Much is made of Venezuela's PDVSA tragedy ... but, who cares?

www.vheadline.com Posted: Monday, March 10, 2003 By: Daniel Burnett

Date: Sun, 9 Mar 2003 05:27:08 -0500 From: Daniel Burnett dburnett1@nyc.rr.com To: Editor@vheadline.com Subject: The real problem facing Venezuela

Dear Editor: There is no shortage of commentary, discussion and heated debate on VHeadline.com and many other websites regarding the current political situation in Venezuela. This makes sense given how much the political crisis in Venezuela is dominating the news. However, this is unfortunate as it masks the real problems facing Venezuela -- namely the poor state of its economy ... and by this I'm not referring to whether the economy is increasing by X% or decreasing by Y% percent this year -- in the grand scheme of things that is insignificant.

• What I mean, when I refer to Venezuela’s economic problems, is the generalized poverty that it has endured for its entire existence, including during its oil boom.

Venezuela’s economy is grossly under-developed and is not in any way capable of giving the majority of its citizens a decent standard of living.

Even with its abundant natural resources, the per capita income of Venezuela pales when compared even with recently developed countries such as South Korea or Taiwan.

I am confident that, however, much we may disagree on the causes of the current crises we all agree that we would like to see the people of Venezuela be much more prosperous and have the increased quality of life that implies.

It is therefore ironic ... and very unfortunate ... that there is almost no discussion of how Venezuela’s poor economic situation could be changed. It is that discussion that I would like to begin by this letter.

It is an axiom of economics that in order to consume one must first produce. That is, to increase the Venezuelan standard of living (i.e. how much Venezuelans consume) we must first increase the productive capacity of Venezuela’s economy.

Given its small size, Venezuela must import most of the things that it consumes and virtually all of its technology. To be able to purchase things abroad, it must have money and the only way to get this money is to export things of value onto the world market.

Of course, it could also just borrow the money, but Venezuela has already taken that about as far as it can go as seen by the enormous size of its foreign debt.

Worse still, when one borrows money, one must pay it back with interest.

So, in reality, Venezuela is going to find its purchasing power of foreign goods ... and hence its standard of living ... limited to what it can produce and sell abroad. And herein lies the problem ... Venezuela doesn’t produce much of anything.

Of course, people are going to protest this statement by saying that Venezuela does produce something -- principally oil.

First of all, oil isn’t really "produced" ... it is just a natural resource that is extracted from the ground. True, it is at times a valuable resource. But it just doesn’t add up to enough to give Venezuelan’s a decent standard of living. Venezuela exports about $23 billion worth of it in a good year with high oil prices. Dividing the Venezuelan population 23.4 million by 23 billion comes to a little less than $1,000 per person per year. Obviously, the average Venezuelan is not going to live well off of oil.

Worse still, Venezuela’s non-oil exports total only about 6 billion dollars, which is pathetically, low, to say the least ... and even most of those are other natural resources.  So from this you really can see that Venezuela doesn’t produce anything.

• In one of his editorials a few weeks back, Mr. Coronel, accused President Chavez of having alienated the “productive” segment of Venezuelan society.

Now, I know what Mr. Coronel was referring to when he spoke of the “productive” segment of Venezuelan society -- he was referring to the business community, the professional class, and skilled workers.

Unfortunately, though, those segments of Venezuelan society are not very productive.

What I mean by that is that they do not create any wealth for Venezuela. Rather they consume the intrinsic wealth that Venezuela has. At the end of the day they do what everyone else in Venezuela does ... they live off the wealth that Venezuela derives from its natural resources.

This can be shown clearly just from statistics: Venezuela’s exports total 29 billion dollars. Oil accounts for about 23 billion of that and other natural resources (gold, iron ore, bauxite, etc.) and the public industries of the Guayana region account for much of the rest.

Venezuelan private industry ... presumably the “productive” segment of society that Mr. Coronel is referring to ... accounts for only a very small portion of Venezuela’s exports. And even most of the exports by the private sector consist of exports by foreign companies such as oil companies and the privatized SIDOR, not by Venezuelan companies.

So exports by private sector Venezuelan companies come to less than $1 billion per year. By way of comparison, Ecuador (which is half the size of Venezuela and itself quite poor) has a shrimp-farming industry that exports a billion dollars worth of shrimp each year. So the entire “productive” sector of Venezuelan society is being beaten by a bunch of Ecuadorian shrimp farmers.

(As an aside, the Ecuadorian private sector exports total about $4 billion a year or four times Venezuela’s private sector exports and 8 times greater on a per capita basis).

Venezuelans should be glad they don’t depend solely on the “productive” segment of Venezuelan society to support themselves ... if they did, they’d have long since starved to death.

Perhaps a better way to illustrate this point is by specific examples: Much has been made in the Venezuelan press of what a great businessman Carlos Fernandez is, and how fortunate Venezuela is to have someone like him ... someone who emigrated from Spain with very little and built a large, successful trucking company in Venezuela.

So has Carlos Fernandez’ undoubted business acumen contributed to the betterment of Venezuela and its economy? The answer is no.

The reason for this is very simple ... his trucking company brings no wealth into Venezuela ... it simply performs a service that would be performed more or less equally well by someone else if it didn’t exist (now if his company was manufacturing trucks or truck components and profitably exporting them, that would be another matter, but that is not what his company does). If his company ceased to exist tomorrow, it would simply be replaced by other trucking companies with no net loss for Venezuela.

The same holds true for virtually all Venezuelan industries. Much is made of what a tragedy the alleged degradation of PDVSA is for Venezuela. But in reality, who cares?

There is nothing that PDVSA does that any one of dozens of other oil companies couldn’t do. So you can fire all the PDVSA employees and have them replaced by other Venezuelans or foreign companies such as Shell, or Exxon, or British Petroleum or Texaco and the oil wealth that will accrue to Venezuela will remain the same.

Why? Because the workers of PDVSA ... as capable as they may have been ... never created any wealth, they just extracted wealth from the ground that was always there to begin with. And if they don’t do it someone else will.

This goes for companies on down the line: Coke leaves. Fine, Pepsi, RC Cola or some one else will replace them, because there is a profit to be made by providing this product to the Venezuelan market. The examples are endless.

This can be still further illustrated by juxtaposing it with countries that do have companies that produce wealth for them.

Take Nokia, the world’s largest manufacturer of cell phones, located in Finland. Does Nokia contribute to Finland’s well being? Considering that it has 22,000 well-paid employees in Finland and exports more than 10 billion dollars worth of goods from Finland to the rest of the world I would say that it does. It contributes to the Finns high standard of living in a myriad of other ways too ... the payment of billions of dollars in taxes, the large investment in the continued education of its employees and significant charitable contributions are but a few examples.

If Nokia didn’t exist would there be some other company in Finland that would take its place? Possibly, but almost certainly not. The reason for this is that, unlike the example of PDVSA, Nokia isn’t exploiting some unique characteristic of Finland or its natural resources. Rather Nokia owes its existence purely to the talent, hard work, and capital of the people who founded it. If Nokia disappeared tomorrow, it would almost certainly be replaced not by a Finnish company but by an American, British or Japanese one ... and Finland would find itself that much poorer.

All industrialized countries posses many wealth generating companies such as Nokia. Venezuela possesses no such companies. It is for precisely that reason that the standard of living of Venezuelans is so low. It simply doesn’t have a productive sector that generates sufficient wealth to give most Venezuelan’s a decent standard of living. That is also why any public welfare or other redistributionist projects that Chavez implements ... no matter how well intentioned ... will lead nowhere. Social welfare programs only work in countries that are already affluent. In Venezuela, there is simply not much to redistribute, save poverty.

That is the real problem facing Venezuela.

What Venezuela clearly needs to do to solve this problem is create companies that can develop and manufacture products that can be profitably sold on the international market.

It also needs a highly-educated and skilled workforce that can create and staff these companies.

So maybe instead of sitting here and bickering over which Venezuelan called the other a bad name first ... or who is more of a dictator than whom ... maybe we should try to figure out how to accomplish the aforementioned tasks.

Daniel Burnett dburnett1@nyc.rr.com New York, USA