[OPE-L] The visible hand of petro dollars in Venezuela

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Sun Dec 03 2006 - 11:34:57 EST

December 3, 2006
Venezuela's Economic Boom Buoys Chávez's Campaign


CARACAS, Venezuela, Dec. 2 - To understand why Hugo Chávez seems set
for victory in Sunday's presidential election and a strengthened
mandate for what he calls a socialist revolution, consider the vigor
here of that most capitalist of institutions: the stock exchange.

Housed in El Rosal, an upscale district with new skyscrapers and
hotels, the 59-year-old Caracas stock exchange was the site of
frenzied trading this week. Its main index climbed to a record high
of 46,741, topping off a 129.2 percent rise this year that has made
it one of the best performing markets in the world. On Friday, the
index climbed 8 percent for its biggest daily gain in four years.

"For all of Chávez's faults, his government has been extremely
pragmatic in economic terms," said José Guerra, a former chief of
economic research at Venezuela's central bank. "State-supported
capitalism isn't just surviving under Chávez," he said. "It is

Often lost in the campaigning between Mr. Chávez and his electoral
challenger, Manuel Rosales, is that Venezuela, with the largest
conventional petroleum reserves outside the Middle East, is having
one of the most significant oil booms in its history. Economic growth
this year is set to pass 10 percent, making Venezuela the
fastest-growing economy in the Americas.

The Chávez government, while wrapping itself in socialist imagery -
like red clothing - and deepening its alliance with Fidel Castro's
Cuba, has made this expansion possible by quietly working with
Venezuela's banking system. The rush of petrodollars into the economy
has led bank deposits to climb 84 percent in the past 12 months,
according to Softline Consultores, a financial consulting business

The boom is evident in an economy that has put financial speculation
and conspicuous consumption ahead of domestic manufacturing. For
instance, foreign automobile companies Ford and General Motors will
sell 300,000 cars in the country this year. Economists describe
Venezuela as a "harbor economy" because of its lust for imported

"Many people say we're in a profound political and social crisis,"
said Michael Penfold-Becerra, an economist at the Institute of Higher
Administrative Studies, a Caracas business school. "On the contrary,
we've returned to a temporary period of harmony. Oil is buying us a
certain social peace and stability."

Neither candidate in Sunday's election seems to acknowledge the
growing consumerism in rich and poor households as one of the main
reasons Mr. Chávez has resilient popularity ratings after eight years
as president. Most opinion polls give him a double-digit lead over
Mr. Rosales, governor of the oil-producing Zulia State in the west.

Mr. Chávez makes frequent exhortations in favor of socialism,
sometimes describing Jesus Christ as the first socialist and Judas as
the first capitalist. Mr. Rosales said in an interview that Mr.
Chávez, who has deepened ties with Cuba by bringing thousands of
Cuban doctors to Venezuela in exchange for subsidized oil, was
"implementing a Castro-style system of autocratic rule in Venezuela."

While Mr. Chávez promises socialism, historians say that in effect he
is delivering old-fashioned populism. He is often compared to Carlos
Andrés Pérez, the populist president who oversaw economic expansion
in the 1970s when Venezuela also benefited from higher oil prices.

"Chávez has a problem in that what he calls his socialist revolution
never involved the overthrow of a dictator like Batista or Somoza,"
said Alberto Barrera Tyszka, who co-wrote an acclaimed biography of
Mr. Chávez. "He's redefining socialism as a concept that could exist
only in Venezuela, where it is characterized by hatred of George Bush
and an excess of BMWs and Audis."

Some Chávez economic policies draw inspiration from formulas used
with mixed results by countries in the developing and industrialized
worlds the 1960s and 1970s. These include price controls for food and
gasoline, strict limits on buying and selling foreign currency and
caps on everything from lending rates at banks to hourly fees at
parking lots.

At the same time, the government has channeled billions of dollars in
oil revenues into social welfare programs and small cooperatives
intended to produce goods to replace imports on the domestic market.
The government says these efforts are moving Venezuela toward a
vaguely defined "21st-century socialism."

Oil is at the heart of this development model. Venezuela, in contrast
to oil-exporting countries like Mexico or Saudi Arabia that tightly
circumscribe the operations of foreign oil companies, still produces
oil in ventures with some of the largest private energy companies,
including Chevron and Royal Dutch Shell. And the government works
closely with Venezuelan and foreign banks to maintain economic

Unlike Rafael Correa, the newly elected president of Ecuador, who
plans to renegotiate the foreign debt, Mr. Chávez has made every
effort to meet Venezuela's obligations with foreign lenders. As a
result, markets still consider Venezuelan bonds about as safe an
investment as bonds issued by Brazil, a neighboring industrial

The Finance Ministry, meanwhile, has tolerated loopholes for the
moneyed classes to circumvent foreign exchange controls by allowing
them to buy stocks and bonds that can be exchanged for securities
denominated in dollars. Critics of this system say it has allowed a
new elite to emerge through opaque dealings with the government.

Fernando Coronil, a Venezuelan historian at the University of
Michigan, said Mr. Chávez's policies were reminiscent of the heady
years after World War II when Democratic Action, a social democratic
party, swept into power on a platform that emphasized distributing
oil wealth to the poor. Leaders even called their movement the
October Revolution, though populist rule in Venezuela eventually
became characterized by a lack of transparency in the distribution of
favors through the state.

While earlier booms revolved around huge investments in industrial
projects like aluminum smelters, analysts say the latest expansion is
especially risky because it focuses mainly on consumption.

Despite boasting of some of South America's most fertile land in an
area the size of Texas and Oklahoma combined, Venezuela still imports
more than half its food, largely from the United States and Colombia.
An overvalued currency, meanwhile, has been disastrous for Venezuelan
industry with the number of manufacturing companies falling to about
8,000 today from 17,000 in 1998, according to Mr. Guerra, the former
economist at the central bank.

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