Venezuela: A Crossroads for its Production Development Model (ARI)

Venezuela: A Crossroads for its Production Development Model (ARI)

Theme: In the midst of the biggest oil boom in the last three decades, Venezuela is advancing towards a new production model which is set to pose major challenges.

Summary: The Venezuelan macroeconomy appears to be healthy and in order. However, this encouraging appearance conceals a production development model with significant weaknesses. While engaging in a pattern of specialisation based on exploiting natural resources, a capital-intensive enclave sector is being linked to an unskilled labour-intensive services economy. The idea of an ‘alternative economy’ comprising thousands of cooperatives maintained through State contracts generates a variety of difficulties: it places these small organisations at the mercy of fluctuations in public spending, it discourages innovation and competition and it creates huge and inefficient client networks. In short, everything hinges on a State financially boosted by oil revenues, which does little to consolidate an industrial sector able to respond to the challenges of a global world.


Feverish enthusiasm for the short term
In the last three years, Venezuela has shown a vibrant economic growth, making it the fastest-growing economy on the American continent. The increase in Gross Domestic Product (GDP) in the last 12 quarters has averaged 12.2%, and there have been even larger increases in public spending and private consumption. Per capita income, which in 2003 was US$3,250, amounted to US$5,630 in 2006. Public and private consumption have amply exceeded local capacity to produce goods and services, and imports duly trebled between 2003 and 2006.

Growth has been boosted by soaring oil revenues. These resources have placed the country in a more robust position vis-á-vis the exterior than it has been in decades. In 2006, the current account surplus attained a record US$27 billion, and accumulated international reserves totalled US$35 billion, more than three times the figure of four years previously. Although the fiscal accounts are still in a deficit, domestic debt as a percentage of GDP, where the rising figures have generated concern in previous years, is on the way down: it is currently 11.1%, while global debt is scarcely 36.6%. These are figures which would make any European Finance Minister blush, if not positively green with jealousy. Inflation is still a chronic problem in Venezuela, but the country appears to have put an end to the sharp hikes of the nineties. In essence, Venezuela’s macroeconomic situation looks worthy of a substantial reward from risk-rating agencies and the external financial markets.

But judgements about both the macroeconomic figures and the country’s position in terms of financial markets and risk ratings are often short-term in perspective, and therefore limited in scope. In fact, the question of whether or not Venezuela’s current stable and favourable economic situation turns out to be lasting and takes the country’s development forward actually hinges on other factors. In this regard, it makes sense to examine what might be the direction and the nature of the changes in its production structure, and what might be the pattern of economic specialisation that is being promoted.

The Production Development Model
The fact that Venezuela’s economy is in the midst of a period of deep-rooted structural change should come as no surprise. It could be no other way in a context of shifting political power, where the rules of the game and institutional changes are the pivotal axis of an administration whose political discourse and practice are revolutionary. As for the production dimension, there is considerable and highly visible transformation in progress. However, whoever wonders about the future development model may be highly aware of the dramatic nature of the changes, but will find it difficult to gain a clear idea of what exactly is happening and how to assess it. In this regard, it is worth trying to present a brief systemisation of the model, with all its contradictions and its limitations.

An attempt to approach the problem and to find the sources of inspiration for the development model being implemented in Venezuela is presented by Camila Piñeiro Harnecker in a paper published in 2005 in the magazine Monthly Review Zine, titled ‘The New Cooperative Movement in Venezuela’s Bolivarian Process’. In this work, Piñeiro asserts that ‘the Chavez Administration has embraced a new development model, referred to as endogenous development,’ and she adds that ‘Its conceptualization draws heavily from Osvaldo Sunkel’s ideas in his book El desarrollo desde dentro: un enfoque neo-estructuralista para América Latina. This is not an isolated impression. References to an endogenous development model, and to Sunkel as the author of the idea, are to be found in other works. However, it was Chávez himself who, in Programme 214 of his Aló Presidente series in February 2005, said that he had been inspired by the Chilean economist to design his proposed production development model.

It might be worth pausing to fine-tune certain details. El desarrollo desde dentro, published in 1993, was written by a handful of Latin American economists who were dissatisfied with the results, already visible, of neo-liberal policies. But beyond their dissatisfaction, it is difficult to identify other coincidences with what is perceived or projected as the new Venezuelan production model. Ramos and Sunkel, in the same book, highlight, for example, that their concept of the process of development ‘means, essentially, resuming and going beyond Prebisch’s original challenge of industrialisation in regard to generating an endogenous mechanism of accumulation and generation of technical progress, which allows for a capacity to grow dynamically and productively’. Later on, they leave no doubts as to which mechanisms should be used and which direction the development model should take: ‘In short, selective intervention is proposed to seek to establish dynamic comparative advantages in the international markets, since exports are the next natural step in the bid to take full advantage of the existing industrial platform’.

El desarrollo desde dentro is, therefore, an invitation to resume the challenge of industrialisation, but oriented towards the external markets, fostering the generation of technical progress and taking into account the region’s own capacities. Sunkel could not have been clearer when in December 2005, in an interview in the journal Cuadernos del CENDES, he said: ‘Export or die, that is still our penitence’. His criticism of what he calls the State-centric mode is strong and this is why he unflinchingly dares to assert that the development model based on State intervention is anachronistic. ‘What was created was a very large State apparatus, highly centralised, highly bureaucratic, highly rigid, highly hierarchical and, in short, highly self-focused and self-referential’.

What elements contrast between this vision and the development model which is starting to be consolidated in Venezuela? We believe there are at least three. First, as we shall see, the production model implemented in Venezuela is State-centric and is therefore exposed to the weaknesses which Sunkel’s critical ‘Cepalism’ identifies. Secondly, the production fabric associated with the model is non-technology-intensive, and it seems difficult for comparative dynamic advantages to be developed. Thirdly, as a result of the above, there is no critical level of innovation and in these conditions it is very difficult to generate endogenous methods of accumulating and improving productivity which make this kind of ‘alternative economy’ a source of long-term growth.

An essential characteristic of this new production model is that it is organised under the financial power of the Oil-State, making evident the renewed relationship between the patrimonialist oil-rich State and the production sector. This general characterisation helps to understand the different elements which piece together to form this new production arrangement. The first is what Chávez has called the ‘basic endogenous core’. According to this arrangement, the State, financially backed by oil wealth, takes part again in production activities and becomes directly involved in primary industrial production and in the provision of basic services, also known as the ‘fundamental pillar sectors’. In edition 205 of his programme Aló Presidente, in September 2004, Chávez put it this way: ‘You start by establishing the fundamental pillar industries to create what we now call a basic endogenous core. In this process, the Minister and Ministry of Industry also play a fundamental role. From this initial creative boost to the iron and steel industry, we branch into the electric and metal machinery sectors; we are talking about other areas: basic chemicals, energy, transport and communications infrastructure based on the use of natural resources which were hitherto being wasted.’

The second element is formed by ‘micro endogenous cores’. These are a set of new formulae for business ownership, such as cooperatives, social production companies (empresas de producción social, or EPS) and co-managed companies, which are promoted in alliance with the State’s basic companies. In the oil sector, for instance, social production companies and cooperatives have increasingly taken on roles in the transport and distribution of supplies and products, solid waste collection, food, security and maintenance services. On the one hand, the clients of these new business ownership formulae are companies belonging to the basic endogenous cores; on the other, State companies are commissioned to exploit the relationship with this kind of small company, forming an alternative economic sphere. However, the subordination is evident in the resulting relationship: the State companies carry the others along with them. In his programme Aló Presidente, in March 2005, Chávez put it this way: ‘Once created, all of these companies which will be founded in micro endogenous cores, small, medium-sized or large cores or poles of development must be closely interrelated to the basic companies, to the major industrial plants’.

It is in these business forms where the problems of unemployment and underemployment supposedly lie. According to the government, they constitute a clear incentive for participation in other matters of common interest, to improve the quality of life and overcome exclusion in the social, economic and political spheres. Suffice to say that from the 35,000 cooperatives registered at the Cooperatives Supervising Authority (Superintendencia de Cooperativas, Sunacoop) in 2003, the figure has increased to close to 130,000 (in July 2007), with some 1,500,000 affiliate companies. However, the Sunacoop figures are confusing and not based on a rigorous survey. And neither do we know exactly what weighting cooperative activity might have in GDP.

The third element in this model is based on the ‘Vuelvan Caras Mission’, a labour training programme with wide coverage which is aimed at using training courses to build capacities to facilitate the adoption of new cooperative production and self-management relations. As Chávez said when he unveiled the programme’s management reviewin September 2005: Vuelvan Caras II will be a demonstration of the success obtained by Vuelvan Caras, which in a short time managed to finance 60% of the cooperatives formed (4,036 cooperatives) which were given an amount of 574 billion bolivars to incorporate some 264,720 warriors to the country’s production activity’.

Furthermore, since mid-2003, President Chávez’s government began to implement the so-called ‘educational missions’ (Robinson 1 and 2, Ribas and Sucre), understood and designed as a set of programmes to tackle the problem of literacy, to increase basic and secondary schooling and higher studies, and to facilitate the inclusion of a broad sector of the population which has been excluded from the educational system. The ‘Vuelvan Caras Mission’ proposes to absorb part of the graduates from these educational missions so that they can learn skills and be trained for work at cooperatives.

In short, it can be said that this set of elements is arranged so as to build a production development model which has so far run parallel to an informal hypertrophied sector and to a non-oil industrial sector that is in decline. The model anchors the educational missions, production missions, micro-endogenous cores and basic endogenous cores in a bid to create a new entrepreneur: the new popular entrepreneur.

The Model’s Weaknesses

A significant feature is that the primary oil export sector is the cornerstone of the model’s financing. This is why, in the midst of the super-abundance of resources from the oil market, no-one is asking at this stage whether the design is sustainable. The model is also clearly managed by the State, so that everything hangs by a thread with tens of thousands of cooperatives oriented in a single direction, since they survive from State company contracts and contracts from other public administration bodies. This makes them woefully vulnerable.

On the other hand, the scope of the new business organisation methods, the heart of the new productive development model, appears to have been overestimated. Cooperatives are a very good option for resolving local problems when there are incomplete markets, when the State outreach is not adequate or when markets operate seasonally. They are a kind of economic organisation which can provide goods and services where the market or State do not reach. However, they are organisations with low technology levels, little capacity to establish vertical links, no economies of scale and scant productivity gains. In fact, there is no experience of economic development in the third world based fundamentally on cooperatives.

Furthermore, cooperatives are an organisationally demanding model. In order for them to work properly they must meet a series of requirements: a system of shared profits whereby members are equal vis-á-vis the organisation and where they all enjoy the same participation, the merger of ownership and control, and the absence of salaried work and trade unions. If these principles are ignored, they tend to fail. Also, cooperatives require a democratic strategic plan for financial planning in the production process, the projection of cash flow as part of the budget to allow a follow-up of the process, feasibility calculations, cost and price analyses for all components, analyses of input supplies, marketing, etc.

The importance of these principles relative to the operation and management of cooperatives is evident when improvisation rules, which is what appears to be happening to judge by the feverish growth in this sector in Venezuela. Cooperatives do not pay taxes and receive State financing in favourable conditions, which encourages opportunism. Legally, the new cooperatives can be founded by five people in a process which takes only a few days. This has led many mercantile companies to disguise themselves as cooperatives. There are wage-earning employees at many of them, subcontracting is rife and, in short, there is a clear mercantile connection between the distribution of profits and the ownership.

These problems are further compounded when the financing of the new cooperatives comes exclusively from the State. It is well known that when the capital of a cooperative does not come from its members, one of the fundamental pillars of cooperativism is broken: self-financing. This not only makes the organisation less independent and viable, but it also ties its operations to the cyclical character of public spending.

The funding for these new production units comes mainly from the State banks: Banco del Pueblo and Banco de la Mujer. This generates problems, since the funds are handed over without a thought for the cooperatives’ equity position, in the belief that repayment does not matter and based on the argument that they are not guided by the profit motive. But this does not make sense. Although it is perhaps not crucial to the sustainability of the credit institutions, repayment is fundamental to guarantee social responsibility. Furthermore, when loans are granted at subsidised rates, not only is the burden on the public banks, but unfair competition is fostered which hampers the development of other, non-governmental micro-financing intermediaries. This can lead to a bad choice and the constitution of a massive clientelistic network focusing on a single concern: distribution of the oil wealth.

Conclusion: Venezuela’s new production development model requires scant capital and low ratings and therefore appears to be an attractive response to the grave problem of social exclusion. However, it runs the risk of consolidating a business fabric of companies that are much more motivated by clientelism than by a spirit of innovation and increasing competition.

Palliative measures should never be confused with real alternatives. An alternative means finding a way in a world where growth depends increasingly on trade, and where trade depends on competitive advantages based on know-how as an indispensable source of value creation.

Unfortunately, the Venezuelan economy, while implementing a pattern of specialisation based on exploiting material resources, is heading down a road that replicates the defects of a dual economic structure. A capital-intensive enclave sector operates alongside an unskilled labour-intensive retail services and trade economy.

There is no more talk of industrial policy: the number of industrial establishments has halved in the last six years, which explains why non-oil exports have stagnated and why the trade deficit in the sector has increased to close to US$22 billion. The non-oil industrial sector has, in effect, entered a spiral of decadence, and has been surreptitiously slipping towards the quieter life of the import business.

Development is a complex and many-faceted phenomenon. However, we now know that the strategically complementary nature of public and private investment, promotion of a highly diversified industrial sector oriented abroad, increased productivity to move the economy towards the technological frontier, and changes in the pattern of specialisation towards products and processes that are more knowledge-intensive, are all critical factors in making progress in this regard.

Leonardo V. Vera
Professor-researcher at the Central University of Venezuela’s Faculty of Economics and Andrés Bello Fellow at the University of Oxford (2002-03)