In Venezuela, Oil Sows Emancipation

Seven economic mechanisms of the Chavez government account for the fact that, since 2004 and in spite of the strong growth in oil prices, the non-oil GDP grew significantly faster than the oil GDP, demonstrating the positive impact of oil exports on activities not directly related to crude extraction.

The data just released by the Banco Central de Venezuela (BCV) confirm that the Venezuelan economy grew at a cumulative 10.2 percent between the fourth quarter of 2004 and the fourth quarter of 2005.  This is the ninth consecutive increase since the last quarter of 2003.  Overall, in 2005, the gross domestic product (GDP) grew at 9.3 percent.

Just like in the previous eight quarters, the strong increase was fundamentally driven by activities not related to oil: civil construction (28.3 percent), domestic trade (19.9 percent), transportation (10.6 percent), and manufacturing (8.5 percent).  The oil sector had an increase of only 2.7 percent.  According to a report by the Instituto Nacional de Estadística (INE), the unemployment rate in December 2005 was 8.9 percent, two percentage points below the rate in the same period of 2004.  In absolute terms, this means 266,000 additional jobs.  Last year, the inflation rate reached 14.4 percent, but that was below the 19.2 percent rate in 2004.  The nominal interest rate went down to 14.8 percent.

These results bear out the expectations of the ministry of finance and belie the persistently pessimistic forecasts made by economic pundits of the opposition, who insist on the idea of a "statistical rebound."  The term was invented in June 2004 as an explanation for the growth in the economy: the increase in the GDP was supposed to be an arithmetic illusion due to the depth of the fall in the previous periods.  But, by now, this would be a fantastic and unheard-of case of a ball dropping on the floor only to bounce back up and up, without signs of slowing down, in defiance of the law of gravity.  In a commentary on the economic expansion, the minister of development and planning, Jorge Giordani, said ironically: "The productive rebound continues . . . social practice and some modest figures have falsified the ominous desires of the political opposition.  Their political judgments, disguised as economic technicalities, have been exposed by the new reality."

It has been shown that one of the legacies of the neoliberal period is the disdain for history: a shortsighted strategy that goes only as far as the horizon of the financial system, virtual, outside of time, detached from reality, fictitious.  That legacy could explain why the orthodox analysts view the Chávez government as responsible for the poor results in the economy between 1999 and 2003, a period they are trying to label as the "lost five years."  Contrary to their view, let us remember: to a large extent, Hugo Chávez won the presidential elections of December 1998 because Venezuela was facing its most catastrophic economic, political, social, institutional, and moral crisis, after 40 years of power sharing between the traditional parties Acción Democrática (the socialdemocrats) and COPEI (the Christian democrats).  The country and the people agonized as a result of the rampant corruption, profligacy, and perversity of the Fourth Republic (1958-98).

Venezuela, which hardly benefited from the oil shocks of 1973 and 1979, was sinking, at a faster speed since the early 1980s.  According to Domingo Maza Zavala, currently a director of the BCV, between 1976 and 1995 alone, the country was awash with nearly 270 billion dollars in oil revenues, equivalent to twenty times the Marshall Plan.  Yet, the national foreign debt owed by Venezuela doubled between 1978 and 1982.  This illustrates well the dynamics of wastefulness and economic savagery of the so-called "Saudi Venezuela."

In the early 1990s, with the "Great Turn" and the "Oil Opening" inaugurated by Carlos Andrés Pérez — continued by Rafael Caldera's and Teodoro Petkoff's "Agenda Venezuela" — the country was handed, tied and gagged, to the International Monetary Fund.  That was the beginning of an accelerated process of national destruction: the role of the public sector in the economy was reduced in size, physical capital was divested, the economy was de-industrialized, strategic sectors were privatized, and historical labor conquests were taken away.  Among others, the following companies were privatized and even de-nationalized: the Compañía Nacional de Teléfonos (Cantv), the Siderúrgica del Orinoco (Sidor), the Venezolana Internacional de Aviación S.A. (Viasa).   They extended a long list of financial institutions, sugar mills, naval shipyards, and companies in the construction sector.  In 1998, there were specific plans to submit PDVSA to the international cartels.

Everything was done, supposedly, in the name of lowering the budget deficit, encouraging the inflow of foreign capital, modernizing the national industry, attaining greater efficiency, productivity, and competitiveness, reducing inflation, and lowering unemployment — semantic trickery to sugarcoat the Washington Consensus and make it palatable.  Less than ten years later, international entities like the UN Economic Commission for Latin America (ECLAC), the World Bank, the IMF and even the Vatican recognized the spectacular failure of these policies.  However, long before their belated conclusions were made public, the Venezuelan people had already raised up and pursued an alternative.  Episodes of this uprising were the Caracazo in 1989 and the two civic-military rebellions in 1992 — the first one led by the then unknown commander Chávez.  These insurrections, unlike what happened in the other countries of our region, constrained to some extent the implementation of the neoliberal agenda.


Under the government of Hugo Chávez, the Venezuelan economy has gone through four different and clearly defined stages.  As the continuous analysis that we have been conducting in the last four years demonstrates, in each of these moments — sometimes determined by the actions of the government itself, sometimes by the reactions of the opposition to the changes in progress — the country has experienced sharp turns in the direction of its fiscal, monetary, and foreign-exchange policies.

In 1999, Venezuela's GDP fell 6 percent as a result of the extremely deteriorated condition of the economy and of the campaign of emotional blackmail against the recently-elected president by the mass media which are historically connected to foreign interests.  Let us remember that Maritza Izaguirre, minister of finance under Caldera, remained in office during the first nine months of the new government.  The contraction of the economy was a natural reflection of this period of adaptation, combined with inertias that dated back to the third quarter of 1998, as well as the oil's extremely low international price — close to 9 dollars per barrel at the time.

The recovery of the prices of the crude — direct fruit of actions undertaken by the Chávez government — and the expansive fiscal and monetary policies put in place marked the beginning of a new stage.  During the years 2000 and 2001, the GDP increases of 3.7 and 3.4 percent, respectively.  In these eight quarters, the non-oil GDP grew 4 percent on average, whereas the oil GDP only rose 1.2 percent.  There were verifiable drops in unemployment, the consumer price index and the interest rate, which led to an increase in credit, consumption and GDP per capita.

Between the inauguration of Hugo Chávez in February 1999 and by midyear in 2002, the oligarchy — connected to foreign interests in the oil sector — adopted a cautious stance.  The outbreak of discontent occurred by the end of 2001, when the government submitted a legislative package seeking to induce deep structural changes in the main sectors of the economy: the state company Petróleos de Venezuela S.A. (PDVSA); and laws encompassing liquid and gas hydrocarbons, land ownership, the financial system, income taxation, and the cooperatives.

Then the third phase began: a battle that lasted a year and a half, approximately.  Between the end of 2001 and February 2003, everything happened in Venezuela: the bosses' lockout in December 2001; the coup d'etat promoted by the CIA in April 2002; conspiracies and the "oil sabotage" between the last quarter of 2002 and February 2003.

The foreseeable result: the Venezuelan economy fell 8.9 percent and 7.7 percent in 2002 and 2003, respectively.  This was a collapse akin to a war economy.  The surprising result: Hugo Chávez emerged stronger from the crisis.  After the coup d'etat failed, the coup participants in the armed forces were exposed and demoralized.  The sadistic attack against PDVSA demonstrated the anti-national and desperate nature of the privileged class, threatened as it felt by the nationalist actions of the government.  The conspiracy managed from Washington caused the collapse of oil production from 3 million barrels per day to 25,000, paralyzing production and triggering the bankruptcy of hundreds of companies.  In the first and second quarters of 2003, the GDP fell 15 percent and 25 percent, respectively.  Altogether, for seven consecutive quarters, the economy, the income per capita, and the international reserves fell — all accompanied by a rise of the unemployment rate to 20.7 percent, of the annual inflation rate to 27.1 percent, and of the interest rate to 22 percent.

But, the third quarter of 2003 ushered the beginning of the fourth and current phase of the Venezuelan economy in the administration of Hugo Chávez: the recovery.  To understand the magnitude of this recovery, consider the size of the disasters in 2002 and 2003.  Today, for example, the gross formation of fixed capital — the additional accumulation of capital assets –reaches 24.2 percent of total GDP.  In the middle of the 2003 conspiracies, it fell to 14.0 percent. Venezuela is just starting to walk again.


This reinvigoration of the Venezuelan economy is direct — although nonexclusive — result of the increase in oil prices to an average of 57.4 dollars per barrel (Brent blend, December 2005).  The hydrocarbons are — and will continue to be for years to come — a pillar of the economy.  But, then, what else is news in Venezuela?

The novel thing is that definitely the country is sowing or planting oil in the productive sectors of the economy, as required by Arturo Uslar Pietri seventy years ago.  A portion of the oil revenues is used as a funding source to structure and strengthen the domestic market ("endogenous development") and jumpstart a sovereign process of industrialization and definitive economic independence.  The oil provides an instrument in overcoming the rentier, unproductive, and importing economy already established by the 1920s, when the operations of the "devil's excrement" began in the Lake Maracaibo.

In particular, the sowing of oil is being made possible through seven mechanisms: (1) the amendment to the hydrocarbons law and the increase in royalties received by the government from the transnational oil companies; (2) the adoption of controls over the exchange rate in early 2003, which doubled the international reserves (from 15 to 30 billion dollars) and made possible the implementation of further measures; (3) the new law governing the central bank and the creation of the Fondo de Desarrollo Nacional (FONDEN) with already a balance of almost 9 billion dollars; (4) the new approaches by the tax collection authority, the SENIAT, that increased tax revenues in 60 percent this year — mostly from large domestic and transnational companies, historically the deadbeats and evaders; (5) a broad plan of public investments in a platform of basic industries, with their consequent multiplier and accelerator effects on private investment in industries that transform basic inputs into products of higher value added; (6) the contribution in 2005 of nearly 5 billion dollars to the Misiones Sociales, as an emergency mechanism to honor the immense accumulated social debt, lower unemployment, and fight inflation; (7) the work conducted by the Ministry of Agriculture and Land (MAT) to rescue and reactivate the production of a million and a half hectares of unproductive large estates, strengthening the 2006 Sowing Plan and incorporating thousands of farmers and workers into the productive process.

These seven mechanisms account for the fact that, since 2004 and in spite of the strong growth in oil prices, the non-oil GDP grew significantly faster than the oil GDP, demonstrating the positive impact of oil exports on activities not directly related to crude extraction.  While in the second quarter of 1999 the share of non-oil GDP was 70.5 percent of total GDP, today it stands at 76.0 percent.  And, partly as a result, in this period, the share of the oil GDP in total GDP shrunk from 20.1 percent to 14.9 percent.

Even more significant is the acceleration in the manufacturing industry between early 2003 and the present.  Manufacturing was the sector that grew the fastest in the period, recently surpassing oil GDP — for the first time since 1997, starting year of this statistical series at the BCV.  This dynamism can be verified especially by the consistent increases in electricity consumption, automotive vehicle sales, cement, durable products for civil construction, iron, and aluminum. Within the manufacturing industry, the branches that grew fastest are: automotive vehicles, trailers, and semi-trailers (13.5 percent); food, drinks, and tobacco (10.6 percent), rubbers and plastic products (10.3 percent), and machinery and equipment (7.0 percent).  The share of manufacturing in total GDP, which shrunk to 14.7 percent during the "oil sabotage," is now reaching 16.7 percent with a momentum to grow briskly.  These results will be improved upon when the full impact of the "Agreement/Framework for the Recovery of the Industry and Transformation of the Production Model" as well as the "Decree for the Provision of Inputs and Raw Materials to the National Manufacturing Sector" are felt.  These policy instruments seek to limit the exports of raw materials and to guarantee basic inputs — like aluminum, iron, steel, and wood — to the Venezuelan producers.  From early 2003, the share of final consumption goods in total imports has gone down from 37.6 percent to 24.2 percent, accompanied by an increase in the acquisition of goods devoted to gross capital formation from 12.3 percent to 25.7 percent of the total.  That is to say, Venezuela has invested its foreign exchange in purchasing machinery, parts, and equipment that make it possible for the process of sovereign industrialization to proceed.

The dollars at the FONDEN have been reserved to finance strategic development plans in such sectors as basic industries, oil, gas, physical infrastructure, transportation, and housing.  Within these outlines, new companies are being created and new projects are unfolding like the new Venezuelan iron-and-steel plan for the production of special steels, a factory of "seamless" oil tubes, three new oil refineries, ten sawmills, plants to produce cement, plants to improve iron ore, factories to produce aluminum sheets, plants to produce pulp and paper, and many others.  In addition to that, the Inter-American Development Bank recently approved a credit of 750 million dollars for the construction of the hydroelectric power plant at Tocoma.  Altogether, just by itself, the national power system will receive investments that approach 3 billion dollars in 2006.

All these plans have been directed by the Venezuelan government, which will control at least 51 percent of these initiatives, although many will involve strategic associations with other countries or private — national or foreign — investors.  The goal is to strengthen international relations, especially with other nations in Latin America, with China, Spain, India, Iran, and Italy, in the spirit of building an Alternativa Bolivariana para la América (ALBA) and contributing to creating a multi-polar world.  Instances of this are the recent initiative to build the oil refinery Abreu e Lima, in the Brazilian state of Pernambuco, agreed between PDVSA and Petrobrás; the agreements with Argentina to build oil tankers at the Santiago River shipyards; and the bi-national tractor factory Venirán Tractor, with the government of Iran, which has already turned out its first 400 units.

The government initiatives to join forces with national entrepreneurs are many, looking to reactivate the industrial and agricultural apparatus.  The goal is not solely the economic recovery, but the creation of bases to abandon the rentier model, sustained by raw oil wealth, and to establish a new productive, endogenous model, with internal dynamics and life, able to guarantee economic growth and national development.  In March of 2005, the ministry of basic industries and mining (MIBAM) was created, commissioned to build the bases for a sovereign process of industrialization.


A recent note published in the Venezuelan newspaper El Universal, under the headline "The Economic Recession Looms," is quite enlightening.  The note says: "the Venezuelan economy is showing the first signs of an imminent recession, due to the stagnation in the non-oil sector."  This is the exact opposite of what the statistics show — as I have tried to explain.

The anti-national sectors that brought us the bosses' lockout, the coup d'etat, the oil sabotage, and the continuous conspiracies against the country are back at it.  This is a reaction against the inroads made in the profound process of economic and social transformation the country is undergoing, the progress in income redistribution and social inclusion, which had very positive effects in the economic activities and the country's political life during 2005.  The initiatives of the government to extend a hand to the nationalist entrepreneurs show the will to seek unity in working to activate industry and agriculture, creating jobs and fostering the endogenous development.  In addition to this, Venezuela is expanding its international relations with important countries and has made effective its membership to MERCOSUR.

All the predictions are that, in 2006, the Venezuelan economy will grow at nearly 6 percent, with parallel advances in an array of economic and social indicators.  This is the best moment the Chávez government has had since it was inaugurated and, with the president's proposition to advance towards the "Socialism of the XXI Century," the stage is set for a process of even more intense structural changes in the outlook.  The next presidential elections will take place in December, this year, and the prospects of another victory for the Bolivarian forces has disturbed the White House and its domestic allies.  It is possible that, in its increasing isolation, the Bush administration will again resort to violence to disrupt democratic and popular governments.  On the other hand, as it has happened before, the actions orchestrated by the U.S. government will meet the resistance of the Venezuelan people, and each aggression will only increase their consciousness and reinforce their participative and protagonistic democracy.

Luciano Wexell Severo is a Brazilian economist.  This article was originally published in Spanish by Rebelión on 12 March 2006.  The English translation was provided by Julio Huato for MR Zine 

Source: MR Zine