Foreign Correspondence

[Amaunet]

Perseverance paying off in Venezuela

Venezuela: Saturday, July 03 - 2004 at 09:19



Despite being vilified by his political opposition at home and the Bush administration in the US, President Hugo Chavez has reversed years of Washington-influenced economic policies in Venezuela, spurring strong economic recovery.

While record high international oil prices are playing a role in Venezuela's economic rebound, the restructuring of the country's state-owned oil company, Petroleos de Venezuela (PdVSA,) is equally important to growth. In addition to greater government control over PdVSA, this restructuring is dramatically increasing cash flow into Venezuela's economy, laying the foundation for sustained, robust economic growth.

After his inauguration in 1999, President Chavez's first policy priority was reunifying a divided OPEC struggling with over-production and plunging international oil prices. Chavez sent Minister of Mines and Energy Ali Rodriguez on a tour of OPEC nations, a tour Chavez repeated in 2000. These tours produced an OPEC summit in Caracas and secured Rodriguez's position as the organization's Secretary General.

Rodriguez successfully convinced OPEC members to reduce oil production. He also implemented the cartel's first-ever target band for oil prices. The efforts of Chavez and Rodriguez to unite OPEC behind strict production quotas immediately pushed international oil prices higher, raising the ire of Washington and threatening the energy security policy of the Bush administration.

What began as a conflict between Caracas and Washington over oil supplies and prices quickly spread to other facets of the Chavez government's foreign policy. The Bush administration lost no opportunity to express its displeasure with Venezuela's close relations with Cuba and growing influence over its neighbors in South America. This influence helped produce unified opposition to U.S. policy positions in the World Trade Organization and in negotiations over the moribund Free Trade Area of the Americas.

Chavez's domestic policies drew even greater rebuke from Washington. Simultaneous to his growing influence in South America and OPEC, Chavez began consolidating his political position at home. In a series of plebiscites in 1999, the Chavez government succeeded in rewriting Venezuela's constitution.

General elections held in 2000, as legislated by the new constitution, kept President Chavez in power. Despite strict observance of Venezuela law during all the polls between 1998 and 2000, top officials in the Bush administration repeatedly labeled Chavez as undemocratic and authoritarian.

The new constitution elevated the importance of social development in Venezuela. While going great lengths to protect private property, it also emphasized the preeminent role of the state in the economy and subordinated the role of foreign investors, especially in the crucial oil sector. The new constitution abruptly changed Venezuela's existing economic order, which had been molded by the Washington Consensus and administered by the IMF.

Central to the heightened role of the state in the economy has been the reassertion of government control over Venezuela's largest company, PdVSA. Including its indirect impact on the economy, PdVSA accounts for 40 percent of Venezuela's production-based gross domestic product. It also produces over 80 percent of the country's export receipts and over 50 percent of fiscal revenue.

The management of state-owned PdVSA enjoyed, for many years, considerable autonomy from the government. Using this autonomy, management focused on keeping company assets and revenue offshore to avoid mandated tax and royalty payments to the government. Unfavorable transfer pricing and huge economically questionable investments in offshore downstream operations, including refineries and gas stations in the U.S., siphoned enormous resources out of Venezuela.

PdVSA had developed its own self-serving style of management cronyism. By directly appointing executives, Chavez began to dismantle this cronyism. Following the PdVSA strike in late 2002 and the mass firing of PdVSA employees in early 2003, the company's new boss, Ali Rodriguez, began to refocus PdVSA investment on Venezuela. Rodriguez also began to dismantle tax and royalty avoidance schemes and began the process of renegotiating foreign investment contracts.

Not only had the Chavez government become a threat to U.S. energy security and foreign policy goals, it also threatened the credibility of economic liberalization already under fire throughout South America. The Bush administration became deeply involved in undermining Chavez. Washington found willing accomplices in Venezuela among opposition political organizations and former PdVSA employees.

Through the U.S. government-funded National Endowment for Democracy (NED), the Bush administration funneled millions of dollars to groups opposing President Chavez in Venezuela between 2001 and 2003. These groups, particularly those organizing the upcoming recall referendum, continue to receive NED funds.

In addition to existing evidence in the U.S. proving the flow of NED funds to Venezuela, President Chavez has repeatedly stated that he has evidence that Washington was directly involved in the April 2002 coup that briefly toppled him. Chavez has persevered through enormous opposition at home and in Washington. Backed by even stronger popular support, he is unlikely to lose the recall referendum scheduled for August 15.

Venezuela's economic recovery is bolstering Chavez's popularity. In the first quarter of this year, gross domestic product increased by nearly 30 percent. Economic growth should top 10 percent for all of 2004. The restructuring of PdVSA and the company's rapidly expanding domestic investment are contributing strongly to economic growth.

Restructuring is also increasing cash flow to the government. Increased revenue from PdVSA is being used to fund numerous social development projects as well as subsidized loans to farmers and small businesses. Both increased investment and cash flow to the government are laying a solid foundation for continued economic growth in Venezuela.

Though strongly contradicting the Washington Consensus, the Chavez government is proving that social development and firm state influence in the economy can produce strong economic growth. Other countries in South America are beginning to implement economic policies similar to Venezuela's. Such developments are natural, as the Washington Consensus has proven to be economically disastrous for South America.



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