Corporate Destruction

A thunderstorm is brewing, and Antonio Arellano, clutching a scrap of paper bearing the number 41, is still far from the head of the line outside the government grocery store. But the 49-year-old printer repairman is not complaining. "Anywhere else," he says, "things are at least 20 to 30 percent more expensive. A chicken here costs 2,400 bolivares [about $1.50 at the official exchange rate]. On the street it's 5,000." The modest, red-white-and-blue-painted store is part of the Mercal chain, an expanding, government-run operation selling cheap staples to the poor. It was launched by Venezuelan President Hugo Chavez earlier this year after a crippling two-month national work stoppage against his government. According to the chain's national coordinator, Army Gen. Wilfredo Silva, Mercal already distributes 1,500 tons of food a day, projected to rise to 2,000 tons shortly.

Chavez describes himself as a "revolutionary," but until recently he'd pursued a fairly orthodox economic policy. Not anymore. Since the end of the business-led strike, which contributed to a 29 percent collapse in economic output in the first quarter (worse than Argentina at the height of its recent economic crisis), Chavez has greatly increased the state's role in the Venezuelan economy, dealing a blow to private companies. Overtly political retail-price and foreign-exchange controls have ravaged normal commercial trade and hobbled manufacturing firms that were already reeling. The government not only distributes basic goods now, but has begun importing (duty free) staples like rice and chicken. It has even entered the light-manufacturing sector, producing textiles and processing coffee. Typically, these days only those companies that are "with the process" (government jargon meaning with the revolution) are asked to tender bids for state contracts. "What we're seeing," says economist Francisco Rodriguez, "is the destruction of the formal private sector."

Rodriguez, who is chief economic adviser to the National Assembly, used to be a Chavez sympathizer. But he now charges the president with the worst economic mismanagement in 50 years. He's got some evidence: a recent survey by the industrial-trade group Conindustria showed a 61 percent drop in the number of manufacturing businesses since 1998. Up to a third of those that remain could close down this year. "If these trends continue," adds pollster Luis Vicente Leon of the Datanalisis company, "Venezuela could look like another Cuba." He's not referring to the revolutionary Cuba of the 1960s, when Fidel Castro's communist government nationalized its industries, but rather to the post-1989, dollarized Cuba. In other words, Venezuela's economy might soon be dominated by a creaky, inefficient state sector that coexists with a few vestigial private enterprises.

Jose Pineda, chief economist of the Venezuelan-American Chamber of Commerce, contends that Chavez wants "to get rid of the domestic private sector," referring to local businesses that have been tenacious political adversaries. Pollster Leon argues that the president's plan is to use foreign-exchange controls to "terrorize the private sector and to eliminate certain [business] actors" who've challenged his government. Since introducing the exchange controls in late January, the government has authorized less than 25 percent of the dollars normally required to keep imports flowing in. That's forced companies to the costlier, informal exchange market.

Chavez's ideas are not exactly novel. Venezuela, in fact, has something of a statist economic tradition. The oil industry, which alone normally accounts for about half of total government revenue, was nationalized in the 1970s. The domestic private sector is puny by comparison. Only about 30 percent of the work force has a formal job, and half of them are public employees.

Many opposition politicians and business leaders now believe that Chavez could remain in power until the presidential election of 2006. Critics have pinned their hopes on a midterm recall referendum scheduled for sometime after Aug. 19. But Chavez and his foes are deadlocked over the appointment of a new electoral authority, without which the referendum cannot proceed. The delay heaps more pressure on the beleaguered domestic companies. "If there is no [resolution] by December," says Pineda of the Venamcham, "I feel it will be time to get in our boats and leave." That might please Chavez but hurt Venezuela's economic prospects for a long time to come.