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Venezuela's unsustainable scheme to cope with flood crisis

By Veneconomy

14.02.05 | The scheme that the government has chosen to cope with the crisis caused by the heavy rains takes only a very short-term view and is unsustainable. Believing that the government will go out and buy homes for Bs.500 million or rent them at Bs.50,000 in order to give them away to the people who have been left homeless is, at the very least, illusory.

However, this is not the first government that has tried to solve problems by throwing money at them, and it will not be the last. This decision is a clear reflection of an administration that, just like its predecessors, thinks that the country’s oil industry is an inexhaustible source of money. Chávez has taken the oil rentier model that has been applied over the past three decades to new depths. This has become evident in the efforts to milk PDVSA to the maximum, regardless of the cost, so that the funds can then be transferred the Executive via fiscal contributions to finance the Bolivarian project’s infinite social programs, programs that are, incidentally, totally unsustainable, given that their continuity over time depends on how long this current cycle of high oil prices lasts.

What is worse, in these revolutionary times, planning, investment, and professional training for managers and technicians are conspicuous by their absence. As for the State, it is not making the investments in the industry that are essential if it is to increase or maintain its production capacity. This disinvestment will, in the long run, rob PDVSA of a degree of freedom, because it will restrict its capacity to respond to the negative impact of lower prices on oil revenues.

Moreover, in this further consolidation of the rentier model, the Chávez administration is looking to the private sector broaden its taxation base. It started with the announcement in December 2004 of the decision to adjust the royalty on production from the Orinoco Oil Belt from 1% to 16% and, more recently, with the announcement that new projects in the hydrocarbons sector will come under the new 2001 Hydrocarbons Law, which increases the royalty from 20% to 30% and reduces income tax from 65% to 50%.

It looks very much as though Venezuela is going back to the old rentier model with a nationalist focus for developing the country’s energy reserves.

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