Caracas Chronicles

Oh, there are all these things I’ve been wanting to write about…I can’t seem to organize them all into a single coherent essay, so instead you get…

Five short essays about Venezuela

I. Too flaky to be a communist

It’s become such a cliche, one foreign journalist actually admitted to me he just cut-and-pastes it into his stories. “The opposition accuses Chávez of governing like a dictator and taking Venezuela towards communism.” OK, the dictator part is pretty straightforward. But Chávez a communist?!

To my mind, it amounts to an unconscionable slur against communists everywhere. After all, communists had an ideology, a coherent view of the world, and a thought-out plan about how to make it better. That plan turned out to be wrong, even monstrous, but for decades it had at least some intellectual currency. It offered a vision of a better future for the people who needed it most, and it was grounded on a philosophy that, like it or hate it, was sophisticated, nuanced, and had a long and illustrious intellectual tradition behind it.

The Chávez experiment couldn’t be further removed from that. As my uncle Pepe Toro argues, in some senses chavismo is much closer to fascism, because it’s really a doctrine about how to obtain and retain power, not about what to do with it. Chavismo might be influenced by marxism, yes – it certainly borrows marxist ways of describing the world – but the overall package is far less coherent than marxism.

Take, for instance, Chávez’s relationship to the private sector. In recent months, it’s become clear that he’s determined to crush it, to drive private entrepreneurs out of business en masse rather than allow them to function as a hotbed of opposition to his regime. This is obviously not what you’d call neoliberalism. But does that make the government communist?

Think of it this way, when Salvador Allende was elected in Chile in 1970, he knew exactly what the road ahead held. As a Marxist, he was committed to ending the control of the capitalist class over the economy, yes, but not as an end in itself. The destruction of Chile’s private sector was just what needed to be done in order to collectivize the Chilean economy, to put the means of production in the hands of the proletariat, to use the lingo. A long tradition of Marxist thought pointed to this as a necessary step in the way to liberating the working class and improving their material position. You might find Allende’s road-map to a better society aberrant – as I do – but you can’t deny he had a plan: he wasn’t just wrecking private businesses for the sake of the wrecking itself.

President Chávez has also explicitly set out to destroy the private sector, but unlike Allende he’s never proposed any sort of alternative to replace it with. He’s been perfectly blunt in saying that the point of the recently announced exchange and price controls is to destroy the traditional private sector. But unlike a marxist, he’s not interested in collectivization or mass-nationalization, he has no plan for remaking the nation’s economy once the capitalist classes have been done in.

The reason, I think, is that his assault on the private sector is not in fact an economic strategy. Like everything else in chavismo, the onslaught is a political act, designed to undermine a source of political dissent, to dump that particular pebble from the president’s shoe, without any reference to anything like a plausible plan for what comes next.

How will the hundreds of thousands of families that rely on income from their private sector jobs make a living after those companies go under? How will the state meet even its most elementary spending necessities after it’s through disemboweling the companies at the center of its tax base? What will Venezuelans eat once the companies that produce most of their food have been driven into the ground, with nothing to replace them? Chávez has no answers to these questions. Nothing in his behavior indicates that it’s even remotely concerned about these issues. He understands the private sector’s opposition as a purely political problem, an unacceptable challenge to his power, and he’s just not prepared to tolerate that.

II. Out-argentinaing Argentina.

The consequences for the country are terrible, devastating, hard to overstate. Credible institutions like Deutsche Bank and GM are forecasting a 20% drop in GDP this year – that’s almost twice as much as Argentina’s contraction last year, and you know what happened to people there. In a country like Venezuela, an economic contraction on that scale simply means people go hungry. Maybe not starvation hungry, but definitely mass-scale undernourishment hungry.

It’s already happening. Every month Cenda, a Think Tank associated with the Venezuelan Labor Movement, calculates the cost of a basket of basic foods. The index is made up of the basic staples in poor Venezuelans’ diets. Right now, the cost for a family of five stands at $210 – well over the $125 minimum wage. In short, it takes two adults in full-time minimum-wage work to meet even the bare-bones basics of nutrition.

The problem is that households with two adults in full-time, minimum wage work are becoming a rarity here. The unemployment is running at 17% – and that’s according to the usually overoptimistic official stats, private firms think 20% or more is probably closer to the mark. Worse still, just over half of working Venezuelans earn a living in the informal economy, sometimes referred to as the “gray market.” Most are “self-employed” as streethawkers, odd-job repairmen, or day-laborers – they make a living entirely outside the legally sanctioned employment system. They’re not covered by any of the nation’s employment protection laws – they have no unemployment insurance, no legally mandated vacation, no provision in case of disability, and of course, no one to guarantee them they’ll earn the minimum wage. According to a recent Catholic University study, 90% of informal workers make less than the minimum wage.

To put it bluntly, millions of Venezuelan families can’t afford to eat properly right now. To a huge and rapidly growing portion of Venezuelans, “food” means white rice, arepas (little corn flour patties), salt and margarine – once or twice a day. They can’t afford anything else.

Cenda, the think-tank, also calculates the monthly cost of a Basic Goods and Services basket, which includes not just food, but also other basic consumption items like clothes, basic school supplies for kids, rent, medicines, electricity and water bills, the bare-bones basics for a modest but reasonable existence. By Cenda’s reckoning, a family of five needs $665 a month to cover this basic basket. And what percentage of Venezuelan households earn $665 or more each month? A mere 6.4%. You read that right. After four years of revolutionary government for the poor, 93.6% of Venezuelans can’t afford even the basics – a crushing indictment, if you ask me.

It’s a dramatic situation. It’s not even that Venezuelans’ purchasing power is stagnant, it’s that it’s in free-fall. Venezuelans haven’t been this poor since the late 50s. This is not a Guatemalan situation where people are poor because they’ve always been poor and have never known anything other than grinding poverty.

Think of it this way – from the 60s to the early-80s, per-capita purchasing power in Venezuela was higher than in Spain. This used to be an up-and-coming country with a large and expanding middle class…a place poor spaniards might reasonably want to emigrate to.

(Many did – poor suckers – and now their children are lining up outside the Spanish consulate to get mother-country passports for the return-migration journey.)

Even more traumatic than the experience of mass-poverty is the experience of mass impoverishment. A very large chunk of the 94% of Venezuelans who are now poor know what it’s like to lead a middle-class lifestyle. They used to have stable jobs, they used to be able to afford vacations and nights out at restaurants and theaters and things like that. They went to university. They might be children or grandchildren of peasants, but they were implicitly promised the comforts of a middle-class lifestyle. And that promise has been cruelly ripped away from them.

Now, obviously, you can’t lay the entire blame for this hideous situation on Chávez. The Venezuelan economy had been in decay for two decades before he took over. But the rate of impoverishment has quickened significantly since he came into office. And just about everything Chávez has done in four years has tended to accelerate the decline – including, crucially, picking an absurd fight with the business community. When the leader of your country spends most of his time dreaming up ways to screw the people who create the wealth and generate the jobs, is it any wonder most people’s get much, much poorer? The truth is that chavismo has never had anything you could reasonably call a serious economic strategy.

In its place, what they’ve offered is turbocharged, unadulterated voluntarism.

III. Will Power

For Chávez, as for any number of megalomanic dictators before him, the sheer will to do something is enough to achieve it. “If the coupsters don’t want to make corn-flour (for arepas),” Chávez said recently, “then we’ll join together in cooperatives and make the flour ourselves!” If people want to band together and replace Venezuela’s private agroindustrial apparatus with a coop, what’s to stop them? Technical problems, supply-chain logistics, inventory management, financing needs, sanitary standards, industrial expertise all these things are trifles when matched to the indomitable will of the revolutionary masses.

If you’ve read about Mao’s great leap forward, or Fidel’s plan for a 10 million ton sugar harvest in 1970, you can recognize this as a an ideological re-run. Voluntarism run amok is the sure-fire marker of megalomanic authoritarian leadership. I can think of no instance when such a view of the world hasn’t led to a huge human catastrophe.

Voluntarists, especially leftish voluntarists, are deeply suspicious of anyone who claims specialized technical know-how or any sort of managerial expertise. Claims of special technical expertise are seen as an arrogant assertion of unjustifiable social privilege, a kind of upper-class ruse to keep the oppressed quiescent. The result is not just disdain towards specialized know-how, but an actual aversion to it, a kind of horror of expertise. ‘

Venezuelans reading this can probably think of 2 dozen examples of what I’m describing here. But for my money, the most tragic manifestation of this tendency in Venezuela has been in PDVSA – the state owned oil company that provides the government with half its income and the country with 80% of its export earnings. When four fifths of the company’s employees joined the General Strike back in December, the government made no attempt at all to negotiate with them, much less to try to woo them back. Instead, it slammed them as saboteurs and coupsters, and fired 16,000 of them – nearly half the company’s payroll. Among the fired were literally thousands of highly specialized workers, technicians, engineers, geologists, seismic experts, rig specialists, managers, executives – hundreds of thousands of staff-years worth of experience and know-how on how to run one of the world’s largest energy companies.

Chávez simply never saw why he might need any of them. After all, how hard can it be to run a transnational oil company? If the will is there, anyone could do it. Isn’t that what the revolution is about?

So out went the people who knew something about how to run the company, in went the ideologically driven chavista “managers.” The results have been truly disastrous – three and a half-months after the oil strike started, Venezuela is still producing under half the pre-strike levels. Government oil revenue is projected to drop by half on last year even by the government’s own estimates. The costs of this contraction in terms of the horrendous retrenchment it will cause in government spending and the brutal knock-on social effects that will have, largely explains why we’re on the verge of an Argentine scenario. Yet Hugo Chávez won’t even consider negotiating the strikers’ return.

Instead, he’s working on jailing their leaders.

IV. Mr. Bean Energy Corporation

Numbers alone don’t come close conveying the scale of the disaster in the oil industry, though. They also don’t show the way chavista voluntarism has led directly to that disaster. To get a feel for the way PDVSA is being destroyed you really need to hear some of the incredibly alarming anecdotes coming out of the industry these days.

The Eastern Shore of Lake Maracaibo is one of the main oil-producing regions. The region is, of course, full of companies small, medium and large that work with PDVSA. The state giant hires them to perform various highly specialized tasks, quite often very specific, sophisticated work that PDVSA doesn’t want to bother with. For instance, a friend of mine who lives out there tells me about one company she’s in touch with that services drill-bits. That’s all they do. It might seem somewhat pedestrian, until you realize that oil exploration drill bits are actually quite high-tech components – made to operate at fantastic depths, under very high pressure and at incredible temperatures – so keeping them in operating condition is a fairly sophisticated task.

Last month, a group of new (i.e. chavista) PDVSA managers approached this drill bit contractor’s management to ask whether they would be interested in an all-inclusive (“turnkey” in the lingo) contract to operate an entire oil field, from logistics and engineering to extraction, well management, and even payroll. The contractor’s managers weren’t sure if they were joking at first. It was the equivalent of asking a kid with a sidewalk lemonade stand to be chairman of the Coca Cola Company – after all, they’re both in the soft drink business.

Apparently, the people who now run PDVSA saw the contractor’s name in internal documents, and figured, “hey, these guys are oil sector contractors, maybe they can run this oil field for us,” so they just asked before making any effort to ascertain whether they were in anyway qualified to do so. The contractor managers were shocked and, well, just freaked out: they had been working with PDVSA for over 25 years, and suddenly they find themselves dealing with managers who plainly haven’t the slightest clue of what it is their company does.

There’s more where that came from. Much more. One of the most shocking stories comes out of Carito oil field in southern Monagas State – one of the youngest, most productive oil producing areas in the country. As a relatively young field, it’s quite easy to get oil out of Carito. That fact put it high on the new PDVSA’s target list for restarting production: it was clearly one of those elusive “easy fields.” In fact, the field is so easy because it has plenty of natural well pressure. That means you don’t need to do anything to get oil out of it – it just comes to the surface on its own, like the oil in cartoons. But anyone who knows anything about oil knows that you need to start reinjecting natural gas and water back into the field to keep pressure adequate when a field is still young – that’s standard operating procedure because it just saves all kinds of trouble down the road.

The problem is that Chávez fired everyone who knows anything about oil production in PDVSA. The new management apparently either didn’t know how to operate the reinjection process, or couldn’t be bothered with it. So they started pumping oil out of Carito on its own natural pressure – without any reinjection.

The problem is that the chemical makeup of the crude in Carito is such that if pressure drops below a certain critical level, a chemical reaction starts to take place that literally turns the oil into asphalt. Once that happens, there is literally no way to ever get it out again. International contractors who operate in the region estimate in private that up to a billion barrels of oil in the region could be permanently lost due to the mismanagement of the Carito field.

Just mull over that number for a second – at the current $32 to the barrel, that’s $32 billion, about the equivalent of Venezuela’s entire foreign debt. Flushed, down the drain, through the incompetence of PDVSA’s new and improved chavista management.

It’s an incredible outrage.

Then there’s the story of an international company (which I can’t name) that was approached by some new PDVSA managers in Caracas who asked that they do several million dollars worth of service work for PDVSA. The foreign company was thrilled by the deal, and told the managers “sure, lets work out a contract and get on with it.” The PDVSA managers dissented. “The thing is,” they said, “we’re in a real emergency situation here, we really need to get this work done right away. Why don’t you go ahead and start, and we’ll work out the contract later.” My source for this story wasn’t so sure whether to laugh or cry as he told me about this. The people now running PDVSA simply had no idea of what an incredibly stupid, amateurish, unacceptable, idiotic request that was.

Trying to collect themselves, the foreign company representatives tried to explain how they would, y’know, all get fired if they even dared to propose something that unprofessional back home, how headquarters in Silicon Valley would laugh them out of the room if they brought it up as a serious possibility. I mean, it’s a fairly basic thing, right, it doesn’t take an MBA to figure this one out. First you sign the contract, then you do the work. You’d think they could wrap their feeble little brains around that one, wouldn’t you?

You’d be wrong, the new PDVSA managers just frowned at the foreign company reps and accused them flat-out of siding with “the coup-mongers even of trying to sabotage the company through this deeply seditious refusal.

Honestly, how do you work with people who think that way?

V. Now what?

One little noted upshot of this entire situation is that, contrary to popular suspicion, foreign energy companies are staying away from Venezuela in droves now. The popular misconception is that with PDVSA dismantled, the Shells and Halliburtons and BPs of the world are salivating over the prospects of a quick buck bailing the new PDVSA out. If the government seriously wants to get production back up, it’s their way or the highway, right?

Not that I can see. The oil people I talk to are really leery about wading too deep into the cesspool that is the new PDVSA – not for ideological reasons, just because they’re impossible to work with. Add to the sheer incompetence and arrogance the company’s deepening financial troubles and the lengthening waits contractors face in trying to get paid, and you start to understand why this is a distinctly dodgy business proposition for the foreign companies. The final whammy, though, is the widespread feeling that when the Chávez regime eventually falls, foreign energy companies that threw it a lifeline will face a very uphill battle in trying to secure new contracts – they could even see some Chávez-granted contracts re-examined, a scenario that keeps foreign managers up at night. So, as far as I can see, the reports of the imminent foreign bailout of the new PDVSA are wildly exaggerated.

The truth is both more banal and far more worrying. The government has managed to crank up oil production to the 1.5 million b/d level, by the end of the year they ought to be in the neighborhood of 2.2-2.4 million b/d. It’s a far cry from the 3.3 million b/d directly before the strike, particularly considering at least 500,000 b/d of prestrike capacity has been permanently lost through field mismanagement. But what’s really alarming is the possibility that production won’t stabilize at 2.2-2.4 million b/d but will only peak there, gradually dropping after that as insufficient investment, well-mismanagement, logistics problems and lack of maintenance start chipping away at production in a chronic way. By some people’s reckoning, by the second half of 2004, we could be right back where we are now, stuck at about 1.5 million b/d.

How the government squares its books on that level of production is a mystery to me. It’s really a nightmare scenario, one that economists here have never really worked through because it just never seemed like a serious possibility. Without diving too deep into the numbers you can see that a permanent revenue hit on that scale could only be worked through with mass public-sector layoffs, a debt default, or both.

Either way, the already atrocious situation of mass impoverishment I described above looks certain to worsen. The day might still come when we’ll remember fondly those halcyon days when a whole 6% of Venezuelans lived above the poverty line.