Venezuela's oil boom

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times, December 3, 2006
Venezuela?s Economic Boom Buoys Chávez
By SIMON ROMERO

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 thriving.?

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 here.

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 goods.

?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 stability.

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 powerhouse.

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.