Hugo Ch�vez's Venezuela: Feeling the Heat

The Economist (Link) - Judi McLeod (May 13, 2010)

From Parque Central station in Caracas a cable car silently speeds workers, residents and schoolchildren up the hill to Hornos de Cal and then down again to San Agust�n, connecting these areas of self-built slum housing to the city�s metro system. The bright-red cars bear the names of Venezuelan states or of uplifting notions, such as �social duty� or �socialist morality�. Hugo Ch�vez, Venezuela�s leftist president, opened the metrocable in January, proclaiming: �A socialist revolution has the essential aim of giving to all men and women the greatest possible happiness.�

The metrocable, of just 1.8km, took three years to build and cost $318m�over ten times as much as a longer line opened in Medell�n, in Colombia, in 2004. But the local leaders of communal councils�the grassroots groups that Mr Ch�vez conceives as the driving force of his �Bolivarian revolution��are indeed happy. �I never thought we would have such a big project in my community,� said Mar�a Eugenia Ram�rez. �I thought it was just a dream.� Ms Ram�rez now has a paid job informing passengers how the system works.

The metrocable is not the only improvement Mr Ch�vez has brought to San Agust�n. Near Hornos de Cal station there is a primary health post, staffed by Cuban doctors, though it is open only in the morning, and a second-tier health clinic, complete with an intensive-care unit. Some of the shacks on the hillsides have had a recent coat of paint, in the regulation colours of another government project (red, yellow, blue or pink). Others were knocked down to make way for the lavish metrocable stations. Their residents were rehoused in new blocks of flats built by Misi�n H�bitat, yet another government scheme.

The communal councils�there are 27 of them in San Agust�n, one for every 500 families or so�have given people �a sense of belonging,� says Ms Ram�rez. Each council has half-a-dozen subcommittees and a wish-list of projects, ranging from football pitches to the installation of sewage systems or walls to prevent mudslides. Ms Ram�rez and her fellow leaders say that it is often hard to get residents to attend council meetings, and to get ministries to respond to their needs. Nevertheless, she remains a committed supporter of Mr Ch�vez. �I like his message and the firm way he gives it,� she says.

For five years or so�after he saw off a brief coup in 2002 and then survived a prolonged general strike�this formula of lavish social programmes and make-work schemes in poorer areas, as well as an unequalled ability to communicate with ordinary Venezuelans, served Mr Ch�vez well. When he was first elected in 1998, the price of oil, Venezuela�s main export, was around $10.50 per barrel. As the price soared, he benefited from a huge windfall. Public spending increased massively. Much money went on subsidies, state job-creation schemes and social programmes, many of them designed by Cuban advisers. As the economy boomed, the share of Venezuelans living in poverty fell from 49.4% in 1999 to 27.6% in 2008, according to the United Nations Economic Commission for Latin America.

By contrast, the opposition�s shortcomings had been cruelly exposed when it governed in an era of low oil prices in the 1980s and 1990s. Because ordinary Venezuelans felt a rapport with Mr Ch�vez, they did not blame him for the steady rise in violent crime which has turned Caracas into the most violent capital in South America, nor for the corruption that has flourished unchecked under his rule.

Mr Ch�vez�s star reached its apogee in a presidential election in 2006, when he easily won another six-year term. He gained 63% of the vote; Manuel Rosales, for the opposition, managed only 37%. Mr Ch�vez took this as a green light for radicalisation. In the first seven years of his rule he behaved like a traditional Latin American populist caudillo, such as Argentina�s Juan Per�n. (Like Per�n, Mr Ch�vez is a former army officer turned civilian politician; he himself led a failed military coup against a democratic government in 1992.) From 2007 onwards, Mr Ch�vez has claimed to be installing �21st-century socialism�.

Two setbacks followed: he narrowly lost a referendum on constitutional reforms that, on paper, would have taken Venezuela close to Cuban-style communism; and in regional elections in 2008 the opposition recovered to win 46.5% of the vote and important mayoralties, such as Caracas. Mr Ch�vez fought back, calling and winning another, narrower, referendum early in 2009 abolishing term limits.

From boom to slump

But for the time being the Bolivarian revolution (named after Sim�n Bol�var, South America�s independence hero) faces unprecedented difficulties. Everyday life is getting harder for Venezuelans. While the rest of Latin America is recovering strongly from the world recession, Venezuela is slumped in stagflation. The boom came to an abrupt end when the oil price plunged in the later months of 2008. Although it has since risen again strongly, Venezuela�s economy has not. Mr Ch�vez last month accepted that it �could� shrink again this year, confounding earlier official forecasts of growth. The IMF projects a contraction of Venezuela�s GDP of 2.6% this year, after a fall of 3.3% last year. By March, average wages (allowing for inflation) were 15% below their peak of 2007.

In January Mr Ch�vez unexpectedly ordered a devaluation, after five years in which the bol�var had been officially fixed at 2.15 to the dollar. Under a new multiple exchange-rate system, priority imports of food and medicine are paid for at 2.60, with 4.30 for other officially authorised imports and a �parallel� (ie, market) rate for the rest (now around eight bol�vares to the dollar). This will increase inflation, which is now over 30%�prices shot up by 5.2% in April alone. But it provides a temporary boost to the state�s finances, since hard-currency revenue from oil exports instantly became worth twice as much in bol�vares. And that gives Mr Ch�vez the chance to throw money around: pay rises for the army, for example.

The short-term fix of devaluation only underlines the deterioration in the economy. That recession has become slump is mainly the result of years of government mismanagement. The problems start with PDVSA, the national oil company, which Mr Ch�vez has turned into a social-development agency. Not only is its budget raided for social projects; it has also set up subsidiaries to produce, import and distribute food. More than 100,000 people are now on PDVSA�s payroll, up from 37,942 when the government seized control of the company after the 2003 strike. But oil output has fallen, from a peak of 3.5m barrels per day in 1998 to perhaps around 2.8m now, reckons Tamara Herrera of the Venezuela office of Global Source Partners, a consultancy. That is less than the government says, but more than OPEC calculates.

Venezuela is still sitting on 100 billion barrels of oil, the largest reserves outside the Middle East, according to research by BP, a British oil company. Having scrapped deals under which multinational oil companies partnered PDVSA, Mr Ch�vez has this year signed contracts with China and Russia for investment in the Orinoco heavy-oil belt. These could boost production in the next few years. But it is unclear how much cash will in fact be invested.

The private sector is increasingly persecuted. Since the 2006 election Mr Ch�vez has nationalised the main telecoms, steel and cement companies, the Caracas electricity distributor, and a string of oil-service and food companies. The latest is Exito, a Franco-Colombian chain of hypermarkets taken over in January. Other private firms have faced more aggressive regulation, including price controls and difficulties in getting dollars for imports. Unsurprisingly, few are investing. Many of the nationalised firms are poorly run.

The most dramatic sign of government bungling is electricity rationing. Since the start of the year many towns and cities have suffered daily power cuts of two hours or more, as well as unscheduled blackouts that sometimes last several times as long. Mr Ch�vez has spared the capital power cuts, apparently out of fear of social unrest. Instead, businesses and homes must reduce their electricity use by 20% on pain of higher charges or loss of supply. Many government departments close in the afternoons to save power.

Mr Ch�vez rightly points out that the immediate cause of the electricity rationing is a severe drought brought about by the El Ni�o weather pattern. This has cut output at three hydroelectric dams on the Caron� river in the south-east. But, in past droughts, thermoelectric plants came to the rescue. The difference is that Venezuela now depends on hydroelectricity for around 70% of its power, and most of that comes from the vast Guri dam.

The president claims that his government has invested $16.5 billion in electricity generation since 2002. But thermal generation capacity has barely risen. According to V�ctor Poleo, a former official in the energy ministry, only a fraction of the money has actually been spent. He blames the rationing in large measure on �the misappropriation of funds.� The biggest thermal plant�Planta Centro at Mor�n, on the Caribbean coast�is in bad shape. Only two of its five generators actually produce electricity. The national grid is so rickety that it would in any case be unable to cope were the power stations to produce at full capacity. Lack of gas (due partly to lower oil production) means new thermal stations will have to run on fuel oil or diesel, cutting PDVSA�s export earnings.