Caracas Chronicles

This appeared in the Wall Street Journal…but when?

CARACAS,Venezuela–By ceremoniously signing a new $1.4 billion loan on Monday, the International Monetary Fund made it official: It’s back in Venezuela. … Venezuelan politicians are breathing a sigh of relief at once again being bailed out and international investors are eyeing their next opportunity. Ironically it’s only the Venezuelan people who are no better off.

On one level Venezuela has made what would seem to be some small progress in the last few months. In January, the Venezuelan government reopened the oil sector to private foreign investments. Analysts welcomed the naming of … to the important cabinet level post of planning minister. Finally, Venezuela has accepted the IMF measures of conditionality, including the removal of price controls and foreign exchange controls and an end to the dramatic state subsidy of gasoline.

But these new measures mean very little. Much of the IMF plan is classic austerity, including higher taxes. More importantly, the IMF loan merely serves as financing for a balance of payments crisis that should be solved by market solutions. Furthermore, the reopening of the oil sector to foreign private investment is not the same as privatization of the Venezuelan oil company. The mandated profit sharing and tax revenues from this oil scheme will flow to the inefficient Venezuelan state. These new revenues, together with the IMF loan, will serve not as a development tool but as a power pack for maintaining corrupt political institutions as they are today.

Venezuela still lacks what it most needs: private ownership (not in the mercantilistic sense) of the nation’s assets. Without it, the country is doomed to economic disintegration. The new oil revenues and the IMF plan simply finance this trajectory.

For decades the Venezuelan political establishment has accumulated control over the country’s assets at a great rate. The list of assets now belonging to the state includes all mines, oil production, petrochemical, aluminum and iron factories, beaches, ports, a large proportion of agricultural lands, prime real-estate locations, 60% of the value of the banking system, manufacturing companies, television and the main radio stations. Most of these state controlled enterprises (save oil) are money losing. Without new funding Venezuela would be forced to sell them to the private sector immediately.

The oil scheme and the IMF loan will isolate the country’s political leaders from reality, thus allowing them to postpone the deep privatization program needed to sell off the disproportionate stake of state-owned companies. Together with tax and gasoline price increases, the strategy to capture foreign private investment in the oil sector is a way of maintaining state control over the economy. The IMF loan only complements this strategy.

Despite Venezuela’s relatively small population of … million and its huge oil revenues … its political leaders are running out of funding. This in turn is draining their power. According to the latest polls, no traditional politician and no political party in Venezuela holds … the electorate’s preferences. And it’s no wonder why.

… GNP has dropped 39% and the inflation index has increased 110-fold … fiscal deficit … external debt servicing costs … foreign debt … unemployment … the informal sector of the economy. The middle class has shrunk….

Instead of borrowing from the IMF, raising taxes and public service utility rates and inviting foreign private investment into the oil sector to obtain higher government spending privileges, … administration should have faced the economic crisis–fiscal and balance of payments deficits–with some important reforms.

First, 20% of the state-owned oil company PDVSA should be privatized in order to reduce public foreign debt.

Second, a popular capitalization fund program should be initiated in order to put all state owned assets–including public schools, hospitals and the remaining 80% of PDVSA–in the hands of the common people. Private ownership of assets in Venezuela is the only way to change the economic course of the country. Such a move will give Venezuela the productivity boost it needs and reduce fiscal spending. Taxes, public service utility rates and subsidized gasoline prices should not have been raised until citizens became direct owners of the economic resources of their own country.

Third, the $2 billion of prime real estate and other assets now owned by the Venezuelan government … should be swapped for outstanding domestic government bonds, thus lowering interest payments on the fiscal budget.

Fourth, Venezuelans should be given the assurance that all additional oil revenues will be used strictly for servicing external debt or be distributed as dividends directly to all Venezuelans without passing through the hands of the government.

The IMF has a shameful role in all of this. Trying to finance fiscal deficits by increasing taxes and public service utility rates and by borrowing heavily is a never ending sacrifice for the Venezuelan people. Despite all the world fuss over recent “economic reforms,” Venezuela today is the same as yesterday. The economy is owned and operated by the state. One wishes that the IMF could somehow get some perspective on its lending program. Do IMF decision makers really believe that Venezuela has deteriorated due to lack of resources? It’s almost as if the IMF believes that capitalism–driven by private property ownership–only works in G-7 countries. Developing economies shouldn’t toy with it.

No IMF plan nor any statist pact with big oil corporations will stave off future devaluation, inflation or the overall depletion of the country, unless the common citizen is empowered. Venezuelans yearn for a true economic revolution. For now they are forced to accept the President plan for them: raising taxes and public service utility rates, maintaining the bloated public sector with revenues from foreign private investment in the oil sector and increasing debt by borrowing more from the IMF.