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Oil Revenues Hide Chavez's Economic Ineptitude

By Vladimir Chelminski | The Wall Street Journal

February 25, 2005; Page A19 -- CARACAS -- After six tumultuous years in power, the claim by Venezuelan President Hugo Chavez that he is leading Venezuelans toward greater prosperity cannot be sustained. Any serious analysis of our economy shows a dramatic deterioration in Venezuelan well-being. A series of feel-good government programs only help ameliorate the negatives that would otherwise accrue to Chavez with his disastrous handling of the economy.

In 1998, the vast majority of Venezuelans were very poor and had no good reason to hope for a better future. For decades, the quality of life had been deteriorating. The democratic process seemed to function well only for the benefit of politicians and their friends. The political parties that had alternated in power since 1958, Social Democrats and Social Christians, were very much the same. Both offered socialism with political freedom. Their policies paid lip service to the poor but always proved counterproductive. Private property and contracts meant little in their laws. Two-thirds of willing workers could not find employment in the formal economy and The Heritage/Wall Street Journal Index of Economic Freedom classified Venezuela as "mostly repressed." The country needed dramatic change.

In that same year, presidential candidate Lieutenant Colonel Hugo Chavez swept the country's imagination with a good assessment of our problems, but wrongly naming economic liberalism as the cause of the misery. He promised a new state with new laws and sold hope to the poor. In December 1998 he won the presidency and for some time after his inauguration, he continued to gain popularity.

It is true that Mr. Chavez has expanded pension payments and implemented programs that did not exist before, like the 11 "missions" programs. Three of these programs are educational. "Misión Robinson" is designed to teach people to read. Participants receive a monthly stipend of 160,000 Bolivars (about $83) and in six months they may receive a sixth-grade diploma and can graduate to "Misión Ribas" where they have the same stipend and in six months may earn a high school diploma. In other words, an adult with no previous schooling can earn in just one year what normally takes 11 years.

There is no question that a monthly stipend is popular among the unemployed or those who earn very little but the quality of these diplomas is suspect. For the government, enrollment helps boost employment statistics since those studying do not count as unemployed.

Another "mission" program provides Cuban doctors, to live and work full-time inside poor communities, ready to help with minor health problems at any time, free of any cost to patients. But as in education, the quality of this care is an unknown. If a medical doctor with a Harvard degree arrives in Venezuela, he cannot work until he revalidates it. But a Cuban doctor's credentials are taken for granted. Moreover, no one knows the cost of these doctors to the nation since they seem to be provided in exchange for Venezuelan oil to Cuba.

Yet another "mission" sells food staples at significant discounts from regulated prices. This is destroying the private sector at the retail, wholesale and industrial level.

Meanwhile the fundamentals in the economy are troubling. The central bank says the economy grew 17.3% last year, one of the highest rates in the world, but this was after a 9.2% economic contraction in 2003 and an 8.9% contraction in 2002. Despite exchange and price controls imposed to rein in inflation, in the past two years we have had an inflation rate only surpassed by Zimbabwe. In 2004 inflation was 19.2% and in 2003 it was 27.1%. The central government ran a deficit of 3.8% of gross domestic product in 2004, even with unusually high oil prices, fictitious central bank foreign-exchange profits and record tax collections.

The financial transaction tax of .5% is particularly damaging. Because most of the population is poor and does not use checks, the government says the tax won't affect them. This ignores the fact that business passes its cost onto consumers. In addition, there are consumer taxes which I estimate create a 22% mark-up on staples. Tax rules now stipulate that even the purchase of a cup of coffee requires the consumer to tell the vendor his tax identification number and address.

A main characteristic of our repressed economy is the imposition of exchange and price controls two years ago. We've seen this movie before. Venezuela had these controls from 1983 to 1989 and from 1994 to 1996. In both cases, corruption ballooned, and the economy sank. In the end, they had to be discarded amid scarcities and hyperinflation.

Another economically pernicious measure introduced by this government is property confiscation. Earlier this year, the country's most productive ranch, owned by the British company Vestay Group LTD since 1903, became the target of a potential confiscation with plans to partition it for "cooperatives." This may be popular with the poor but if the past is any guide, the newcomers will either starve or go back to where they came from. Meantime, the nation will have lost a major productive asset. Next we'll be wondering why there is not enough investment and job creation.

Mr. Chavez still has credibility among his disciples and his charisma may carry him for some time to come, despite rising crime, filthier cities, declining services, an expanding informal economy and more beggars in the street than ever before. His followers are so infatuated that they do not pay attention to the contradictions in his speech or his numerous promises never fulfilled. But when the price of oil comes down, the "missions" will be unsustainable and the bloom is sure to fall off the rose.

Mr. Chelminski is a private consultant in Caracas.

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