Why Venezuela was so cool to cuts made by OPEC
Caracas — Venezuela's reluctance to join its fellow OPEC members in agreeing to lower oil production quotas this week was not simply an effort to get a bigger share of the oil exporting pie. In the midst of the most severe economic crisis since it was transformed from dictatorship to democracy 25 years ago, Venezuela needs all the income it can get.
The Latin American nation was the last member of OPEC (Organization of Petroleum Exporting Countries) to agree to the cartel's price- and production-cutting agreement reached in London Monday.
Even with its oil revenue (which will now come from 1.7 million barrels a day instead of 1.8 million), the government has been forced to adopt some economic measures considered drastic here.
On Feb. 28, President Luis Herrera Campins decreed new regulations that would control the outflow of foreign currency and indirectly devalue the bolivar from 4.3 to about 8 per dollar, a rate that will fluctuate on the open market.
To some, the precipitous drop of a currency that had been stable since 1960 signifies the end to Venezuela's stupendous oil boom and dollar wealth of the 1970s. Others have expressed relief that after three years of relative economic retraction and uncertainty, the bolivar will again find its true value, thereby halting the exit of dollars from the country.
A long time in the making, this crisis was set off by oil price reductions, first by non-OPEC producers in the North Sea - Britain and Norway - then by Nigeria, an OPEC member. The specter of an international oil price war sent shock waves through Venezuela, where the government suspended the sale of dollars two days later.
''If changes occur in either (oil) production or prices, it is logical that the government must consider reorienting its petroleum policy and the economy,'' an Energy Ministry spokesman explained before the OPEC meeting in London.
Venezuela has two major industries, construction and oil. The former is the principal source of domestic employment, while the latter earns most of the country's income, including about 80 percent of its foreign exchange, which it uses to import 70 percent of what it consumes.
The currency controls established a system of differential exchange rates in an effort to stem the capital flight, estimated at $170 million a day the previous week.
The government will apply a high rate of 4.3 bolivars to the dollar for public debt service, expenses of students abroad, and imports it deems essential. For other purposes, it will exchange bolivars for dollars at a fluctuating rate.
Since Venezuela lacks diversified national industry, the demand for imports will continue, although most people will now pay about twice as many bolivars to obtain import dollars. To prevent rampant inflation, however, the government froze all prices for 60 days. It is not certain what will happen after price controls are lifted.
Furthermore, observers wonder whether the other fiscal measures, considered temporary, will stem the outflow of money from the country which reflects the Venezuelan penchant to buy foreign goods and services.
At home, Venezuelans prefer to buy imports, although these cost more than the few national products available. Even the government, local newspapers claim, purchases its staples abroad. During the past generation, middle-class Venezuelans have grown accustomed to semiannual shopping forays to Miami.
In the past, the nation compensated for its lack of national industry and tendency to buy foreign with an enormous oil income, estimated at $19 billion last year. But in last year's choppy oil market, Venezuelan sales dropped about
Given the debt repayment problems recently encountered by Mexico, Argentina, and Brazil, foreign lenders exerted pressure on Venezuela to meet substantial loan obligations coming due this year.
In this turbulent atmosphere, the threat of oil production and price cuts in OPEC could have sown chaos here, had the government not acted. In fact, on Feb. 25, two days after the initial announcement of exchange controls, international banking sources stated their willingness to refinance some Venezuelan loans.
Individuals and institutions holding dollars could double their money here, and observers will certainly watch for an increase of foreign investment. Venezuelans themselves will be encouraged to invest at home if ''the exchange controls, complemented with other measures, reactivate the national economy by reestablishing confidence and creating investment incentives,'' remarked Luis Nunez, publisher of the newspaper El Universal.
''If the controls aren't correctly applied, the greatest burden will fall upon the middle- and lower-income sectors in the form of inflation,'' Dr. Nunez said.
Together, these sectors make up the vast majority of Venezuela, now an urban society. Although Caracas, the capital, boasts a downtown vista of skyscrapers and sumptuous middle-class suburbs, like most Venezuelan cities it has a ''belt of poverty'' encircling it.
About half of all Caraquenos live in makeshift dwellings called ranchos and earn less than $600 a month, says Dr. Mercedes Vivas, director of the Caracas Agency for Social Development.
''More than income,'' she explained, ''they lack access to services like medical care, water, housing, employment.'' In Campo Allegre, on the road to La Guaira, ranchos tucked into hillsides overlook a school recently built with government assistance in this neighborhood with few paved roads.
But Dr. Vivas added that it's clear that the government, one of the nation's largest employers, must reestablish priorities and cut some programs. But she expressed concern that cuts may include community development projects like the one that helped build the school in Campo Allegre and a food stamp program, approved but not yet in effect, which is ''an experiment to redistribute income outside Caracas to the 22 percent who earn less than $250 per month.''
Furthermore, if government austerity sharpens the three-year recession, it could aggravate unemployment, which ranges from 10 to 20 percent in this nation of 15 million.
''We are in for tough times,'' one political commentator said. ''But the nation is sound. We have a solid oil industry, a relatively small population, 25 years of political stability, elected government, and intensive education.''