www.washingtonpost.com Last Week Sunday, January 26, 2003; Page H02

It may be a month or two before the first shots are fired in Iraq, but for all intents and purposes the war has already begun on financial markets.

On Wall Street, stock price declines over the past two weeks have wiped out the gains built up earlier in the month on expectation of an economic rebound later in the year. On Friday, stocks took their steepest dive in four months, leaving the Dow Jones industrial average off more than 5 percent for the week. A steady stream of downbeat corporate earnings reports and forecasts prompted the sell-off, but most analysts blamed jitters about war for the market's downbeat mood.

Perhaps more ominous was the nine-day tumble of the dollar against the euro, with the dollar ending the week at a three-year low of $1.08 to the euro. That's down 1.4 percent for the week and 8 percent over the past two months. Shaken by what they see as President Bush's willingness to have the United States bear the full political and economic cost of a war to oust Saddam Hussein, some European investors have concluded that the dollar and dollar-denominated stocks and bonds may not be the safe havens in a time of geopolitical crisis that they are usually thought to be. Not surprisingly, the price of gold continued to climb, hitting $368 an ounce by week's end.

The challenge for the dollar is not that foreigners are selling their U.S. stocks and bonds en masse. It's that at a time when the United States has to attract more than $1 billion a day in foreign capital to sustain its record trade deficits, the dollar can fall even if Europeans and Asians simply slow the pace of their new U.S. investments.

The dollar's fall mirrors the steady increase in price of crude oil. The continued shut-off of supply from strike-ridden Venezuela and fears that another Gulf War could disrupt shipments from Iraq and other Middle Eastern countries combined to drive up the price in New York trading Friday by 3 percent, to $33.28 per barrel -- 69 percent higher than at this time a year ago. Economists say that when gross domestic product figures come out this week, higher energy prices will be one reason the numbers may show the economy has stopped growing.

Indeed, in a meeting last Monday with more than a dozen economists, President Bush acknowledged that because of the downdraft in consumer and business confidence caused by anxiety over war, the package of tax cuts he has proposed will have "little impact" on the economy or the stock market in the short term. He and his team are now pitching the plan as a stimulant to long-term growth.

www.nytimes.com By JUAN FORERO

CÚCUTA, Colombia, Jan. 21 — Jeremias Guerrero may not seem like a successful entrepreneur. He sleeps by the side of the road and awakens every morning at 3, covered in bug bites, to start the business of waving at passing cars with a rubber hose.

Drivers know that is the signal to stop and fill up from the five-gallon jugs of gasoline on Mr. Guerrero's makeshift stand. These days, with an eight-week strike crippling the oil industry in Venezuela, just a mile away across the border, gasoline dealers here are doing a steady trade.

By sunset, Mr. Guerrero, a 40-year-old father of two who has rarely held a steady job, counts up to $200 in earnings, half of that clear profit.

His customers pay nearly $2 a gallon — seven times the price at Venezuelan pumps before the strike started Dec. 2 — but are simply grateful that Mr. Guerrero and other dealers are willing to haul in the fuel from Colombia's interior.

"Thank God for Colombia," said Juan Pablo Rojas, 22, a university student from San Cristóbal, Venezuela, as he finished filling up the tank of his Dodge Dart and paid Mr. Guerrero before departing on a 90-minute journey home. "In my country, the lines at gas stations are 400 cars long, or 1,000, and you do not even know if they will still have gas after you wait."

Mr. Guerrero agreed. "If not for us, think of how Venezuelans would be suffering," he said.

But while those selling gasoline here celebrate, not everyone in Cúcuta (pronounced COO-coo-tah) is pleased.

This town of 800,000 was created for cross-border commerce, and has come to depend on increasingly affluent Venezuelans taking advantage of their stronger currency to cross the craggy canyons east of here to spend a day shopping.

While the sophisticates in the far-off Colombian capital of Bogotá would snicker that this was a backwater, Cúcuta in fact has a busy downtown with Miami-style fashion boutiques and elegant shoe stores catering to Venezuelans.

True, the Venezuelans also flocked to big Wal-Mart-like megastores on the city's outskirts to buy everything from appliances to mangos. But they also spent handsomely dining in the local restaurants and sleeping at city hotels, with the Caribbean lilt of Venezuelan Spanish becoming music to local ears.

Now, with business across the border hobbled and the currency plummeting in value, the flow of visitors has dried up.

"We live by the Venezuelans," explained Gerardo Raynaud, owner of a shoe factory and two outlet stores that have seen sales drop 40 percent. "We love them. When they do not come, we cry. Just imagine, 90 percent of my clients are Venezuelans."

Among the hardest hit are taxi drivers and trucking companies whipsawed by rising gasoline costs. Colombian coal produced in the outlying mountains is not being transported because the docks in Venezuela through which it is usually exported are shuttered.

"When you sum it all up, there are more losers than winners," said Alberto Santaella, president of the Chamber of Commerce. "Everything is down at least 40 percent — clothes, furniture, shoes. Today, those buyers have simply disappeared."

Downtown Cúcuta still appears normal — 10th and 11th Streets, chock full of boutiques, teem with passers-by.

But they are not Venezuelans, lamented Jorge Hernandez, a shoe store manager here, after a family of six walked in and out without so much as really browsing.

"Colombians," he explained, noting that December sales at the six outlets he manages dropped by half to $14,000 per store. "Those are our people. They do not buy. They do not have money."

Across the street, at Elegant World clothing, Pedro Arias waited listlessly for customers. Three employees stood motionless.

"You have to remember, Cúcuta just has too much commerce for its size," Mr. Arias said. "This was a city build for a frontier zone, and all the people who cross it."

The Venezuelan strike, which has closed businesses large and small across a country that is the world's fifth largest oil exporter, has fostered a cross-border trade in more basic goods than the hip-hugging jeans and other fashionable fare touted by Mr. Arias.

Marleny Peña helps her family run a small market just yards from the border, and is doing a brisk trade in soft drinks, beer, flour, beans, pasta and milk. Huge sacks of potatoes are piled in front of her store, and she has ordered 20 times as much Coca Cola and beer as the store normally stocks.

"We like to say this still feels like Christmas," she said with a laugh.

www.nytimes.com By JORGE I. DOMINGUEZ and STEVEN LEVITSKY

CAMBRIDGE, Mass. — Venezuela is in its worst political crisis since the establishment of its constitutional democracy in 1958. At stake is not only Hugo Chávez's presidency, but the ability of any democratic leader to govern in the future. Public opinion polls show that most Venezuelans want Mr. Chávez out of office. They have good reasons. Since Mr. Chávez's election in 1998, his administration has mismanaged the economy, fomented violence and concentrated power, threatening Venezuela's core democratic institutions.

In response, a coalition of opposition parties, unions and business leaders has held a crippling general strike for nearly two months that has emptied store shelves, paralyzed the oil industry and pushed the country to the brink of civil war. Opposition leaders have vowed to continue the strike until their demands for Mr. Chávez's immediate resignation and new elections are met.

Such a disruptive strategy is misguided. It has not only inflicted enormous damage on Venezuela's economy and democracy, it has weakened the opposition itself. Laying siege to the government plays into Mr. Chávez's own strategy of rallying his supporters by polarizing the country along class lines. Even if the strike succeeds in forcing Mr. Chávez to resign or in provoking a military coup, such a victory would likely be Pyrrhic. The opposition could lose a new election. It is highly fragmented, and none of its potential presidential candidates enjoys broad public support. If faced with multiple challengers, Mr. Chávez might win again.

Were the opposition to succeed in a new election, it would still not be guaranteed the ability to govern. Mr. Chávez retains the intense support of an important minority of Venezuelans, concentrated among the poor. If he were forcibly removed, his supporters would not accept the legitimacy of a new government and would work to undermine it. Post-Chávez Venezuela would be as ungovernable as it is today.

Argentine history offers lessons about the consequences of trying to save democracy by going around the constitution. The 1955 coup against Juan Perón, a semi-autocratic populist much like Mr. Chávez, did not bring about a return to stable constitutional rule. Those who supported Perón denied the legitimacy of all successor governments and worked actively — and at times violently — to bring them down. Those against Perón fought back. Three more presidents fell victim to coups. More than 30 years passed before another elected president completed his mandate.

Fortunately, there is an alternative model: Chile. During the mid-1980's, after protests failed to topple the dictator Augusto Pinochet, Chilean democrats embarked on a different course. The opposition decided to abide by Chile's Constitution and wait for a plebiscite in 1988 to determine whether General Pinochet would step down. Opposition parties used the time to build a broad coalition and organized an ultimately victorious campaign. Because the plebiscite had been General Pinochet's idea and was run according to his rules, he stepped down. Chile became one of Latin America's most successful democracies.

The Venezuelan opposition can follow suit. Mr. Chávez's 1999 Constitution allows for a binding referendum to remove the president at midterm, or in August 2003. If Mr. Chávez were to be voted down, a new presidential election would be held within 30 days.

Thus far, the opposition has refused to wait until August. It should reconsider. The opposition could use the next seven months to organize an effective campaign and agree upon a single candidate for future presidential elections. In playing by the rules, the opposition would also be able to maintain the domestic and international legitimacy that it forfeited with a failed coup in April 2002.

Unlike a forced resignation, a recall election would be constitutional and more peaceful. Mr. Chávez's electoral defeat would most likely demobilize, rather than antagonize, his supporters. While Mr. Chávez might try to cancel or steal the election, he would do so at enormous cost. The 2002 coup attempt gained Mr. Chávez widespread support among Latin American governments. A blatant move by Mr. Chávez to disregard his own Constitution and block a free vote would have the opposite effect. Most Latin American countries would turn against him and weaken his already fractured government, opening the way to impeachment.

As Argentina's postwar history makes clear, when politicians temporarily suspend democratic rules of the game during crises, they risk weakening democracy to the point of collapse. A constitutional solution is the best means of preserving Venezuelan democracy. It would also benefit Latin America. Recent years have brought tough economic times, which in turn have posed a threat to democracy in the region. The forced removal of presidents in Ecuador and Argentina suggests a possible trend in which mass protest serves as a somehow more acceptable form of coup d'état. Mr. Chávez's forced removal would only reinforce this, making fragile governments all the more vulnerable.

The Venezuelan opposition should be patient. As former President Jimmy Carter recently proposed, the opposition should lift the general strike and abandon current efforts to remove the president in exchange for an agreement with the Chávez government to choose the day for an internationally monitored referendum in August. If the opposition were to force Mr. Chávez's removal before that, it would risk ushering in a cycle of polarization and violence that could grip the country for years. Avoiding this and saving Venezuela's constitutional democracy is well worth waiting eight months.

Jorge I. Dominguez and Steven Levitsky are professors of government at Harvard.

www.thetandd.com By STEPHEN IXER

At least a hundred thousand Venezuelans _ many equipped with tents, inflatable mattresses and foldout chairs _ parked themselves on a Caracas highway Saturday in what they said would be their longest protest yet against President Hugo Chavez.

Shouting "until he goes!", the protesters blanketed a stretch of nearly three miles, prepared to spend the night. On the advice of organizers, many also brought water, sun hats, portable TVs and radios to help while away the hours.

Police at the scene estimated the crowd at between 200,000 and 300,000 people. At least a hundred thousand were present, Caracas fire chief Rodolfo Briceno said.

"Prepare yourself for the longest protest in history!" screamed TV commercials and newspaper ads in the opposition-run media.

The opposition is trying to recover from a Supreme Court ruling on Wednesday that postponed indefinitely a Feb. 2 referendum that would have asked citizens whether Chavez should resign. Although the referendum wouldn't have been binding, opponents had hoped a negative outcome would persuade Chavez to quit.

"Although they stole the referendum from us, spirits are higher than ever," said Alexandra Suarez, a 19-year-old student carrying a sleeping bag on her shoulder.

Opponents had gathered 2 million signatures to petition for the vote. They backed up their demand by launching a devastating national strike Dec. 2 and staging daily street protests. Six people have been killed during protests since the strike began.

The 55-day strike has badly hurt the oil industry, which provides half of the government's income and a third of Venezuela's gross domestic product. But production in the world's fifth largest oil exporter is slowly reviving.

The government claims most of the 40,000 employees at the state oil monopoly, Petroleos de Venezuela S.A., have abandoned the strike and that output has reached 1 million barrels per day. Striking executives put the figure at 855,000 and deny most employees are back to work. Output was 3 million barrels a day before the strike. It reached a low of less than 200,000 last month.

Justices ruled that no national vote _ a referendum or election _ can be held until it decides whether elections council member Leonardo Pizani is eligible to serve on the panel.

Members of Chavez's ruling party filed a suit arguing that Pizani couldn't serve because he resigned from the council in 2000, only to rejoin last November. Pizani insisted he could rejoin because Congress, by law, had failed to formally accept his resignation.

Searching for a new strategy, the opposition Democratic Coordinator movement is gathering signatures to demand a constitutional amendment that would pave the way for early elections. The amendment would involve cutting Chavez's six-year term to four.

Former President Carter proposed a similar plan while attending negotiations between the government and opposition in Caracas last week. His Atlanta, Georgia-based Carter Center, the Organization of American States and the United Nations are co-sponsoring the talks.

Under Carter's plan, the opposition would call off the strike in exchange for a government pledge to quickly push through a similar amendment. Such a deal would save the opposition the effort of collecting signatures because either the president or Congress _ where the government has a majority of seats _ can call a referendum to approve the amendment.

Carter proposed a second plan that would have both sides prepare for a binding referendum on Chavez's rule in August, midway point in his term. The constitution allows such a vote. The Democratic Coordinator said it was also collecting signatures to petition for that vote.

Chavez has indicated he would be open to both the amendment and the August referendum, and he welcomed Carter's proposals on Saturday. "The general focus, the strategy, appears spot on," Chavez told reporters. He had argued the February referendum would have been unconstitutional.

Today in Italy - Special service by AGI on behalf of the Italian Prime Minister's office

(AGI) - Agrigento, Italy, Jan. 25 - The adoption of the euro has had an effect on Italian consumer trends and real inflation, that which is felt by consumers, "is decidedly higher" than that quoted by Istat, whose survey system is "rigorous" but "traditional." Bank of Italy Governor, Antonio Fazio, speaking from the stage at Agrigento, where he gave his traditional speech at the Forex convention, has once again turned his attention to price increases - and it appears that he gives credit to the complaints put forward by consumers, who over the last few weeks have created much controversy over official statistics concerning inflation. "The change to the single European currency has weighed on consumer trends," he said. "Empirical analysis - he added referring to the elaborations carried out based upon the Bank of Italy's econometric model carried out together with ISAE on Istat data - shows that the inflation felt by consumers is decidedly higher than that which emerges from the traditional and rigorous methods used by Istat." Fazio explains that "the increase in consumer prices between the end of 2001 and the end of last year was equal to 2.8 percent and the effect of the rounding up of prices is assessable to a little more than 0.5 percent." The price of general food goods weighed most heavily on the bread basket where "price increases measured by official indexes is above or is a little below 10 percent." "Decreases on the other hand were registered for consumer durables." (AGI)

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