The truth about Venezuela's "entrepreneurial" fat cats

By Ignacio Portes , written on December 10, 2013

From The News Desk

I probably wasn't the only person to be shocked to read the recent guest post, here on Pando, by the former CEO of the Venezuelan American Chamber of Commerce Antonio Herrera-Vaillant.

There's no denying that Venezuela's government has done a lot wrong to create the country's current economic crisis. But the picture of Venezuela painted by Herrera-Vaillant, in which the country's business sector is a bulging repository of "common sense," entrepreneurship and crisis-management that the rest of the country apparently lacks, is almost comically self-serving.

For the guest post to make sense, first, "common sense" would have to be defined in a very narrow way, reducing it to profit-seeking with little interest for democracy or equality.

Then, the "entrepreneurial" nature of Venezuela's most privileged strata should be accepted as an article of faith. We would need to ignore the fact that, as with most of Latin America's elites, Venezuela's "business community" was incapable of developing an innovative, stable or inclusive economy during their whole time in charge.

"Criollo" businessmen, Latin American settlers of European origin, had two centuries of barely disputed dominance over the country since independence: for decades they even legally monopolized the right to vote or be elected, as you needed a certain amount of income or property to do any of those things according to the law.

Yet despite owning vast amounts of fertile land, wealth and having a privileged access to education and first world goods and ideas, Venezuela's business elite failed to build any viable initiative to take the country out of its very basic economy, which consisted of exporting what the inequitably distributed land gave them, to then buy everything else they needed from the rest of the world, creating no sustainable, well-paid jobs for the country's impoverished masses.

Those elites even had the added advantage, later on, of oil revenues so big that are the envy of the rest of the region, but that still didn't change the nature of the commodity-exporting economy that its owners felt too comfortable with to try to transcend, bar one or two isolated attempts.

Throughout the 20th century, government after government in Venezuela found itself on the brink of collapse any time international oil prices fell, as barely any jobs, commercial activity or social services could be sustained without the huge income oil exports brought and the massive amount of imports they allowed, just as it had happened in the 19th century, with coffee or cacao plantations.

And yet the entitled mentality of the Venezuelan upper classes, like Herrera-Vaillant, still means that they see themselves as people who deserve the privileges they inherited. They are, after all, more cultured, smart or innovative than everyone else: which is how praying for continued high international prices for the couple of crops you grow or the magic bituminous liquid you found underground can be seen as "entrepreneurship".

Finally, Herrera-Vaillant makes the claim that the Venezuelan “business community” has usually been helpful and level-headed in "calamitous times." In fact, it's much easier to argue that, as far as Venezuela is concerned, that community has done its best to create as much calamity as possible. Not only in failing to change the country's core economic structure, but also for their direct boycotts of governments that were elected on a mandate of change.

A year after his constitutional reform, Hugo Chávez started to push forward the economic promises of his political platform: land redistribution, higher taxes and mandatory state participation on oil extraction, re-strengthening of the OPEC alliance of oil-exporting countries to coordinate the amounts of oil extracted and sold to the industrial powerhouses in order to get better prices, fisheries reform and so on. But no. Along came the good old Venezuelan “business community” who refused to comply with the democratically elected government's policies, and instead rapidly began working to oust it.

The story is relatively well-known: Fedecamaras, the organization that binds together Venezuela's owners, be them from banking, farming, energy, media, commerce or any other big sector of the economy, joined forces with the management of Venezuela's state-owned oil company, PDVSA, which opposed Chávez's pro-OPEC and revenue-distributing policies, and virtually stopped all the country's economic activity, including oil production, which they controlled. It was a bosses' strike, a lock-out, from the most privileged people in Venezuela. On April 2002, a second lock-out started, and on its blood-soaked third day, the army toppled president Chávez and installed the head of Fedecamaras, Pedro Carmona, as his replacement.

That's right: Arguably the most powerful man in Venezuela's "business community" not only led an effort to cripple the country's economy in order to block the will of the people, but he also ended up personally abolishing the Constitution, sending a massively popular president into exile and disbanding the Congress and the Supreme Court.

The coup was defeated by loyal members of the army and mass mobilization, but the economic boycott went on. In his piece, Herrera-Vaillant says: "during the fourteen years of Chavez’s rule, the national oil company, PDVSA, was purged of its professional management, who were replaced by Chavez loyalists". That statement isn't false, but it's hugely misleading without context.

PDVSA had long-standing ties with the United States. It's technology infrastructure was outsourced to a company named INTESA, controlled by the US-owned SAIC, Science Applications International Corp, whose board is populated by former Defense Department and intelligence agency officials, and is a conglomerate that epitomizes the concept 'military industrial complex'". What was the interest of the US military industrial complex in PDVSA? Simple: keep the oil flowing north at cheap prices.

Chávez had a policy of reviving the Organization of Petroleum Exporting Countries (OPEC) agreements to make Venezuela's biggest natural resource more valuable for the country, imposing coordinated extraction quotas with the other member countries to get a better price for it, and then redistributing the increased utilities amongst the poor.

The top managers and technicians at PDVSA thought otherwise: in line with US interests, they wanted to maximize production at all times possible, competing with the rest of the oil-producing countries that coveted the US market by means of increased output and cheaper prices, even if that meant Venezuela's non-infinite oil was sold for less.

By December 2002, the conflict peaked. Managers refused to follow government policies, and got thousands of PDVSA workers to stop production, abandon oil-transporting ships in the middle of the sea and sabotage machinery. INTESA's technology, controlled by the US, locked automated systems and blocked anti lock-out workers from restarting production. Only after two months did the anti lock-out workers and government forces defeat PDVSA's boycott, with grave consequences for the country's oil-dependent economy.

With this context in mind, Chavistas' fear and sometimes paranoia about the US, their alliance with Cuba (the only country in the region at the time that they could trust against them), or Chávez's decision to fire thousands of workers from PDVSA and replace them with people of his confidence even if they weren't equally prepared technically, no longer looks like the work of a tyrannical, ideologically capricious, rambling madman as it is portrayed by people like Herrera-Vaillant.

Instead, it starts to make sense as the difficult, maybe even improvised, but certainly not irrational decisions of a statesman and his comrades and sympathizers in the middle of an uphill struggle.

Venezuela's current economic crisis has its roots in all of the above. The country's oil exporting dependency meant that, during the PDVSA boycott, it wasn't getting any of the dollars needed to import most of what its economy consumes. The country's Dollar balance was already affected by capital flight from owners that were deciding to move to Miami, Panama or Colombia, where their businesses could continue untouched. In an attempt to ration the available dollars before the lock out emptied the Central Bank's coffers, Chávez decided to install foreign exchange controls.

What this currency controls meant was that you couldn't freely move zillions of dollars out of the country for no stated reason.

In the short term, it worked. Scarce dollars were saved to keep the economy from tanking until Chávez regained control of the oil industry, stopped the boycott, got it producing again and guaranteed he would remain in power.

But in the longer term this created a confused and convoluted economic structure which lead to today's crisis.

Inevitably, Venezuela's "common sense" capitalists found ways of bypassing currency controls. Starting an import business as a front for capital flight became as common in Venezuela as the sun rising from the east. The government responded by tightening up controls even more, asking for more and more paperwork to prove that businesses were legitimate. But this only drove small businesses and middle class people into the much more expensive but straight-forward black markets for dollars.

Suddenly, the biggest incentive the economy was giving to the big capitalists (with their lawyers and network of inside contacts) was to commit fraud by finding a way of importing anything at the official but limited 6 Bolívares to the Dollar exchange rates and then re-selling the exported dollars back in Venezuela at its 40 Bolivares to the Dollar black-market exchange rate.

There's a multitude of mechanisms to do it, including buying non-existent products to phantom companies abroad or buying real products manufactured outside Venezuela by a company that was owned by the same people as the importer. Schemes like these could create up to 600% profit margins for the savviest fat cats.

People like the disconsolate Lebanese shop manager in the "viral" video that Herrera-Vaillant mentioned in his post are unlikely to have had the right friends at the right places or the ability to set up phantom companies in Panama. In that regard Herrera-Vaillant is right: the business owner could risk bankruptcy if forced to sell at official dollar prices what he bought at inflated rates on the black market with no other choice.

It would be disingenuous to deny the government's responsibility in all this mess, and I'm angry enough at the people on the left who do that. I mean: How could government's supposedly leftist advisers not see this scheme was going to run right into the hands of financial speculators, just like President Jaime Lusinchi's similar foreign trade regulations three decades earlier?

But, while not ignoring that responsibility, what can you say when someone from the class that's had the most opportunities to shape Venezuela's destiny chooses to write a guest post for an American blog, pointing fingers at everyone but his friends for the difficulties the country now faces? How can you reconcile the "business community" shouting from every available rooftop about being "repressed and muzzled" with the fact that they keep pocketing millions in profits? What, if not convenient selective blindness, explains the massive omissions in Herrera-Vaillant's picture of Venezuela's troubles?

[Illustration by Brad Jonas for Pandodaily]