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Lack of Business Confidence Slowing Venezuelan Economy, Analysts Say - 2002-01-19

Venezuelan President Hugo Chavez has acknowledged his oil-rich nation faces a difficult year, in large part because of falling petroleum prices on world markets. But other factors also are contributing to the economic slowdown, not the least of which is the continuing uncertainty in the business sector over Mr. Chavez' populist policies.

In his state of the union address before the Congress earlier this week, President Chavez predicted 2002 will be a hard year for the Venezuelan economy. He proposed a series of new tax measures to make up for the shortfall in the Treasury, caused by falling oil prices.

Petroleum accounts for 25 percent of Venezuela's economy, 60 percent of the government's budget, and 75 percent of exports. Oil is now selling below $20 a barrel, compared with over $30 a barrel in 2000.

But some analysts say the drop in oil prices is not the only problem affecting the Venezuelan economy. Robert Bottome, editor of the Caracas-based business publication Veneconomia, says the lack of business confidence is contributing to the economic slowdown.

Economic growth last year slowed to 2.7 percent, from the 3.2 percent growth achieved in 2000. Mr. Bottome notes that the economy did not grow at its traditional rate of more than seven percent a year when oil prices were high, because companies were uncertain about the future under Mr. Chavez.

"Normally, in times of high oil [prices], the economy booms. This time we had high oil, and the economy did not boom. And so, it made people go back and think about what's wrong, and you suddenly realize, there's a missing link. In the past, the price of oil would go up, and people would say: 'Wow, the price of oil is going up. I better put in an extra line; I better add inventory; I better hire, because good times are coming.' This time, they didn't do anything of the sort. They were scared. They didn't know what Chavez was going to do; so, they didn't go out and put on the extra line; they didn't go out and hire the extra people. And the boom that normally accompanies higher oil prices never materialized," Mr. Bottome explains.

Mr. Chavez, a populist former army paratrooper, took office in 1999, after winning an overwhelming election victory on promises to stamp out corruption and end the poverty that affects up to 80 percent of the population. Under his administration, a new constitution was passed in a referendum that amasses more power for the executive, while setting out social objectives for ending poverty and raising living standards.

Late last year, Mr. Chavez decreed a series of economic laws, which, he says, will meet the goals established by the constitution. But the private sector opposes most of these measures - including one that calls for land redistribution - saying they undermine the concepts of private property and free enterprise.

Critics of Mr. Chavez' policies say they are scaring investors. Antonio Herrera, general manager of the U.S.-Venezuelan Chamber of Commerce, says several American companies recently decided to pull out of Venezuela because of concerns over the situation. Mr. Herrera blames the Chavez government for their decision.

"Many public officials here have the delusion that corporate investors are dying to be here. This is an old mythology that foreigners come to steal our wealth, which belongs to a certain type of mentality. … And since people in government positions often don't come into contact with reality, then you have the situation where all these things are going on, and many don't want to believe it," he said. Business publication editor Bottome says another factor working against investment and production is that the Venezuelan currency is overvalued. This makes imports cheap, which in turn affects domestic production.

Mr. Bottome points to the recent decision by Kraft Foods to stop making candy in Venezuela as an example.

"Kraft Foods has decided to manufacture Life Savers in Costa Rica, instead of Venezuela, closing the Venezuelan production. I don't imagine very many jobs are involved or anything else, but it gives you an idea. What is it that Costa Rica has that we don't have that makes Life-Savers cheaper to make, or better to make, or more efficient to make than [in] Venezuela? Well, what it boils down to is that, we're overvalued, and we have these legal uncertainties, and so on, that the people who are sitting up in Chicago, or wherever the home office of Kraft is, are saying 'we don't want that', and they're hard-nosed people with sharp pencils," he says.

Mr. Bottome predicts the economy will sink into a recession this year because of all these factors. Other predictions put economic growth at less than 1.5 percent.

Despite the lackluster economy, Mr. Chavez says there have been some achievements under his administration. In his speech earlier this week, he said inflation is down, while per capita income grew last year by 1.2 percent. He said his government raised education spending by seven percent last year, which resulted in the creation of more schools and better salaries for teachers. He said increased spending on medical services has led to a drop in infant mortality, while health care has improved.

Yet public opinion polls show concern about the future of the economy is the main worry of Venezuelans. Unemployment at 15 percent is high for Venezuela, which in the past had experienced rates of around seven percent. If the economy slows as projected, economists say unemployment could rise to 17 percent by the end of this year.

All this will make 2002 a difficult year, not only for Venezuela, but for Mr. Chavez, who has seen his popularity slide dramatically over the past year-and-a-half. When he took office in February 1999, he enjoyed the support of 90 percent of Venezuelans. Surveys now show him down to around 30 percent support, with three more years to go in office.