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Industrial activity is declining in Venezuela

Industrial activity is declining in Venezuela

Posted by Dubraswka Aguilar on November 08, 2014

Data provided by the Venezuelan National Statistics Institute (INE) at the closure of 1998 -the year before Hugo Chávez first came to power- show that back then 11,117 industrial facilities were in full production, providing jobs for 449,636 workers.

By 2007 the number of private companies in industry had dropped to 7,093, employing 345,168 workers. The number of expropriated industries and businesses has increased since 2008, the last year INE published updated figures. The decline in industrial activity has continued to this day, while expropriated or nationalized businesses have such enormous costs and negligible revenue, if any, that they have to be subsidized by the government resulting in significant financial losses.

Such data are used in a recently published book, Del Pacto de Punto Fijo al pacto de la Habana (From the Punto Fijo Pact to the Havana Pact), as building blocks for a comparative analysis of two economic models that have coexisted in Venezuela across two different political periods. The book, released by publishing house La Hoja del Norte, was edited by former Public Works Minister José Curiel.

A chapter in the book devoted to the unfolding of the Venezuelan industry from 1958 to 2012 thoroughly describes how the sustained increase in manufacturing output between 1958 and 1998 went into a steady decline right after Hugo Chávez came to power. According to the study, the country's deindustrialization process is closely linked to the economic model advocated by Hugo Chávez in his twenty-first century brand of socialism.

As the country sinks in deepened economic crisis, with widespread shortages of basic goods and soaring inflation (already the highest in the world), Venezuelans are starting to wonder whether the real cause of their woes lies in the "economic model."

The latest survey by local pollster Datanálisis found that 80.1% of the population think that the economic model must be changed, even if 45.3% of respondents identified themselves as pro-government.

Most Chavistas think that the government must "change the economic model, allow the market to open up, release controls, and strengthen private enterprise." The survey shows that 67% of respondents favor changing the economic model (42% of Chavistas, 64% of independents, and 81% of oppositionists).

This perception has become more widely held over the two years of President Maduro's government. His predecessor Hugo Chávez had managed to raise hopes of a better quality of life through his socialist platform. But after the significant negative economic impact of the so-called "Dakazo" [when Daka Appliance Store was forced to sell its goods in steeply discounted prices in November 2013] and the "economic war," any lingering hopes have been killed off, as shown by opinion surveys.

For Luis Vicente León, one of the country's top pollsters, the main concern of today's Venezuelans is not about politics but about "the economic crisis affecting their lives." After two years hearing speeches on the "economic war," the population is divided between those who don't believe in it, and those who think the government cannot win it. An unprecedented survey indicator shows that 82% of respondents admit the country is bad or very bad, something that wasn't even reported during the oil strike of 2002.

The economic legacy

The gradual but steady process of deindustrialization started in the early 2000s when 49 laws aimed at restricting economic freedoms were enacted under the Enabling Law of 2001. One such law was the Land Law, which paved the way for expropriations and triggered political conflict and the general strike of 2002-2003.

The process was further compounded when the monetary authorities adopted a rigid exchange control system. The government failed to convince the electorate to approve a package of 69 constitutional amendments aimed at deepening Bolivarian Revolution, losing the 2007 constitutional referendum.

But that didn't stop the government from trying to pursue its goals. Windfall oil revenues allowed it to take over efficient private companies, like Venezuela's largest telecommunications company Cantv, and the country's biggest publicly traded electricity company Electricidad de Caracas; cement factories Cemex, Lafarge, and Holcim; and Banco de Venezuela, an affiliate of Spanish bank Santander, to name some of the most noteworthy. Meanwhile, despite the fact that Venezuelans overwhelmingly rejected Chávez's bid to reform the country's Constitution, efforts to establish a socialist system continued unabated, grounded on enabling laws and other measures.

Although no official data is available on government interventions, an analysis by the Venezuelan Confederation of Industries (Conindustria) based on official and media information, revealed that by August 2013 1,200 private entities had been intervened.

In an effort to weaken the foundations of private property, the government promoted different ownership modalities, like cooperatives, social production enterprises, or codetermination arrangements. Although no accurate figures are available, there is the widely held perception that expropriated and nationalized businesses have failed to become more efficient; quite on the contrary, most operate at a profit loss, as even well-placed Chavistas often denounce.

In the chapter of the book devoted to these topics, economist Francisco José Chirinos sums up how, following the failed attempt at socialist-oriented constitutional amendment in 2007, the all-encompassing State machinery was set in motion –the State as regulator and as an entrepreneur, owning or controlling core activities of the Venezuelan economy, fueled by Pdvsa's financing.

An import-oriented country

The book's chapter devoted to industry in Venezuela reports that in 1998 industrial GDP accounted for 17.4%, which explains why non-oil exports rose to an all-time peak during that period –as high as 32% of the country's total foreign exchange revenue. At the closure of 2012 industrial GDP had dropped to 4% of foreign exchange revenue.

In 1999 goods and services were imported for an amount of USD 14.49 billion, whereas in 2012 the amount climbed to USD 59.33 billion, with non-oil exports dropping from USD 4.22 billion to USD 3.77 billion.

Industrial production decrease

A chart by economist Francisco José Chirinos on growth rates for Latin American countries during the 1998-2010 period, shows that Venezuela ranked last, with 4.9 % growth, as compared to Peru (45%), Chile (35,60%), Argentina (25,20%), Brazil (24,5 %), and Colombia (13,7%).

The Economic Commission for Latin America and the Caribbean (Eclac) forecasts that Venezuela will show the worst economic performance in Latin American during 2014, followed by Argentina. At a time when the region is projected to grow at 2.2%, Venezuela ranks last. With de-growth of 0.5%, it is the only country in the region whose economy is not growing.

The Central Bank of Venezuela (BCV) forecasts an annualized inflation rate of 63.4%, placing Venezuela as the country with the highest inflation in the world, followed by North Korea (55 %), Sudan (46,4%), Malawi (22,3%), and  Belarus (20,6%). It should be noted, however, that food price inflation is 30% above the general rate of inflation.

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