Volatile Times in Venezuela

By Green, Paula L. | Global Finance, September 2002 | Go to article overview
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Volatile Times in Venezuela

Green, Paula L., Global Finance



Political instability and plunging oil prices have put a stopper on investment in this once-prosperous nation. There is no solution in sight. * By Paula L. Green

With declining oil revenues and an extremely controversial president who survived a failed coup attempt barely five months ago, Venezuela is in the midst of a severe political and economic crisis that may send its gross domestic product skidding downward by 4% this year.

The latin nation, which has used oil as a cash cow since the 1920s, is now struggling with declining world oil prices as well as a cut in production mandated by its membership in the Organization of Petroleum Exporting Countries.

Politically, the nation of 24 million people remains deeply divided over their controversial president, Hugo Rafael Chavez Frias, who took office in February 1999 on a platform of radical reform tinged with leftist tendencies. The frustration with Chavez's mismanagement of the economy and political rabble rousing culminated in a poorly executed coup by an unusual coalition of military and business leaders in April.While Chavez returned to power in a matter of days, the disillusionment with his rule by the middle class, business leaders, unions and the military hasn't dissipated.

"There was nothing inevitable about his return. If the coup plotters were not so inept, he would be on a Caribbean island somewhere or in Cuba," says Russell Crandall, a professor of political science at Davidson College, in Davidson, North Carolina. "Now it's up to Chavez. If he's going to pursue his old strategies, he can-but he's going to have to see what will happen."

Chavez Rattles Investors

Those strategies, which have been labeled autocratic and made both domestic and foreign investors nervous, included the reform of the federal constitution in 2000 to give the president and executive branch additional power. Then, to make government rules and regulations conform with the new constitution, in November of last year Chavez pushed through 49 economic laws. These controversial laws were issued by presidential decree right before the expiration of a special enabling law, which legally granted the president the authority to enact laws without parliamentary debate.

The array of economic laws left the private sector even more antagonized and alienated as they watched the government place additional restrictions on their business dealings.

The Hydrocarbon Law, for example, hit the country's vital petroleum industry by increasing the royalty rates levied on foreign companies and mandated that the stateowned oil company, Petroleos de Venezuela, take a minimum 51% stake in any new joint venture. And with oil exports accounting for one-third of the country's gross domestic product and half of government revenues, any deterrence to private investment in the petroleum industry threatens Venezuela's overall economic health.

Another decree that unnerved a business sector already worried about Chavez's increased activism was the Land and Agrarian Development Law. The law gives local officials within the National Land Institute the power to decide whether private land is being properly exploited and limits the rights of owners by introducing certain expropriation proceedings.

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