Venezeula's Alternative to Neo-Liberalism

It is recognized that Venezuela's economy can not depend on only oil. ( Reuters photo)

The Venezuelan experience has in some ways been the most successful and emblematic, not only because of its strong president, but also because of Venezuela’s distinctiveness as the continent’s largest oil-producing country—and, until recently, its only OPEC member.

The Venezuelan experience under Hugo Chavez is thus instructive for what— at the outer extreme—might be possible when trying to move beyond the very negative results of the neoliberal legacy.

The Venezuelan Alternative

Based solely on this dismal economic growth experience, it is fair to say that neo-liberalism was complete failure in Latin America.

Now, with ten years of Chavez's project of   '21st Century Socialism' and 'Bolivarian Socialism' [1], it is possible to evaluate this project so far and to look ahead, in the light of the global recession of late 2008.

The Venezuelan alternative to neo-liberalism has four dimensions: oil policy, industrial policy, social policy, and regional integration.

Oil policy is so important for Venezuela to the extent that its oil revenues account for half of Venezuela's budget and 80-90 percent of its export earnings.

Since the price of oil had collapsed in the late 90’s, dropping as low as $10 per barrel, one of  the government’s first priorities was to bring the price of oil back up again. Accordingly, during his first years as president, Chavez embarked on visits to all OPEC countries, as well as several non-OPEC countries, and organized the second OPEC summit in Caracas in 2000 in order to secure high oil prices.

Venezuela’s and other countries’ renewed commitment to OPEC meant that the price of oil began to climb almost immediately and oil-producing countries could once again enjoy a fairer price for their non-renewable resource.

Oil Sovereignty

Once the price had been brought up, the next task of the Chavez government was to bring the oil industry under control.

Although Venezuela’s oil industry had been nationalized in the 1970’s, it had always been run as a 'state within a state', largely because the country did not change the transnational administration of oil companies.

Venezuela’s state oil company, PDVSA [2]  , was intentionally wasting revenues, so that it could pay as little taxes to the state as possible.

The government’s confrontation with PDVSA’s administration eventually led to the opposition’s attempts to shutdown oil industry.

However, in February 2003, the government defeated such attempts and regained control over oil industry.

Then, under the title of achieving 'Oil Sovereignty', Chavez proceeded to increase oil royalties [3]  from 16 percent to 33 percent, forcing all foreign oil companies to become minority shareholders of joint ventures of state-owned  oil companies.

Previously, foreign oil companies paid minimal taxes and as little as 1 percent royalties for extracting oil in Venezuela’s extra heavy oil belt in the Orinoco River Basin.

Also, many companies enjoyed 'operating agreements' where they simply charged the Venezuelan government for producing oil to the extent that the companies’ charge to produce oil was greater than what oil could be sold for.

Shifting these operating agreements to joint ventures eliminated ability of foreign oil companies to inflate costs.

While it is extremely important for the Chavez government to regain control over  oil industry—in order to gain a fair price of oil to Venezuela's people, the government realized that it can not only base its economy on oil.

Not only is Venezuela’s oil bound to run out [4], but also its sole dependence on  oil makes other sectors highly inefficient and unprofitable.

As a result, Chavez's government actively pursues a policy of diversifying the economy, first by focusing on derivatives of oil production, such as the petrochemical industry.

Second, the government is expanding other sectors of the economy, particularly that of agriculture. For example, the government advocated an extensive land reform program which has so far benefited over 200,000 farming families.

Social Aspects of Economy

Rather, Chavez’s policy aims at trading with and mutually strengthening the economies of Venezuela's Latin American neighbors, as well as other Asian and African countries.

As a result, not only has Venezuela's policy strengthened existing regional bodies, such as Mercosur (with Argentina, Brazil, Uruguay, and Paraguay), but also it has contributed to the creation of new ones, such as Unasur (Union of South American Nations) and ALBA (Bolivarian Alternative for the Americas – Venezuela, Cuba, Bolivia, and Nicaragua).

Other regional integration projects include Telesur (a continental television channel), Banco del Sur (Bank of the South, to replace dependency on IMF [6]  and World Bank), and Petrosur (a continental oil association).

While Mercosur is still largely a neo-liberal free trade project that Venezuela hopes to transform into something more political and progressive and Unasur is more of a political association, it is ALBA and the other new associations which embody the essence of the Venezuelan vision for international trade.

For example, Venezuela allows cash-strapped Cuba to pay for its imports of Venezuelan oil by sending its physician doctors to Venezuela.

Similarly, Venezuela trades with Bolivia and Nicaragua on the basis of exchange, rather than cash, thus introducing a new system of international trade.

In addition, Cuba is now offering over 60,000 free eye operations per year to citizens of all ALBA member countries. During the first year of ALBA 2004/2005, trade between Cuba and Venezuela increased by 255 percent.

Although the overall economic effect of ALBA is surely minimal, it points to a fundamental re-orientation of trade agreements that are based on  cooperation and mutual benefits, rather than  competition that undermines living standards of lay citizens.

Less Affected by the Crisis 

Firstly, it emphasizes achieving a fair price for its raw materials instead of maximizing export volume.

Secondly, instead of minimizing state involvement in the economy, it strives to use state revenues for investment in infrastructure and in people via health and education programs.

Thirdly, it seeks to engage the population in the formulation and implementation of social programs and investment projects instead of implementing them from above.

A common criticism of the Chavez government’s development policy, though, is that it is only sustainable in the context of high oil prices.

Oil revenues are used to finance Chavez's program of 21st 'Century Socialism' or 'Bolivarian Socialism'.
 
However, achieving a fair price for oil ought to be a key policy for oil-producing countries. Moreover, not all of Chavez's development policies depend on high prices of oil.

Citizen involvement and cooperative regional integration policies serve as strong bases of the economy, even during tough economic times.

Venezuela still has enormous currency reserves and a fairly large development fund (totaling $60 billion), which might help the country through the world economic crisis.

So far, though, other than the declining oil price, the crisis has no impact on Venezuela, because Venezuela has a currency control in place since 2003, which significantly slows down capital flight.

Also, since it depends far more on state investments instead of foreign direct investments, it will not suffer from a foreign investment slowdown either.

Moreover, Venezuela has become almost entirely independent of international financial institutions such as the IMF because it has paid off all of its IMF and World Bank debts. And, It lowered its total debt load both domestic and foreign from 30.6 percent of GDP in 1998 to 19.3 percent in 2007.

Meanwhile, Venezuela helped other Latin American countries, particularly Argentina and Bolivia, to pay off their debts to the IMF, thereby increasing the financial and economic independence of these countries.

[1] Bolivarian Socialism is named after Latin America’s 19th century independence hero Simon Bolivar.

[2] PDVSA is the acronym of Petr?leos de Venezuela S.A.

[3] Royalties are the percent of profits which the government takes from foreign oil companies.

[4] It is expected that at least after 40 years, Venezuela oil reserves will theoretically start to run out.

[5] Many institutions-mainly European and American ethnocentric ones- use the pejorative world 'Third world' in order to refer to developing countries of Latin America, Asia, and Africa vis a vis the developed countries of Europe, the United States, Australia, and Canada.

[6] IMF is the acronym of the International Monetary Fund.

Gregory Wilpert is editor of Venezuelanalysis.com and is the author of Changing Venezuela by Taking Power: the History and Policies of the Chavez Government (Verso Books, 2007). He teaches political science at Brooklyn College, New York.