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Analysts:  Hugo Chavez Remains Strong as Venezuelan Economy Stagnates

Venezuela's economy is struggling, weighed down by declining oil revenues, and the mandates and initiatives of President Hugo Chavez's brand of socialism. So says a panel of Venezuelan economists and analysts who are visiting Washington this week. Although experts say the Venezuelan economy is underperforming, they do not foresee a collapse that would loosen Mr. Chavez's grip on power.

Earlier this year, Hugo Chavez boasted that, thanks to his leadership, Venezuela had insulated itself from the global financial crisis and the worldwide economic slowdown.

The Venezuelan leader said his country has been left untouched by a crisis that threatens the world. Mr. Chavez said the crisis could affect Venezuela, but that, "by the grace of God," 10 years ago the country embarked on a [Simon] Bolivarian revolution to protect the nation, its workers and families.

But after years of rapid economic expansion fueled by oil revenues that grew eight-fold from 2000 to 2008, Venezuela's economy is stagnating, according to Caracas-based economist Asdrubal Oliveros who spoke at the American Enterprise Institute here in Washington.

Oliveros says Venezuela's gross domestic product is expected to fall by a half percent this year, with the country's oil industry shrinking by nearly eight percent. The economist states that it is oil revenue that guarantees the viability of the Chavez economic model.

That model combines massive social spending with increasing government control and regulation of industry. The Venezuelan-born editor of Foreign Policy magazine, Moises Naim, describes the Chavez economic plan this way.

"Hitting the brakes while also hitting the gas at the same time," he said.

Naim and other panelists note that, until recently, record-high oil revenues and unprecedented government spending sent the consumption of goods and services into overdrive in Venezuela. At the same time, government price controls and state takeovers of key industries have decimated domestic production. The results have been rampant shortages of food and consumer goods as well as runaway inflation, which stands at roughly 30 percent per year - the highest in Latin America.

Venezuelan political analyst Luis Vicente Leon sees a vicious circle that begins with private sector fears of government expropriation.

"Fear means private disinvestment, [the] fall of supplies, price increases, shortages, popular pressures [for government action], Chavez looking for a scapegoat, the takeover of companies to control the situation - etcetera, etcetera, etcetera," Leon said.

To make matters worse, notes Moises Naim, Venezuela has underinvested in its oil industry.

"Venezuela today has the cheapest gasoline in the world. It is no surprise that gasoline consumption in Venezuela has gone through the roof. The more you consume domestically, the less is left for you to export," Naim said.

And yet Venezuela's stagnant economy could out-perform most of those in the region this year. The World Bank projects a 2.2 percent drop in GDP across Latin America, with Brazil's economy contracting by 1.1 percent, Argentina by 1.5 percent, and Mexico by nearly six percent.

Analyst Luis Vicente Leon says that despite the constant threat of government takeovers, investors are not fleeing Venezuela.

"Even in the middle of a crisis, we have a lot of money going around in Venezuela. The majority of Venezuelan investors are still in Venezuela, because Venezuela is a mine. It is an oil mine," he said.

Moises Naim adds that the economic slowdown does not constitute a serious challenge for President Chavez.

"Reports of the imminent collapse of the Venezuelan economy have been widely exaggerated. That has not happened and I do not think it will happen," Naim said. "I think that the combination of highly-concentrated political power and economic power derived from oil, regardless of the price, can generate a very long life for this regime."

The global financial crisis has also given President Chavez a rhetorical tool domestically and on the world stage. Again and again, the Venezuelan leader has stated that the crisis has exposed the United States as bankrupt and capitalism as a failure - and that he is more determined than ever to press ahead with what he terms "21st century socialism."