venezuela has entered into a period of difficult economic growth, while polls suggest that voters are tending to prioritize economic problems over the political debate. The expropriations will cause a further decline of private investment, while all the countries in the region are registering a significant growth. This lack of private investment will limit the capacity to increase production and respond to any fiscal stimulus, transforming it into import growth and higher inflation. On the social front, despite Chávez's assertions that he is advancing with this policy to improve the living conditions of the poorest of the country, we unfortunately expect an important increase in the poverty rate, considering a real GDP per capita contraction of 4.4 percent this year and growth of less than 0.5 percent in 2011.

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


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