The Tough Choices Facing Hugo Chavez’s Successor

Like most of the slums that crawl up the steep hillsides in Venezuela's capital, Caracas, Antímano owes much to late President Hugo Chávez Frías. Chávez, who died last month, may have been controversial internationally, but among the residents of Antímano he was nothing less than a savior. He educated illiterate adults, built health clinics for the sick, gave pensions to the poor, rebuilt houses that were falling down and constructed new ones for others. "Before Chávez, the government didn't care what was happening here. They didn't invest any money in neighborhoods like this one," says Mireya Guzman, a community leader who helps distribute household appliances at deeply discounted prices, thanks to a government subsidy. "The change has been enormous."

The Venezuela Chávez left behind, however, faces trouble, including rising crime rates, half-finished public works projects, ongoing currency problems, worries about inflation and shortages of basic food items. Critics say that Chávez mismanaged the country's vast oil fortunes by spending heavily on social programs and doling out foreign aid while failing to invest in infrastructure and the economy. Meanwhile, private industry has shriveled. "We have a systemic problem here, something that can't be fixed easily.It's potentially, a very dire state," notes Robert Bottome, a Venezuelan economist and editor of the financial publication VenEconomía. "We can't continue with this illusion of wealth that's created by petro-dollars. There needs to be a long-term plan."

That task falls to Nicholas Maduro, a mustachioed former bus driver who rose through the ranks of the socialist party to become Chávez's vice president and hand-chosen successor. Maduro beat centrist challenger Henrique Capriles, capturing 50.7% of the vote in Sunday's election, the country's electoral council said after tallying 99% of the ballots. Capriles, who received 49.1% of the vote, called for all of the machines to be opened and the paper ballots to be counted. In his victory speech, Maduro evoked the late president's name, as he often did during the campaign, saying: "Chávez … continues to be invincible…. He continues to win battles."

While Maduro has pledged not to touch Chávez's hallmark policies, analysts say that his six-year term will be marked by tough decisions, including whether to make changes to the programs that came to define Chavismo. "I think it's going to be very difficult for Maduro," notes Carlos Romero, a political analyst and professor at Central University of Venezuela in Caracas. "There will need to be changes, but it is unclear whether people will go along with them. He lacks the charisma and leadership skills of Chávez."

There is little evidence that Maduro is prepared to take any drastic steps. In a little over a month as interim president, he did make minor moves toward addressing some of the countries issues.

He has tried to address the country's ever-weakening currency, the bolivar. The currency was devalued seven times under Chávez, most recently in February. The official exchange rate stands at 6.3 bolivares per dollar. Chávez placed strict restrictions on the amount of U.S. dollars that individuals and businesses could import, creating a scarcity of American currency. As a result, a black market sprung up in which a dollar is worth around 23 bolivares, or nearly four times the official exchange rate, according to a website that tracks the market. To introduce more dollars to the local market, Maduro announced the creation of a parallel initiative that would auction dollars to private business, allowing them to import needed goods. Analysts, however, have questioned exactly how effective the program will be in addressing the currency problems.

In another shift from Chávez's approach, Maduro has consistently talked about the nation's crime problem, particularly in poor areas of Caracas. Venezuela's murder rate went from bad to worse under Chávez. In 2011, the country saw 45.1 murders for every 100,000 residents, up from 25 per 100,000 when Chávez took office, according to figures from the United Nations. Maduro has announced two initiatives aimed at preventing crime in violent neighborhoods by creating alternatives for young people. However, he has said little about law enforcement's role in combatting crime.

In addition, there has been little mention of the structural problems that have placed Venezuela in a bind, with a budget deficit of 7.4% of gross domestic product (GDP), shortages at markets due to a lack of available dollars and an overreliance on imported foods.

On a recent day at a supermarket in the relatively upscale Altamira neighborhood, basics like toilet paper and beans were missing from shelves. "You can never tell what's going to be in short supply," says Jorge Castillo, a shopper. "It's not consistent. Who knows what will be here next week?"

The Petroleum Question

Maduro shouldn't have to worry about things like missing rolls of toilet paper. The country he's taken over sits on a nearly bottomless source of cash. Its proven petroleum reserves — 297.6 billion barrels — are among the world's largest. (A recent estimate put the country ahead of Saudi Arabia, which has the second-largest proven reserves with 267 billion barrels.) There are vast stretches of nearly untapped fields, including the Orinoco Belt, which contains as much as 257 billion barrels of tar heavy petroleum reserves, according to Petróleos de Venezuela, the state-run oil and gas enterprise better known by its Spanish acronym PDVSA.

And thanks in part to Chávez himself, the price of petroleum remains high, above $90 barrel, compared to the less than $10 barrel the commodity traded for in 1998 when he was first elected president. Chávez pushed oil-producing countries in the OPEC cartel to limit production to push prices higher. He also increased taxes on foreign oil companies. ConocoPhillips, Exxon Mobil and other firms that refused to go along with the taxes — levied at 50% or more in some cases — had their operations nationalized by the government.

That gave Chávez control over the nation's most valuable resource. (Petroleum exports make up 96% of Venezuela's foreign income). The Chávez administration used Venezuela's oil wealth to provide social services that successfully drew millions out of poverty, cutting the rate in half after he exerted more control over the oil fields. Those efforts won Chavez political support in barrios such as Antímano that helped him repeatedly win elections by a landslide. Meanwhile, he sent millions of barrels of oil to foreign governmentsunder preferential payback terms. That strategy, known as "petrodiplomacy," gave Venezuela political allies from the Caribbean to South America to China.

But while Chávez's spending spree made him popular both at home and abroad, the source of that money received little attention. A lack of investment in the heavily nationalized petroleum industry caused oil production to drop by 13% from 1999 to 2011. The output stood at 2.7 million barrels per day in 2011. Production fell by a further 7% in the first quarter of 2013, according to industry statistics.

The lack of investment in PDVSA is underscored by the slow development of the Orinoco Belt. The crude in the fields is heavy and more difficult to extract and refine than light sweet crude. Under an ambitious Chávez plan, the government vowed that production from the fields would be at least 195,000 barrels a day by the end of 2012. That day came and went with the region only producing around 6,000 barrels a day due to a lack of spending in pipelines and equipment. As a result, the government is losing out on roughly $19 million a day in revenue, according to industry analysts.

Chávez also changed PDVSA's charter in 2008, allowing it to contribute directly to social programs and invest in other industries. "He raided [PDVSA], the most important enterprise in the country," Bottome says. Credit agencies still view the lack of sovereignty for PDVSA as a negative. After Chávez's death, Chicago-based Fitch Ratings reminded investors of its negative outlook. "PDVSA credit quality is inextricably linked to the Venezuela government," the ratings agency wrote. The government "displays limited transparency in the administration and use ofgovernment-managed funds, and in fiscal operations, which poses challenges to accurately assessthe stance of fiscal policy."

What's more, the "petrodiplomacy" deals cost the country dearly. Instead of selling petroleum at market prices, the Venezuelan government strikes deals with foreign governments in which they are allowed to pay for the oil shipments at 1% interest during 20- to 25-year periods. Some countries send goods instead of cash. The Dominican Republic, the recipient of up to 50,000 barrels per day of subsidized Venezuelan oil, paid in black beans last year.

Leonardo Vera, a professor at Central University of Venezuela, estimates that all those deals mean as much as 25% of the petroleum PDVSA produces is sent abroad and no profits are coming back in return. "This affects the rest of the economy because petroleum is essentially our sole export," Vera notes. "PDVSA doesn't have the revenue coming in that it should and that's our only source of hard currency."

Chávez's involvement in PDVSA was indicative of his broader position toward industry. He alienated many businessmen and corporations by expropriating their properties for what seemed like whimsical reasons. For instance, he once commandeered buildings housing functioning businesses because the structures had a limited historical connection to Simón Bolivar, the South American liberator whom Chávez idolized. Private industry is unlikely to extend an olive branch to Maduro, analysts note, unless the government changes its approach to working with corporations.

In searching for new sources of income, the Maduro government has said it will look to improve relations with China and Russia. The government has not explained what exactly it wants future deals to look like. Venezuela already sends China about 430,000 barrels of crude per day and Russia has expressed interest in helping Venezuela modernize its oil production system. "Foreign assistance could help the government improve efficiency and production within PDVSA, which could, in turn, improve the economy," Vera says.

Improving PDVSA's production would surely help Maduro avoid making difficult choices. But it would not address the larger structural problem that exists in post-Chávez Venezuela. "There's no doubt that Venezuela is in a better place than it was before Chávez took power," notes Venezuelan-American scholar Miguel Tinker-Salas, a professor of history and Latin American studies at Pomona College in California who supports many of Chávez's policies. "But the question for the next president will be how to diversify the economy."

Tight Times Ahead?

Venezuelais "totally dependent on the petroleum sector," Vera agrees. "Oil prices have been high, which has allowed the system to continue for as long as it has. But the next president will need to make changes."

Maduro may have to choose between cutting the oil sent to foreign countries under preferential terms or reduce the level of spending on popular domestic programs. But George Ciccariello-Maher, a professor at Drexel University in Philadelphia and author of We Created Chávez: A People's History of the Venezuelan Revolution, predicts: "It's not going to happen. He can't and won't make any cuts to either."

Ciccariello-Maher says that both the domestic spending programs and the international oil shipments are so fundamental to Chávez's legacy that Maduro can't risk angering his political base by cutting them.

The political trap Maduro faces is this: The Venezuelan government may need to make changes to existing initiatives, but Maduro owes his political fortunes to Chávez and must maintain his legacy. "We shouldn't do anything different. Maduro shouldn't change anything because these are the things that President Chávez wanted," Guzman, the Antímano community leader, says.

Maduro, then, has few good options. Bottome, the editor of VenEconomía does not foresee a Maduro administration taking any substantive steps to reform the economy. "It's not politically feasible for him to cut Chávez's programs and he doesn't have a plan to make up the difference. I think Venezuela will just keep getting worse, little by little."

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