Dissecting command and control.

Chávez leaves legacy of economic disarray

By Francisco Toro

Venezuela has no choice but to deal with the oil majors as a supplicant

With its 300bn barrels in oil reserves, the Venezuela left behind by President Hugo Chávez’s death cannot be ignored. Amid mounting institutional disarray, doing business with its increasingly disorganised and cash-starved government will present a challenge for foreign oil majors. Opportunity lurks, but so does the peril of operating in a country battered by years of aggressive misrule.

The Chávez legacy is complicated: a half-built socialist command-and-control economy layered over the wreckage of a still partially operating private sector.

Rather than trying to undo private enterprise altogether, Chávez gradually co-opted capital, preserving areas where his allies could accumulate wealth quickly. The government monopoly over the oil industry made this strategy feasible: with 96 per cent of Venezuela’s hard currency earnings passing through state coffers, Chávez was always in control of distributing the spoils.

Cronies found it easy to profit. A convoluted currency control regime resulted in multiple prices for the US dollar. The arbitrage opportunities this set-up created were legion: the well-connected could buy a dollar for one price on the official market, sell it for three or four times that price on the parallel market, then repeat it all over again. It was magical wealth, the kind of impossible conjuring trick possible only in a petrostate amid an oil boom.

To those outside the magic circle, an immensely detailed, prescriptive and punitive regulatory regime stripped out the meaning of ownership even for those companies that were not seized outright. A thicket of rules on hiring, firing, working conditions, pricing and investment turned managers into little more than compliance agents, all too aware that violating any of the multiple, at times contradictory, restrictions they faced could invite an investigation leading to heavy fines or expropriation.

None of this made the country’s capital less profitable. On the contrary, the investment drought this regulatory regime created made capital scarce, competition slack and profits high. With companies’ profitability based entirely on their capacity to please regulators, customers came to be treated as an afterthought. The result was to import the miserable service standards of Soviet-style economies right into Venezuela’s private sector. Then, in a peculiarly baroque twist, the shoddy goods and atrocious service private companies provided were cited as reasons for expropriation. It was a perfect circle.

In the public sector, Chávez’s determination to reward loyalty and ideological conformity above all other considerations left the management of an ever-growing state-owned sector in the hands of hardcore ideologues and shameless opportunists. He leaves behind a country of state-owned steel mills that do not produce steel, state-owned electric utilities that cannot keep the lights on, and state-owned supermarkets where you may be able to find chicken, coffee or toilet paper, but rarely all three at the same time.

Nowhere was the impact of Chávista managerial chaos more obvious than in PDVSA, the state-owned oil group. A walkout by virtually all of the company’s management and technical staff in 2002 led to a purge of more than 20,000 of Venezuela’s most highly qualified professionals: a massive, self-inflicted brain drain that has hobbled Venezuelan oil production ever since. Ten years on, oil production remains about a third lower than it was before the strike, and successive announcements of plans to increase production with the help of Chinese, Russian or Vietnamese state-owned groups has foundered on the shoals of the company’s administrative chaos.

Of course, the enormous potential of Venezuela’s reserve-rich Orinoco Belt has never been lost on the oil majors. The real irony here is that, as Venezuela’s fiscal picture darkens, its bargaining position with the companies that have the expertise and financial muscle to develop its huge oil reserves has only weakened. Whatever its ideological stripe, the next government may have no choice but to reach out to the majors as a supplicant more than a partner. Some legacy for Latin America’s most-celebrated anti-imperialist leader.

The writer is a Venezuelan journalist and author of ‘Blogging the Revolution ’

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The biggest flaw int eh Communist theory is that is pushes aside the reality of human nature. Communists are no less greedy then the most greedy of Capitalists. Communists never produce wealth only the equal distribution of poverty.