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Hugo Chavez' expropriations cost more than $23 billion, while his price controls led to food shortages in oil exporting Venezuela. (Photo: Cadivi)
Monday, March 11, 2013
Commentary

How Chavez Ruined Venezuela’s Economy


The economic legacy of 14 years of Hugo Chavez.

BY JOACHIM BAMRUD

Hugo Chavez – who ruled Venezuela for 14 years until he died last week -- tried his best to emulate Cuba, a country in economic ruins. He almost succeeded.

Despite being a major oil exporter and having the world’s largest oil reserves, Venezuela’s economy is now in shambles, with rising food shortages, growing power black outs and Latin America’s highest inflation.

More than 800,000 jobs and 170,000 companies closed as a result of Chavez’ economic policies, business federation Fedecamaras estimates.

Behind the failure is a combination of economic policies aimed at boosting state controls and reducing private enterprise and economic freedom as well as pure and sheer mismanagement.

Venezuela now has the world’s fourth-most repressed economy, according to The Heritage Foundation. Only North Korea, Cuba and Zimbabwe are worse.

Chavez’ economic policies included wasting more than $23 billion on expropriating companies that were subsequently mismanaged and imposing price controls that led to food shortages.  “Shortages are inevitable when socialist governments interfere with free markets through price and other controls,” Otto Reich, a former US Ambassador to Venezuela, wrote in The Wall Street Journal last month.

Despite their aim to reduce inflation, price controls typically have the opposite effect. As a result, Venezuela has had Latin America’s highest inflation for several years. In practical terms that means that Venezuelans' purchasing power suffers. Venezuela, along with Argentina, is expected to have Latin America’s worst decline in purchasing power this year, according to a Latinvex analysis.

Thanks to Chavez’ economic policies – which are expected to continue under acting (and soon elected) president Nicolas Maduro -- Venezuela is expected to have Latin America’s worst macro economy the next five years, according to a Latinvex analysis. Its GDP will see the second-lowest growth and its inflation will be the highest.

EXPROPRIATIONS

Chavez expropriated more than 1,600 companies from 2002 to 2012, according to the Venezuelan Confederation of Industries (Conindustria). They included companies involved in a broad range of sectors, including telecommunications, energy, steel, insurance, banking, sugar and even hotels, supermarkets and shopping malls. Econoalitica estimated in July 2010 that the cost of expropriations until then had reached $23 billion.

The most prominent examples of expropriations include the 2007 takeover of telecom company CANTV and electricity company EDC. The latter now is blamed for frequent blackouts.

The many victims of Chavez’ expropriation binge include US food giant Cargill, French retailer Groupe Casino, Mexican food producer Gruma, US oil services company Helmerich & Payne, US glass maker Owens-Illinois, Irish pulp giant Smurfit Kappa Group and Argentine steelmaker Tenaris.  

As a result of the expropriations, Venezuela now has the worst private property rights in Latin America and third-worst worldwide, according to the International Property Rights Index. Only Yemen and Libya are worse globally.

AUTO, MINING AND OIL

Chavez imposed currency controls that made it difficult for companies to access dollars. As a result, automakers couldn’t buy components needed to assemble cars. The auto sector was also hit by various regulations on car sales.

Meanwhile, in 2011 he expropriated three companies -- Oci-Metalmecánica, C.A., KSB Venezuela, Carioli C.A -- that provided production and assembling services to the automotive industry.

Chavez also nationalized gold mining in August 2011. As a result, no major private company is now active in Venezuelan mining and the sector is contracting.

But the biggest changes took place in the key oil sector. In 2007, Chavez changed the laws governing how foreign oil companies operated in Venezuela, reducing the profits they could earn. Exxon Mobil and ConocoPhilips refused to accept the new terms and sued Venezuela in international courts.  

CORRUPTION AND MISMANAGEMENT

At the same time that foreign oil companies were being driven out, Chavez politicized state oil company PDVSA, once seen as one of the world’s most efficient oil companies.  His initial efforts at putting unqualified people at the company resulted in a 2002 strike. Chavez’ answer: Firing all the protesters (40 percent of the company’s workforce), resulting in massive brain drain from PDVSA. Today, Pacific Rubiales in Colombia is one of the results. The hugely successful private oil company is managed by Venezuelans led by Ronald Pantin.

Instead of investing in maintenance, PDVSA subsidized Chavez’ spending spree on other sectors of the economy (including social programs).

This led to a significant decay of PDVSA’s equipment and facilities, which in turn led to falling oil production and even fatal accidents. In August last year, 40 people died when PDVSA’s Amuay refinery, the largest in Venezuela, exploded.

Meanwhile, there has also been widespread mismanagement of funds. A report from Reuters in September last year revealed how state development agency Fonden, which received $100 billion of Venezuela's oil revenue since 2005, had wasted billions. 
 

In May 2010, as Chavez accused private companies of hoarding food, a PDVSA warehouse was found full of 80,000 tons of rotten food.  

Under Chavez, Venezuela became the most corrupt country in Latin America.  In the latest Global Perceptions Index from Transparency International, Venezuela ranks last in Latin America along with Haiti. Worldwide, only eight other countries are more corrupt.

Corruption was a major problem before Chavez as well (Venezuela ranked as the fourth-worst country in Latin America in 1998), but his policies of increasing the role of the state and imposing more controls only made matters worse.

CONTRAST WITH URIBE

Chavez’ legacy stands in contrast to that of Alvaro Uribe, president of neighboring Colombia for eight years between 2002 and 2010.

While Chavez was driving away local and foreign investors, Uribe was attracting them to Colombia thanks to improved security and a series of business-friendly laws.  Today, Colombia is seen as one of Latin America’s economic stars while Venezuela is among the leading failures.

Colombia now ranks third in Latin America on The World Bank’s Doing business ranking (which measures ease of doing business), while Venezuela ranks last in Latin America and sixth-last worldwide. The World Economic Forum’s Global Competitiveness Report ranks Colombia among the seven most competitive economies in Latin America while that of Venezuela ranks second-last (after Haiti).

While Uribe managed to make Colombia safe again, crime and insecurity only skyrocketed under Chavez.  Venezuela’s official 2010 homicide rate of 50 per 100,000 inhabitants is the third-highest in Latin America (after Honduras and El Salvador) and the highest in South America. It is also twice the Latin America average of 25.6 per 100,000 inhabitants, according to a Latinvex analysis of data from the United Nations Office on Drugs and Crime. In 1998 – the year before Chavez became president – Venezuela's rate stood at 19.4 per 100,000 inhabitants. Meanwhile, homicide rates fell in Colombia and stood at 33.4 per 100,000 inhabitants in 2010.

TRAGIC LEGACY

Hugo Chavez left behind a tragic legacy of economic failure, spiraling crime and a vicious and intolerant political landscape where opponents were routinely vilified (and critical media attacked through trumped-up politically-motivated legal charges).

Although Chavez is now dead, his legacy will likely continue to weaken Venezuela for years to come.

 

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