Oil Economics
Source Jim Devine
Date 06/06/10/20:46
June 8, 2006/New York TIMES

With Oil's Cash, Venezuelans Consume

CARACAS, Venezuela, June 7 — On a recent Sunday morning here,
free-spending customers have emptied Vintage, a trendy upscale bar, of
nearly all its best vodka. At the Castellana Chevrolet dealership
nearby, buyers wait eight months to get the keys to cars they paid for
long ago....

With oil revenue flowing into its coffers, the government is spending
like never before on social development programs that free up cash for
the poor by providing free education and health care and cheap food.
Wage increases and infrastructure projects also fill the economy with
money that filters down to Venezuelans' pockets. As a result,
consumers are buying more each year, helping Venezuela post growth
that exceeded 9 percent last year and in the first quarter of 2006.

But economists here and abroad say that such rosy indicators are part
of an artificial economic boom that could later hurt the country; the
spending spree, they say, is masking the fundamental limitations of an
economy propped up by spending, but failing to generate enough new
private investment to sustain longer-term growth and job creation.

Michael Gavin, chief Latin American economist at UBS Warburg in
Stamford, Conn., said, "They're hollowing out the economy and setting
Venezuela up for a real setback if oil prices ever return to more
historically normal levels."

[This is something I've been worried about for awhile.]

President Hugo Chávez, who has shaped much of his domestic economic
policy around the funneling of oil revenue into social programs, has
tightened his reins on the private sector; he has forced foreign oil
companies to change their contracts, expropriated private land
considered idle and imposed labor laws.

Mr. Chávez has been emboldened by a sixfold increase in oil prices
since he was elected in 1998. But for many investors, increased
government controls and Mr. Chávez's brash moves against private
business are clouding the outlook for operating in this country, one
of the world's big oil exporters.

"That's very bad and inconvenient," Domingo Maza Zavala, a central
bank director, said in an interview. "If this is the vision of our
private investors, in a few years the Venezuelan economy will fall
into a difficult situation because of productive inefficiency."

Mr. Maza says the government is making the same mistakes that
Venezuelan governments made in the 1970's and 80's, when spending
sprees in times of high oil prices were hard to curb once prices fell,
leading to soaring national debt and economic downturns.

"We know the bonanza will come to an end," he said. "Unfortunately, I
don't think the government is learning the lessons of the past."

Direct foreign investment nearly doubled last year, to $2.9 billion,
from $1.5 billion in 2004, as the economy recuperated from a freefall
that followed widespread antigovernment strikes in 2002.

But Venezuela attracted 30 percent less direct foreign investment in
2005 than it did, on an annual average, in the second half of the
1990's, a period when the oil industry opened to multinational
companies, according to the United Nations Economic Commission for
Latin America and the Caribbean, which tracks economic performance.

[Why is a country's ability to attract DFI a sign of its success?]

Total private investment rose 3 percent from 2000 to 2004, according
to the central bank. Mr. Gavin of UBS Warburg says Venezuela's
private-sector performance is weak compared with that in other growing
Latin American economies. Mexico, for instance, attracted twice as
much private investment in relation to its total output last year than
Venezuela did in 2004. The central bank has not published figures for

[isn't it _total_ investment that counts, not _private_ investment?]

Mr. Maza told the National Assembly on Wednesday that private
investment was now below 15 percent of output, the level he says is
needed to maintain a growing economy. "This is one of the defects of
the present growth," he said.

An influx of foreign goods holds back industries from expanding and
creating jobs, said José Rojas, a former Chávez finance minister who
is now an economic consultant. Imports, nearly a third of them from
the United States, increased by 28 percent last year, reaching almost
$25 billion, the government says.

Though the economy grew 9 percent in 2005, that growth produced a rise
in the number of jobs just under 2 percent, according to the
government's National Statistics Institute.

Yet public spending was up 40 percent in the first quarter of 2006, to
$11 billion, according to the central bank. The planning and
development minister, Jorge Giordani, expects the economy to grow as
much as 7 percent this year, as the demand for goods has renewed
investment in areas like telecommunications and commerce.

Middle-class Venezuelans seem happy to go along. "When I see someone
with a new model of clothing, I have to buy it," said Judith Quintero,
29, who said she was spending more of her own money since sales at the
Confetti children's clothing store she manages went up 40 percent last
month. "My husband tells me I'm spending more than I'm making."

Companies are tight-lipped about their reluctance to invest because
they do not want to upset the government and they are profiting now
from the high consumption levels. Those levels nearly doubled in the
first quarter, according to a market research firm, LatinSource.

"Businessmen are all very happy because they're making a lot," said
Oscar García Mendoza, president of Banco Venezolano de Crédito. "But
they don't want to invest at all."

While windfall oil profits have caused building booms in other
oil-producing countries like Qatar and the United Arab Emirates, Mr.
García noted that he could see no construction cranes as he gazed at a
wide view of downtown Caracas from his high-rise office.

[maybe that's a good thing?]

President Chávez, a leftist who has become the Bush administration's
most visible antagonist in Latin America, has discouraged much-needed
[private] investment by maintaining a strident discourse against
capitalism while endorsing Venezuela's transformation to the "new
socialism of the 21st century."

With the judiciary controlled by the government [is this true??], many
businessmen say they think there is little respect for contracts,
according to Antonio Canova of the law firm of Bolinaga Levy Márquez &
Canova in Caracas. Investors are also concerned for their personal
safety, as frequent crime troubles Venezuelan cities and a recent
series of kidnappings and murders have jolted the country. [is V the
only Latin American country with a crime problem? did this arise with
Chávez's government?]

Forty percent of industrial companies have closed since Mr. Chávez
became president, most soon after he took office early in 1999, and
the number of companies doing business has not recovered, the
Venezuelan Confederation of Industry says. [What does it matter that
the _number_ of private industrial companies has changed?] While the
industrial sector foresees 10 percent growth this year, only one-tenth
of companies are planning long-term investment like expanding their
factories or building new ones, the group says.

Edmond Saade, president of the Venezuelan-American Chamber of
Commerce, adds: "There are not really established rules and
regulations to encourage the private sector. There are more to really
control it and make its life more difficult."

Mr. Chávez has transferred foreign currency reserves and oil profits
to a development fund, which Mr. Maza of the central bank estimates
will reach $20 billion by the end of the year. That money finances a
flurry of social development programs that are the hallmarks of the
president's socialist [sic] "Bolivarian revolution."

Mark Weisbrot, co-director of the Center for Economic and Policy
Research, a left-leaning policy group in Washington, says these
programs have helped raise living standards and workers' productivity
among the poor. He noted that figures from the National Statistics
Institute showed that poverty had fallen 7 percent since Mr. Chávez
came to power.

Mr. Weisbrot disagrees with economists who foretell doom from the
consumer-generated boom, saying that 11 percent first-quarter growth
in industries other than oil is a more important gauge of the economy
than investor confidence.[right]

For now, at least, Venezuelans are spending like there is no tomorrow.

"People from every social status have money in their pockets," Mr.
Pereira, the owner of the bar Vintage, said, collecting pricey bottles
that patrons left behind half-full. "So everyone's consuming."

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