CIPE Insights: Reconstructing Venezuela

06.07.2019 | CIPE Insights | John Zemko

As the political and humanitarian crises deepen in Venezuela, a pressing question still to be answered is how leaders can pull the country from economic freefall. Conventional wisdom would look to traditional sources of global development, such as the World Bank or International Monetary Fund, to begin a long process of rebuilding Venezuela’s crumbling productive sector. However, new evidence indicates that Venezuela could skip that step and recover fairly quickly if leaders pursue the right policies.

Since many of Venezuela’s problems are self-inflicted, a number of swift and targeted actions could spur the beginnings of an economic reboot within one or two years. Key to this turnaround: Leveraging the power and resources of the private sector to revive Venezuela’s battered economy. If policymakers attract constructive capital in the form of private and foreign investments, they can significantly reduce the need for multilateral loans.

 

Our work over the past two decades with Venezuela’s business community has led us to this conclusion and helped the Center for International Private Enterprise develop a five-year plan to resurrect the country’s productive sector via private sector investment. The roadmap to jumpstart the Venezuelan economy is based on hard data from a comprehensive survey, which includes extensive interviews with private sector leaders in-country. The oil industry and agribusiness are two key sectors, of nine we studied, that could play important roles in Venezuela’s economic recovery.

Here’s why:

Venezuela can use oil revenue for more productive purposes.  Venezuela has the largest proven reserves of oil in the world and conventional crude reserves that exceed those of all the rest of Latin America combined, plus 80 percent of the region’s natural gas reserves. Revenues from conventional reserves could be boosted with important early increases in oil production and sales. Oil production has been declining since 2014, thus reducing Venezuela’s hard currency income. Current production has dropped below 70 percent of installed capacity. With some key legal changes, such as streamlining national oil company PDVSA, better management of oil resources should not be a difficult task for policymakers.

Venezuela has a tremendous comparative advantage in agribusiness.  However, both its agricultural output and its processed food industry have faced scrutiny and harassment by the government for the past two decades. Reform is required to eliminate all legislation that limits or forbids companies from producing any kind of products, in quantities and quality, selling at market prices, or storing their inventories at their convenience. Successful reinvigoration of these two sectors and others can be hastened by swift and substantive public policy changes or reforms in three key areas:

Venezuela must curb hyperinflation. Among its first steps, Venezuela must reform its exchange control policies to eliminate inflation and its insidious effects on the Venezuelan people. This will require decisions to either dollarization or adopt some form of a currency board to peg the bolivar to the world financial system. Either step would solve the problem in the shortest time possible. Other banking reforms that allow private capital to finance business investment will also be key.

Policymakers have to free private labor. The government has intervened and controlled almost every aspect of labor regulation. The labor market must be freed up through negotiations between the private sector and labor unions. This includes reforms to the social security system that improve services and benefits to workers.

Public infrastructure and services need to be restored.  The regulatory environment for public services is the core cause of the poor state of affairs in this area. Much of this relates to the mismanagement of confiscated properties by the state. Private sector participation must be encouraged in areas such as electricity generation, transportation and telecommunications.

Consider these facts: Venezuela’s economy has shrunken by approximately 50 percent in the past five years. Going back further, there were 650,000 enterprises in Venezuela 20 years ago, compared to approximately 200,000 enterprises today. Additionally, the aforementioned study indicates that many of Venezuela’s core industries are operating at between ten and 30 percent capacity, indicating they could scale up production fairly easily. If this is done, it is easy to envision a growth rate in Venezuela well in excess of seven percent in the next five years.

By any reasonable measure, Venezuela should be in the upper tier of medium developed countries. It would be easy to envision a universe of more than one million private businesses in Venezuela within two to five years, if the proper steps are taken. We do not claim that the political process for securing all of these reforms will be easy, but our studies indicate that many positive changes are doable and should not take long, relatively speaking. Let’s get started.

John Zemko is the Regional Director for Latin America and the Caribbean at the Center for International Private Enterprise (CIPE) in Washington, D.C. Aurelio Concheso is a Venezuelan businessman and President of the TAMANACO Consulting Group. LLC in Caracas, Venezuela.