Skip navigation

Foreign Policy Centre

Ideas for a fairer world

Articles and Briefings

The difficulties Venezuela is bound to experience

By Thiago de Aragao.

Oil prices at $120 per barrel allow Hugo Chávez to do many things he would not normally be capable of. Venezuela, historically dependent on their greatest blessing, oil surpluses, has never developed other industries to help the country grow stronger, more developed and self-sufficient. Huge oil reserves have made the Venezuelan government and high society fond of imports.

Oil prices at $120 per barrel allow Hugo Chávez to do many things he would not normally be capable of. Venezuela, historically dependent on their greatest blessing, oil surpluses, has never developed other industries to help the country grow stronger, more developed and self-sufficient. Huge oil reserves have made the Venezuelan government and high society fond of imports.

This behaviour has resulted in a huge gap between rich and poor in the country. The split was based on the ability of each group to buy basic goods. Those who were not affluent would buy low-quality Venezuelan products, since local industries have never seen real development. The wealthy would always buy imported, high-quality products, preventing the local industries to develop.

With this recurring scenario throughout the years, the situation experienced nowadays has not seen its inception in the Hugo Chávez government only. Food shortage in the country is not a temporary issue of the current government. It is a structural problem present throughout the history of Venezuelan development. When the government put a limit to the already weak local industries, their output became inhibited and incapable of provide basic goods for the population. Imported products were still out of reach for the majority of the Venezuelan population. Those who produced food in Venezuela started realizing that the costs and prices imposed by the government were not compatible with the production costs and then preferred to suspend their activities.

The big mistake by Chávez's government was in not foreseeing this situation and failing to offer the necessary incentives for private producers in the country. The creation of PDVAL, a subsidiary of oil company PDVSA, aimed at the food sector, did nothing more than centralizing the acquisition of food companies in the country. Those which had not closed their doors adhered to the government and started producing without the hope that their effort will represent more profits. Oftentimes, there was not even a profit.

In line with that, inflation is damaging the Chávez government. Obviously, with oil barrels costing $120, inflation goes unknown for the government, but not for the poorest sections of the population, who make up Hugo Chávez's electoral base. It is not surprising that recent approval polls have shown the worst results for Chávez since he took office.

Some analysts believe that oil prices will not sustain at such high levels much longer. Some believe it could end the year at $90 per barrel. Estimates are even more pessimistic for the industry, with forecasts of $73 by 2009 and $70 by 2010. With prices falling, inflation will take on huge proportions, as the government seems not to be doing anything to tackle it.

Throughout the Chávez years, we have been able to see that, whenever any domestic problem arises, the government imposes some fresh radicalization. Two factors will cause strong radicalization by Chávez:

1. If oil prices drop to $73 by 2009, Chávez will blame a foreign enemy for the lack of domestic progress. High inflation rates will be treated as "a foreign boycott on the economy." Nationalizations will intensify due to the need for income from other sources. However, as there is no technologic development, it will not sustain for long. The lack of investment in PDVSA itself will harm the company's extraction capabilities in the next years.

2. If Chávez wins the upcoming municipal elections in November 2008, there will be intense political radicalization in 2009. According to government sources, an even more extreme constitution reform will be presented in 2009, simultaneously with a weakening of the economy, thus deepening any constitutional changes.