Latin American Politics - Latin American political blog of Thiago de Aragão

Venezuela: Chávez’s financial crisis paradox

To President Hugo Chávez, the US financial crisis is also the result of a lack of ethics and of “unjust law”. His words came during the 3rd Summit of Presidents of Judicial Branches of the Union of South American Nations, taking place on the Margarita Island, off the Venezuelan coast.

Due to his stance since the beginning of the global financial crisis, Chávez will use the current scenario to extend his anti-American rhetoric and domestically strengthen the idea that capitalism “is a system in crisis”.

Based on that, he will try to reunite his allies around the “21^st century socialism” thesis. Since Chávez’s project relies on structures rather than conjunctures, the longer the crisis sustains, the better for him. That way, he can resume the discourse that fell into disrepute after his defeat in last-year referendum.

However, he may experience trouble if there is a sharp fall in international oil prices. Even with domestic unity, such a scenario can bring even more alarming economic developments.

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French presence in Latin America increases

The political presence of the French in Latin America is increasing considerably in the past years. Besides acting strongly in Brazil, where the French tries to sell jet fighters, submarines and helicopters (though possibly only the submarines and helicopters will be successful), they are now increasing the approximation with Venezuela.

Last week, the Minister of Foreign Affairs of both countries (Bernard Kouchner for France and Nicolas Maduro for Venezuela) signed ten cooperation treaties. The focus areas are, as expected, energy, technology, military, industrial, telecommunications and combating narcotics.

As part of the deal, the French will invest in the oil, gas and infrastructure sectors. As announced weeks before the visit, nuclear technology will be shared between the two nations.

Hugo Chavez: What to Expect…

After being shut down by the King Juan Carlos of Spain, Hugo Chavez visited him one year later in order to settle out their differences. Many are confused towards this behaviour from Mr. Chavez.

Why is Chavez passing through a “light” phase? How come he is not as radical as he used to be?

Last time Chavez abused of rhetoric and radical discourses, was in the same time period as the referendum being voted in Venezuela to approve his new Constitution. At that time, Chavez criticised openly the Colombian President Alvaro Uribe, the King, as well as any one who opposed his method of ruling Venezuela. The result was a surprising defeat that reshaped national politics.

At the brink of the municipal elections in November, Chavez is trying not to maek the same mistake again. Victory in the municipal election is critical for the implementation of the new Constitution in the near future. Also, a defeat would allow the opposition to come back from the ashes.

Aiming at a municipal victory, Chavez decided to embrace a more “light” appearence. After making peace with the King, he will stop criticising Uribe for a while. With 94% of approval rate, he would not be smart to criticise the colombian, since the proximity between the two countries allow the population to make unfavourable comparissons towards Chavez.

At least until November, a light Chavez will be on the scene. Nevertheless, beware! If victory comes at the municipal elections, good old Chavez will return with much more financial power, thanks to the barril price.

The difficulties Venezuela is bound to experience

Oil prices at $120 per barrel allow Hugo Chávez to do many things he would not normally be capable of. Venezuela, historically dependent on their greatest blessing, oil surpluses, has never developed other industries to help the country grow stronger, more developed and self-sufficient. Huge oil reserves have made the Venezuelan government and high society fond of imports.

This behaviour has resulted in a huge gap between rich and poor in the country. The split was based on the ability of each group to buy basic goods. Those who were not affluent would buy low-quality Venezuelan products, since local industries have never seen real development. The wealthy would always buy imported, high-quality products, preventing the local industries to develop.

With this recurring scenario throughout the years, the situation experienced nowadays has not seen its inception in the Hugo Chávez government only. Food shortage in the country is not a temporary issue of the current government. It is a structural problem present throughout the history of Venezuelan development. When the government put a limit to the already weak local industries, their output became inhibited and incapable of provide basic goods for the population. Imported products were still out of reach for the majority of the Venezuelan population. Those who produced food in Venezuela started realizing that the costs and prices imposed by the government were not compatible with the production costs and then preferred to suspend their activities.

The big mistake by Chávez’s government was in not foreseeing this situation and failing to offer the necessary incentives for private producers in the country. The creation of PDVAL, a subsidiary of oil company PDVSA, aimed at the food sector, did nothing more than centralizing the acquisition of food companies in the country. Those which had not closed their doors adhered to the government and started producing without the hope that their effort will represent more profits. Oftentimes, there was not even a profit.

In line with that, inflation is damaging the Chávez government. Obviously, with oil barrels costing $120, inflation goes unknown for the government, but not for the poorest sections of the population, who make up Hugo Chávez’s electoral base. It is not surprising that recent approval polls have shown the worst results for Chávez since he took office.

Some analysts believe that oil prices will not sustain at such high levels much longer. Some believe it could end the year at $90 per barrel. Estimates are even more pessimistic for the industry, with forecasts of $73 by 2009 and $70 by 2010. With prices falling, inflation will take on huge proportions, as the government seems not to be doing anything to tackle it.

Throughout the Chávez years, we have been able to see that, whenever any domestic problem arises, the government imposes some fresh radicalization. Two factors will cause strong radicalization by Chávez:

1. If oil prices drop to $73 by 2009, Chávez will blame a foreign enemy for the lack of domestic progress. High inflation rates will be treated as “a foreign boycott on the economy.” Nationalizations will intensify due to the need for income from other sources. However, as there is no technologic development, it will not sustain for long. The lack of investment in PDVSA itself will harm the company’s extraction capabilities in the next years.

2. If Chávez wins the upcoming municipal elections in November 2008, there will be intense political radicalization in 2009. According to government sources, an even more extreme constitution reform will be presented in 2009, simultaneously with a weakening of the economy, thus deepening any constitutional changes.

Venezuela – January 2008

Venezuelan president Hugo Chávez is trying out a new discourse. He is changing the typical left-wing rhetoric for one focusing on solving issues that are specific to his grass and roots – security and basic food supply. This change of posture aims at regaining the confidence of his “light” supporters who did not provide enough support during the referendum.

There is no doubt that Hugo Chávez’s image became strongly tainted with his defeat in the late 2007 referendum. Over the course of one year, confidence in president Chávez has dropped nine percentage points, as informed by the Datos institute. According to the poll, his approval rate has fallen from 39% to 30%. Re-building his image is a two-front effort: domestic and international. Domestically, Chávez has started to provide financial support to students’ centers in several universities and institutions across the country so as to bring them to his side. It should be noted that students took an independent stance during the movement against the referendum. If they were against the government, they didn’t either support the opposition. This uncertainty has created a silent battle between government and opposition in order to “conquer” the student masses. This is crucial for the government’s future, as it is certain that a new referendum will be held in approximately two years for the people to decide again on the same proposals put forward by Chávez.

Besides, Chávez has been obtaining significant support amid the population. If in direct proposals, such as last years’ referendum, Chávez did not achieve the victory he expected, we can notice that, in indirect terms, the population is lining up alongside him and trusting in the centralized government Chávez is creating. Venezuelans are the nationals to provide the lowest support for market economy, according to a Latinobarómetro poll. Even accepting that private enterprise is necessary for development, they believe that the State should be the sole responsible for solving the population’s problems, as only the State has the necessary means to do it. A total of 67% believe that “the State is capable of solving all the problems.”

Internationally, Chávez has put some effort into participating in the hostage release sponsored by the FARC. Given that many countries regard the FARC as a terrorist organization, Chávez did not help his cause by saying that they are not a terrorist group, but rather a people’s movement willing to fight in the name of the people.

Another important fact last month was the creation of another government-owned company – the PDVAL, in charge of producing and distributing food. It is a PDVSA subsidiary aiming at taking food directly to consumers. Initially, the company will produce milk, sugar, rice, cooking oil, chicken, and pork. The company is part of the government’s strategy to put an end to the shortage of basic food supplies in supermarkets. This is expected to increase the offer of products and regain the support of those voters who had chosen Chávez but failed to support him in last year’s referendum. This measure is related to a new attitude by the Venezuelan government, who shifted from an ideology discourse centered on structural reforms towards solving specific social problems by means of State intervention.

Despite the government’s particular solutions, fear of an economic crisis is stronger than ever. The stabilization of oil prices in the international markets will spark a crisis in the Venezuelan economy very soon. The advertence was made by economist Pedro Palma Durante. He recalled that a US recession will reduce the oil demand in all countries. As a consequence, oil prices will slow down. Palma does not rule out that oil prices may range around USD 30. Thus, the economist emphasized that funds from oil sales need to continue rising for Venezuela to keep their current growth rate.

However, Venezuela is shielded against the current US economy slowdown, even though the US is their main oil customer. The comment was made by the Venezuelan Finance Minister, Rafael Isea. Although he acknowledges that this crisis may impact the demand and prices of the nation’s main export product, he said that “the impact would be neither severe nor immediate.” According to Isea, trade relations between Venezuela and other nations create “a type of shielding.”

Welcome! Latin America is becoming consistently more important for the world. As the region becomes more stable, the world sees Latin America as a potential business area. In order to understand te potential Latin America has to offer, the world must understand the unique dynamics that the local politics function. This blog already exists in Portuguese since 2005 and is widely read. I believe it can be an important instrument to understand this amazing region. Suggestions, criticisms and opinions are welcome. + learn more

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