Venezuela has long bee
n an oil exporting based economy ever since huge deposits were found in Lake Maracaibo around the beginning of the previous century. Nevertheless, the manufacturing and commodities sector not related to oil exports accounted for 40% of GDP when Hugo Chávez first took over as President while now stands at less than 20% of GDP. To be precise, non-traditional exports, meaning exports not related to oil, used to account for a total of 20% during the beginning of Chavez’s first term while now we are looking at less than 10% of total exports. Likewise, manufacturing geared towards domestic consumer spending was slashed in half in similar nature. Consequently, these economic alterations are caused directly by government policy more or less intended towards the destruction of the private manufacturing sector in Venezuela through the introduction of both currency and price controls. However, although currency controls were at first introduced to prevent capital flight which stood at record highs soon after the first election of Chávez, the government has kept a very unfavorable official and fixed currency exchange rate that makes the non-traditional export industry not competitive at all. As a consequence, this government maneuver is giving rise to the shrinking of output stemming from a government-induced high export price that leads to a steep slump in demand abroad. In the same fashion, the manufacturing sector catering to domestic consumer spending is barely coping with unfavorable price controls where often times companies cannot cover their fixed costs or breakeven and thus in need to reduce output substantially that we all know is leading to massive shortages of food and consumer staples found in the shelves of supermarkets. Just to give you an example of this grossly deficiency caused by government policy, the biggest food processing company in Venezuela known as Alimentos Polar C.A. has not declared dividends since 1999 according to its Chairman, CEO and co-owner billionaire Lorenzo Mendoza Giménez. Accordingly, the company has to struggle operating barely at breakeven every year thanks to the price controls and yet ending with massive sales of nearly $ 4 billion a year accounting just for the food processing unit alone. In fact, Venezuela used to import less than 40% of food staples and agricultural products being self-sufficient in many items while now the country imports at least 70% of its food consumption, roughly twice as much when Chávez first took office as President. Similarly, although sales are actually higher thanks to higher crude prices per barrel, oil output at the state-owned company Petróleos de Venezuela S.A., better known by its acronym as PDVSA, has shrunk 25% since 1999, going from more than 3 million barrels a day to some 2.4 million barrels a day now according to the Organization of Petroleum Exporting Countries or OPEC because government figures are difficult to be reliable. Altogether, the economy has grown very little if at all in real terms after accounting for inflation since 1999.
On the other hand, this is where the mixed results come into play, the GINI coefficient for income distribution has gone from 0.50 in 1999 to 0.40 today. Similarly, the poverty rate has been slashed in half, going from at least half the population in 1999 to less than 30% today thanks to massive government spending in the form of welfare programs the government labels “Bolivarian Missions” comprising subsidized housing, health care and food such as Misión Mercal C.A., which sells at a discounted price food staples at more than 15,000 store locations throughout the nation. Overall, the government is spending at least $ 20 billion annually, or 5% of GDP a year on average, on social programs and where half the resources come from PDVSA alone. Accordingly, the state-owned company, which underwent a strike in 2002 where 40% of its payroll comprising the highly skilled was dismissed at once, is pretty much crippled today after sustaining heavy under-investment, lack of maintenance and poor controls which led to an accident at the Paraguaná Refinery Complex in 2012, killing 48 employees at one of its three refineries. Moreover, although Venezuelan commands around $ 400 billion in GDP, 40% of it coming from PDVSA alone, that picture wasn’t much different from 1999. By far, the growth has been entirely nominal after accounting for inflation. Consequently, although we are looking at a better distribution of the pie, the pie hasn’t grown at all and this is what President Nicolás Maduro needs to understand. The wellbeing of the economy requires a better distribution of the pie, which is not being implemented properly after accounting for the lack of property rights, but at the same time the pie needs to grow as well and in a steep manner taking into consideration that the GDP per capita of Venezuelans currently stands at less than $ 15,000 a year according to The Economist. By the same token, the vast array of nationalizations and expropriations, often times without fair indemnification when dealing with certain Venezuelan entrepreneurs the government considers enemies of the state, is destroying investor confidence in the country and in the same fashion leading to record lows of foreign direct investments if any. However, when foreign multinationals are involved, I do agree that the government norm has been to pay book value at least like known cases such as AES-Electricidad de Caracas, CEMEX-Vencemos, TECHINT-SIDOR and Santander Group-Banco de Venezuela.
To conclude, at least in economic terms and despite showing mixed results overall, Venezuela is certainly not on the right track and the one to blame is the government. Accordingly, taking into consideration that socialism does not adapt well in the hemisphere after considering the diverse nature and structure of it, I sincerely think a market economy with an aggressive and meaningful redistribution of wealth through a progressive tax system is the way to go in order for the country to be on the right track. In fact, this is something presidential candidate Henrique Capriles Radonski has stated tirelessly while making reference to Brazil but yet the political regime in place is unable to visualize what is really happening without detailing worsening social problems that are becoming widespread and showing record highs in all types of criminal activity like murder, robberies and kidnappings. Likewise, since the government machine is completely dependent on oil, which we all know is a cyclical and endangered energy source, as soon as oil prices fall which eventually will but maybe not too soon, the Venezuelan economy is not hedged at all. This in turn represents a very risky maneuver countries like Norway along with member states of the Gulf Cooperation Council are offsetting very successfully by the reinvestment of at least half their oil profits, if I’m not mistaken, in capital markets around the world through the use of sovereign-wealth funds as well as the attraction of foreign direct investments including skilled migrants and diversification of their oil reliant economies. In short, the Venezuelan economy is a gamble, if oil prices fall or collapse the house of cards will crumble with it while barely showing mixed results overall as we speak right now.