Page last updated at 07:00 GMT, Tuesday, 19 January 2010

Venezuela's economy in further slide

By Robert Plummer
Business reporter, BBC News

Back in 2002, just weeks before Venezuela's President Hugo Chavez was briefly forced from office by a coup attempt, I found myself planning an impromptu trip to his country.

Venezuelan National Guard member standing in a supermarket aisle in Caracas on 11 January, 2010
Price checking is done by the military in Venezuelan supermarkets nowadays

Having just got married in Trinidad, my wife and I were heading to Brazil for a honeymoon, via a short stopover in Caracas.

I had visited Venezuela a few times before and had reported for the BBC on the early days of Mr Chavez's Bolivarian Revolutionary Movement, as it was originally known.

However, I had not had the opportunity to set foot in the country since his rise to the presidency in 1998.

A former colleague who had moved to Caracas some years earlier was helpful in indicating what to expect.

"You'll notice some deterioration," he laconically observed.

He was right. The Venezuelan capital was never the prettiest in Latin America, but it had definitely taken a turn for the worse.

Bags of rubbish were piled up on patches of waste ground, while many walls were adorned with pro- and anti-Chavez graffiti.

The city centre shops were less well-stocked than before, and the standard of service in them seemed to have declined.

Military checks

Nearly eight years on, that deterioration in Venezuela's infrastructure and economy has continued.

Those same city centre shops are now subject to raids by soldiers, checking to make sure prices have not been artificially raised in the wake of this month's currency devaluation.

The bolivar's official exchange rate, which is set by government decree, had been held at 2.15 to the US dollar since the last devaluation in March 2005.

Shopping mall tower in Caracas with dimmed lights to save power, 5 January 2010
Shops in Caracas have been dimming their lights to conserve power

But it now has two rates - 2.60 to dollar for "priority" imports, and 4.30 to the dollar for other items considered non-essential - a 50% devaluation.

At the same time, chronic energy shortages have led to a programme of regular power cuts throughout the country, although the resulting outcry has led Mr Chavez to exempt Caracas from the blackouts while maintaining them elsewhere.

Opposition politicians have been quick to accuse the Chavez government of underinvestment, just as they did in 2006 when a viaduct collapsed on the main road from Caracas to the airport, rendering the highway impassable for more than a year.

But in both cases, previous administrations are equally to blame for the lack of infrastructure spending, including Mr Chavez's immediate predecessor as president, Rafael Caldera, who died on Christmas Eve aged 93.

Price spiral

More worrying is Venezuela's apparent inability to get to grips with persistent inflation, which is now the highest in Latin America, reaching an annual rate of at least 27% in 2009.

Last week, yet again, Mr Chavez merely fuelled the inflationary spiral by raising the minimum wage to compensate workers for their loss of purchasing power.

At the same time, he has attempted to impose price controls which have largely failed to work.

Exito supermarket branch in Caracas
Exito means "success" - but its French owners failed to please Mr Chavez

As a result, he has increasingly resorted to the ultimate economic sanction - confiscating the businesses of those who refuse to curb their prices.

The latest victim of this policy is the Exito supermarket chain - run by a Colombian retailer but ultimately controlled by France's Casino group, which also owns stores in Brazil, Argentina, Mexico and Uruguay.

That makes it the ideal target for Mr Chavez, who has ordered its expropriation as an example of "transnational companies" coming to Venezuela to "speculate with our prices".

Yet there is little evidence that Exito was doing anything other than reflecting the higher costs of imported goods that now have to be paid for with Mr Chavez's devalued bolivars.

Recession prolonged

These heavy-handed measures have steadily brought more of the Venezuelan economy under state control, but they have not done anything to promote economic growth.

While most of the country's Latin American neighbours are leaving the global recession behind, Venezuela is still bogged down in the financial mire.

A woman touches the coffin of Venezuela's former President Rafael Caldera during his funeral mass in Caracas, 26 December 2009
Mr Chavez's predecessor Rafael Caldera died on Christmas Eve

The country's central bank has estimated that the economy shrank 2.9% in 2009.

And according to the International Monetary Fund, Venezuela is set to be the region's worst performer in 2010, with a projected contraction of 0.4% in a year when Latin America as a whole is expected to grow by 4%.

Oil, as ever, is still the mainstay of the Venezuelan economy.

In fact, it is responsible for more than 90% of the country's foreign currency inflows and 50% of government revenues.

The devaluation is therefore good news for the state oil company, PDVSA, which will now see the value of its petrodollars soar in bolivar terms.

That will translate into higher oil receipts for the government, helping to plug a hole in its finances.

Inflation ignored?

But the whole exercise leaves Venezuela's fundamental economic problems untouched.

As the respected survey organisation Consensus Economics puts it: "Price controls have done little to cap price increases and the authorities have refused to tackle underlying reasons for high inflation, most likely because this would conflict with the state's socialist agenda."

That may be unduly harsh. Brazil, for one, has shown that it is possible to combine left-leaning politics and social welfare programmes with a tough anti-inflationary stance.

But unlike Venezuela, Brazil realised as far back as the early 1990s that inflation hurts the poor most of all, because richer citizens can always find investment opportunities that mitigate its effects.

Unless Mr Chavez takes a similar view, he may find that his main support base will become rapidly disillusioned with his administration.

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