Oil-rich Venezuela gripped by economic crisis

By Juan Forero
Washington Post Foreign Service
Thursday, April 29, 2010; A07

SAN CRISTOBAL, VENEZUELA -- Every day for the past three months, government-programmed blackouts have meant the lights flicker and go dark in a city that once bustled with commerce. And Fifth Street, with its auto parts stores and car repair shops, has ground to a halt.

"We just stop," said Jesus Yanis, who paints cars. "We don't work."

Neither does the rest of Venezuela, where a punishing, months-old energy crisis and years of state interventions in the economy are taking a brutal toll on private business. The result is that the economy is flickering and going dark, too, challenging Venezuela's mercurial leader, Hugo Chávez, and his socialist experiment like never before.

No matter that Venezuela is one of the world's great oil powers -- among the top five providers of crude to the United States. Economists say Venezuela is gripped by an economic crisis that has no easy or fast solution, even if sluggish oil production were ramped up and profligate state spending were cut.

"The government is paralyzed, unable to handle the situation -- and there are no fiscal plans to deal with the crisis," said José Guerra, a former Central Bank economist who directs the economics department at Central University in Caracas, the capital. "Our situation is unbelievable, because we have one of the biggest reserves of oil in the world, thermal-electrical and hydroelectric sources."

Chávez still hails what he calls his "21st-century socialism" as the answer to the American-style capitalism he calls an abject failure. But through his long tenure, the Venezuelan economy has expanded by an average of less than 3 percent a year, even as the price of oil hit a historic high of $150 a barrel in 2008.

Last year, the economy slid 3.3 percent. Some economists, including Guerra, predict a 5 percent contraction this year. The International Monetary Fund says the economy will probably shrink 2 percent.

Venezuela's performance stands in stark contrast to the rest of Latin America, where some central banks worry about overheating economies in 2010. In Peru, Chile and Brazil, all of which embrace globalization, growth could indeed go well beyond 4 percent, the IMF says. Venezuela, economists say, stands out -- its economic policies marked by the nationalization of industries and stringent currency controls.

"The reason Venezuela is contracting is because private activity is contracting," Augusto de la Torre, the World Bank's chief economist for Latin America, said in Washington last week. "What we're seeing in Venezuela is a phenomenon where productivity, private activity and private business is falling."

Paralysis and polls

The oil industry is pumping 20 percent less crude than in the 1990s and is saddled with debt. The country's inflation rate could hit 35 percent this year, economists say. Thousands of factories, paralyzed by a failure to access money or spare parts, have closed since 1999, said Carlos Larrazábal, president of Coindustria, which represents manufacturing nationwide.

At Three M, a metal mechanics workshop here, manager Marta Medina has had to reduce her workforce from more than 50 employees a year ago to eight. She describes problems coming from every direction: blackouts that have burned out motors on huge machinery, a shortage of spare parts, falling orders.

"We have losses, we have uncertainty, we lose credibility as a company," Medina said.

Chávez's popularity has fallen below 50 percent, rare during his tenure and problematic for his followers as they gear up for parliamentary elections in September. Analysts say opposition could carve out space for itself in a Congress once wholly controlled by the president's allies.

Chávez has publicly expressed no concern, though he acknowledged the economic downturn in a Sunday speech.

"Is that reason to worry?" he asked the party faithful. "Not at all."

Chávez instead posited that declining car imports were a key reason economic figures had slumped. "And what does that have to do with socialism?" he asked.

The "world capitalist crisis," he explained, "for us is no tragedy."

"It's a marvelous opportunity to push a new model," he said, referring to Venezuela's increasingly state-controlled system.

Crippling blackouts

The downturn has only been compounded by the inability of Venezuela's hydroelectric dams to generate enough power. The government blames a long drought. But energy experts say Venezuela failed to make billions of dollars in investments to upgrade hydroelectric dams and power-generating plants.

To save energy, the government has imposed rolling blackouts in major cities since Jan. 13. In some cities, the blackouts can last four hours or more a day.

"They failed to do everything," said Nelson Hernández, a professor of energy policy at the Metropolitan University in Caracas. "If you do not develop your infrastructure -- your hydroelectric generation, your electrical generation -- you're going to have a collapse."

The government has tried to ease the crisis by imposing fines on companies that use too much electricity and by "bombing" clouds to induce rainfall. Chávez also tapped his closest ally, Cuba, for help, bringing in Ramiro Valdés, a 77-year-old former rebel, to advise Venezuelan energy officials.

But Cuba has suffered through serious blackouts for a generation, and Venezuela has made little headway, even as the rains returned in recent days.

Here in San Cristobal, the capital of Tachira state, the blackouts have affected every level of an export-driven economy, said Gov. César Pérez, an opponent of the president.

"Tachira is one of the states hardest hit by the electrical crisis. The rationing is the most severe," Pérez said in an interview. "This is the result of a socialist vision."

The blackouts mean that diners at Iris Coisa's sandwich shop eat in the dark, even though she can still fry burgers on a gas grill. Across town, a company that makes buses for the state reports that production is on the verge of collapse because metals from eastern Venezuela, which has been hard hit by nationalizations and electricity shortages, are barely arriving. A toy factory has let go of half its staff because orders have plummeted.

Isidoro Teres, president of the industrial chamber of commerce in Urena, says the blackouts and state interventions have hurt his business. His warehouses store imports from Colombia.

But he said business is down more than 40 percent also because Colombian exporters are looking to other markets.

"Evidently, no one escapes the economic crisis," he groaned, standing in a warehouse that was nearly empty.

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