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Sunday, 14 April, 2002, 13:45 GMT 14:45 UK
Analysis: Venezuela's crippled economy
A shuttered Caracas market
In Venezuela, there's no action outside the oil business
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By James Arnold
BBC News Online business reporter

As Venezuelan President Hugo Chavez returns to power a mere 48 hours after being ousted amid mass strikes and street protests, BBC News Online assesses his chances of revitalising the country's embattled economy.

It's not every day that demonstrators take to the streets in support of oil company executives.

Key figures, 2001
Population: 24.5 million
GDP growth: 2.7%
GDP per head: $5,250
Oil production: 3.1 million barrels/day
Exports: $27.8bn
Imports: $16.8bn
Inflation: 12.5%
External debt: $35bn
Like many a previous Latin American leader, Hugo Chavez, Venezuela's populist president, was eased out of office by a last-minute shove from the army.

But his real usurpers were the ranks of the middle class, office workers and union officials protesting against Mr Chavez's perceived mismanagement of the economy.

In particular, they blame Mr Chavez for wrecking PDVSA, the vastly dominant state oil company, by sabotaging its strategy and replacing its management with yes-men.

Although their attempt to put in place a new government has failed, the episode will serve as a stark warning to Mr Chavez that many Venezuelans are running out of patience with his handling of the economy.

A good idea...

Ironically, Hugo Chavez came to office in December 1998 with the economy firmly on his mind.

With unprecedented support of about 60% of the electorate, mainly among the disadvantaged majority so often overlooked by previous leaders, Mr Chavez planned to reduce the country's debilitating dependence on oil.

Hugo Chavez
Mr Chavez had the right idea, but the wrong method
It was a worthy aim. The world's fourth-biggest oil exporter, Venezuela relies on petroleum for four-fifths of its exports and one-third of its gross domestic product.

This made a lot of Venezuelans rich, but it also dangerously sucked money away from the rest of the economy.

Hefty crude oil exports artificially boosted the currency, the bolivar, making imports cheap and rendering local manufacturers unable to compete.

Of the country's $3bn-4bn in annual foreign investment, almost every cent went into oil.

... turns nasty

But Mr Chavez saw reforming PDVSA as a political, not merely an economic imperative.

By the 1990s the vast oil firm, he saw, had become a state within a state, siphoning petrodollars away from the country's poor.

He was right, but PDVSA was also "one of the best-run firms in Latin America," says Justine Thody, Latin America analyst at the Economist Intelligence Unit.

The Chavez government starved PDVSA of finance, ramped up the burden of tax and red-tape, and appointed a series of inexperienced political allies to run the firm.

The result was that dollar earnings from oil were down 20% year on year at the beginning of 2002, bringing to an abrupt end years of double-digit growth in the industry.

Bolivar wobbles

And the result of PDVSA's stumble was that Venezuelans started to get seriously nervous about the bolivar.

The middle classes, who had initially welcomed Mr Chavez as the candidate most likely to sweep clean Venezuela's rotten institutions, turned decisively against him.

Demonstrating against the Chavez government
Sticking up for executives' rights
Between November and February, the central bank spent $7bn trying to prop up the bolivar, as middle-class Venezuelans rushed to change their money into dollars.

The currency was floated in February, and plunged, with the central bank at one point spending $200m a day to keep it afloat.

Inflation, which had fallen as low as 12.5% in 2001, is forecast to jump to nearly 40% this year.

In April, the government poured petrol on the embers by getting rid of 19 senior PDVSA executives who were refusing to play ball with the pro-Chavez board.

Where next?

Whether Mr Chavez intends to go easier on PDVSA in the light of his 48-hour spell in the political wilderness remains to be seen.

The bolivar

Softening his stance would shore up Mr Chavez's political support among the middle classes, but nursing the oil company back to full health would be no easy matter.

The turmoil of recent months has taken its toll on PDVSA's performance.

It has not produced at full tilt since last year, and is likely to need a fresh injection of scarce government funds to get back on its feet.

And last week's events will not make the task of attracting fresh foreign investment to other areas of the economy any easier.

The BBC's Mark Gregory
"Chavez claims to be a changed man."
See also:

12 Apr 02 | Americas
Venezuela's president resigns
07 Apr 02 | Americas
Venezuela's escalating oil dispute
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