Grupo La Colina

Venezuela's economy

Towards state socialism

A wave of nationalisation promises scarcity and decline

Nov 18th 2010 | CARACAS

OWNERS of property, large or small, sleep uneasily in Venezuela these days. After the opposition narrowly won a majority of the vote in a legislative election in September, Hugo Chávez, the country’s leftist president, has been on a nationalisation spree, seizing everything from steel companies and bottle makers to housing schemes. When workers have protested, he has deployed the national guard against them. The government has justified the confiscations by saying that it was breaking up monopolies or stopping breaches of labour or environmental rules. But the aim appears to be to move decisively against what Mr Chávez calls “the oligarchy” before the new parliament, which has a sizeable opposition minority, comes into session in January.

On October 25th the Venezuelan subsidiary of Owens-Illinois, an American glass maker, became the 200th business nationalised so far this year. As usual, managers and workers learned of their fate during a live television broadcast by the president. He accused the company of exploiting its workers and laying waste to forests. But the expropriation decree, published the next day, made no mention of these alleged crimes, accusing the company instead of exploiting its dominant market position.

By the government’s own reckoning, it has confiscated some 3m hectares (7.4m acres) of farmland, and plans to seize another 450,000 hectares next year. Although the 1999 constitution guarantees property rights, successive changes to the land law have given the government the right to seize any farm it takes a fancy to, in most cases with little or no compensation.

Industrial and commercial firms have fared no better. According to the employers’ organisation, Fedecamaras, since Mr Chávez became president in 1999 almost 400 companies have been nationalised, the vast majority in the past two years. The Venezuelan-American Chamber of Commerce says that compensation was paid to the owners of only nine out of the 44 of its member-firms that have been taken over this year. The constitution states that no expropriation can take place without a final verdict from the courts and fair compensation. In practice, a stroke of the president’s pen is all that is required.

Over the years the official rationale for nationalisation has changed. The earliest takeovers were justified on the grounds that the company (or farm) was unproductive. The government then decided that “strategic” areas of the economy should pass into state hands. So in 2007-08 it took over private-sector oil and electricity businesses, as well as telecommunications, the cement industry and Sidor, an iron and steel firm privatised in the 1990s.

The government also now controls a quarter of the banking system. Mr Chávez said recently that any bank which declined to “co-operate with national development” by assigning credit according to government priorities would also be taken over. Nowadays officials openly state that their aim is to implant a socialist economy.

Paradoxically, despite the takeovers, the state’s share of GDP seems still to be around 30%, the same as it was in 1998. That is partly because the private sector expanded rapidly during the 2004-08 oil boom. But it is also because many nationalised companies now produce less than when they were in private hands. Much of the food industry has been confiscated in order to “ensure food sovereignty”. But the result has been a sharp increase in imports. Earlier this year, more than 130,000 tonnes of decomposing food imported by PDVAL, an arm of the state oil company, was found in ports and on wasteland.

There are one or two exceptions. Officials say that output at Enlandes, a nationalised milk firm, has risen by 50% in two years. The science minister said recently that CANTV, the main telecoms firm, had 65% more customers since its nationalisation, though he provided no details. But more typically, once companies are in state hands their staffing levels rise, prices fall and they become dependent on government subsidies, according to Richard Obuchi of IESA, a business school in Caracas. In addition, they tend to make a smaller range of products.

The construction industry has been badly hurt by nationalisation. Cement and steel rods have become scarcer (there is a thriving black market in both). Sidor produced 4.3m tonnes of steel in its last year in private ownership; this year it hopes to make 2m tonnes. Another reason that housing schemes have slowed or halted is that the government has banned developers from adjusting prices in line with inflation, which is running at over 30%. Earlier this month Mr Chávez expropriated six new estates under construction, to the horror of most buyers. Developers, the president says, are “bandits” who will not be compensated for the seizure.

The story is repeated in almost every area the government has moved into. Electricity nationalisation contributed to power shortages that saw severe rationing earlier this year and continuing unscheduled blackouts across the country. The oil industry, the bulk of which was already state-owned, has seen production of both crude and refined products fall (by how much is a matter of dispute).

Polls suggest that most Venezuelans disapprove of the nationalisations and firmly support private property. But Mr Chávez seems to be following the advice of Alan Woods, a Welsh Trotskyist who has become an informal adviser. Mr Woods, who is better known in Caracas than Cardiff, publicly urged the president to respond to his electoral setback by “accelerating the revolutionary process”, expropriating land, banks and the main industries. Venezuelans had better brace themselves for more nationalisation, scarcity and economic decline.