Sunday, August 31, 2008

Business department, editorial staff...

In the latest Foreign Policy (September/October 2008) is a "Special Advertising Supplement" - "Surprising Kazakhstan - Think you know Kazakhstan? You might be surprised." In this you can read 'The Surprise of the Steppe' (e.g. "The streets of Almaty, the commercial center, and other cities throughout the country are clogged with Mercedes, BMWs, and Porsche SUVs. At night the cafes and restaurants are as full as those in any European capital, as well-heeled clientele sip white wine and cappuccinos..."); an interview with Prime Minister Karim Massimov - "Steward of Economic Growth"; "A Question of Balance" (e.g. "Its foreign-policy strategy blends pragmatism and ideology through skillful and sensitive management"); and other hagiographic "articles" and "interviews."

Kazakhstan - Wikipedia
Kazakhstan - CIA World Factbook
Kazakhstan - US Dept of State

Previously, in 2002, this blogger had commented on another such advertising supplement that lauded the Andean countries, including Venezuela (OPED11 reprinted below), and wondered at the risk of running puff pieces when the subjects of these puff pieces were very likely to figure (unfavorably) in future editions of Foreign Policy! The magazines obviously need the advertising revenue, but it seems to this blogger that it might be better to find alternative sources. Although the pieces are prominently marked as advertising and provide disclaimers, one wonders if this does any harm to the magazine's reputation....

The latest edition of Foreign Policy (Jan/Feb 2002) contains a special advertising supplement, The Andean Surprise, sponsored by Foreign Policy and the Andean Development Corporation. The introduction briefly acknowledges that some of the Andean countries (Colombia, Venezuela, Peru, Bolivia, and Ecuador) are facing difficulties (see quote below), and then the supplement goes on to highlight positive developments in the various countries.

"What follows is a country-by-country review that highlights surprises not wishful thinking or romantic ideas, but impressive accomplishments that deserve recognition and offer solid ground for optimism. This is not to deny the region’s troubles, a number of them no doubt considerable."

This OPED will take a quick look at Venezuela- at some of the positives highlighted in the supplement and then at some of Venezuela's "troubles". According to the supplement one of the 'impressive accomplishments' achieved by Venezuela is that:

  • "Venezuela is one of the first countries in the world where cellular mobile telephones surpassed subscribers to fixed-line services." In developed countries the level of cellular penetration has almost become a proxy for the telecommunications technology level of a country, with greater cellular penetration being seen as evidence of greater advancement (for example the higher cellular penetration in the Scandinavian countries as compared to the United States is taken by some as a sign that the US is falling behind some European countries in this field.) This is because cellular includes a host of advanced technologies such as SMS, WAP, 2.5G and 3G technologies, etc. Thus, superficially, the assertion that cellular penetration in Venezuela has exceeded fixed-line services might seem to be very positive. However, cellular penetration in less developed countries does not have the same meaning as it does in developed countries. In developed countries cellular penetration comes on top of fixed-line services in the 99% range. In less developed countries a significant portion of cellular penetration is among new subscribers that have not previously had fixed-line access (since often the telecommunication sector had been state-owned, inefficient, with long wait times to obtain services...). Thus with cellular subscribers in Venezuela representing approximately 16 percent of the population, it can be inferred that total access to telecommunications services is still at under 30 percent of the population.

  • Other "accomplishments" are that "Venezuela is endowed with reserves in gold, bauxite, iron, and coal", "Venezuela's natural gas reserves are the seventh-largest in the world", and "Venezuela produces the highest-quality cacao in the world." While this certainly puts Venezuela in a better position than if it had been poor in natural resources, mineral reserves do not necessarily translate into greater prosperity. Many raw materials are commodities, for which world prices are fairly low. Raw materials exports contribute much less to the economies of developing countries than if they are converted to final processed goods with a higher value-added prior to export. These statements do not provide sufficient information to draw any inferences as to the value that these reserves translate to for the Venezuelan economy.

The following is a short list of some of the factors (not mentioned in the supplement) that contribute to Venezuela's "considerable troubles":

  • Tariffs: Venezuela has an average tariff rate of 13.1 percent. While Venezuela has regional free trade agreements (e.g. the G-3 agreement with Colombia and Mexico) that are reducing tariffs and liberalizing trade, significant barriers exist with other countries. For example, while fresh and dried fruit from the Andean Community and Chile may enter Venezuela duty free there is a 15 percent duty on similar imports from the United States.
  • Non-tariff Barriers - Services: The government imposes a number of restrictions in certain service areas. Only Venezuelan nationals may be licensed as architects, act as accountants for companies with more than 25% of public stock, and eighty percent of a firm's employees must be nationals (companies with more than 10 employees may only have a maximum of 10% foreign employees, and the foreign employees' salaries may not exceed 20% of the payroll.)
  • Non-tariff Barriers - Standards & Certification: Importers of US products have complained that the government applies product standards more rigorously to imports than to domestic products.
  • Non-tariff barriers - Customs: Barriers to imports exist through onerous requirements that are part of the customs clearance requirements. For example, importers of agricultural commodities (or their byproducts) are required to register in the Importers Registry at the Ministry of Production and Commerce and provide copious documentation (e.g. of their import history - items, volume, point of origin, valuations, etc.) before they are allowed to apply for import permits. The government was also considering implementing preshipment inspection of all imports along with an inspection fee, thus potentially causing import delays.
  • Non-tariff Barriers - Export subsidies: The government provides export subsidies to some industries e.g. exporters of cocoa and some seafood products receive tax credits equal to 10 percent of the export value.
  • Non-tariff Barriers - Intellectual property rights protections: Though they have improved in recent years, intellectual property protections are still weak, trademark counterfeiting is common, and the piracy of software and videos is widespread.
  • Economic problems - Government intervention/regulation of the economy: According to the Economist Intelligence Unit "Venezuela has one of the most pervasive governments in South America, in so far as it is involved in the economy... The state still dominates production of oil, liquefied natural gas, aluminum... Other sectors dominated by the state include electricity generation and distribution and petrol retail sales, though both are being opened to the private sector..." Bureaucracy and red tape are substantial, with the government employing sixteen percent of the workforce. Corruption is endemic.
    Monetary problems: The annual rate of inflation has averaged 21.9 percent over the period from 1991 to 2001.
  • Economic Problems - GDP: The Gross Domestic Product of Venezuela was positive in 2000 (3.2%) and 2001 (2.7%) following a contraction (-6.1%) in 1999.
    Government debt levels: Government spending levels are increasing faster than revenues, leading to increased deficits.
  • Country rating: Moody's 2001 rating for Venezuela is B, while S&P's is B2 - sub investment grade, with Venezuela only beating out Argentina. This means that the costs of international borrowing will increase as Venezuela is forced to offer higher interest rates to offset the increased riskiness of its bond issues.
  • Capital flows and foreign investment: Several industries are not open to foreign investment e.g. foreign ownership of television, radio, and the press is restricted to under 19.9 percent. All foreign investments need to be registered with the government and must be approved by Congress if they effect the "national interest." Capital flight has increased as the political and economic uncertainty has increased.
  • Wage and Price controls: The government controls the prices of many products e.g. utility and telephony rates, petrol, the wholesale and retail prices of a number of staples, etc. Venezuela maintains a minimum wage.
  • Political problems: Venezuela's political problems are even more pressing than her economic woes, and they are due to one man - President Hugo Chavez Frias. Decades of stable oil prices had led to a stable Venezuelan democracy, unusual in South America, until things went off the rails in the '80's. Falling oil prices seriously damaged Venezuela's prosperity and led to a decade of great poverty, which led to an explosion of riots by slum dwellers in 1989. After attempting a failed coup in 1992 that put him in prison until his sentence was commuted in 1994, Chavez was first elected in 1998 with 56% of the vote. Chavez won the election based on popular disgust with the established political elite that was perceived as corrupt, uncaring of the plight of the poor, and responsible for squandering the country's vast oil wealth. Chavez's Fifth Republic Movement (MVR) won a majority in the Venezuelan Congress. Following his victory Chavez proposed a new Constituent Assembly, which assumed powers to curtail the activities of Congress and wrote a new 350-article constitution. This constitution abolished the judicial council and created a unicameral Congress and was approved in a referendum in 1999. Following this Chavez was re-elected in July 2000 with 59.5% of the vote. Chavez's party also won a majority of state governors, mayors, city councilors, etc. Since then Chavez has restructured the armed forces under his command, has brought military officers into the government, and promoted his supporters into command positions. However, despite Venezuela's substantial oil revenues poverty is not falling and the common lot has not improved. With the lack of progress and the weak economy Chavez's popularity slipped substantially in 2001, and political opposition has been increasing. The middle class that never liked Chavez is increasingly alienated by Chavez's authoritarianism and attempts at compulsory political indoctrination. The labor unions have also become disenchanted with Chavez. December 10th the country was closed down by a strike called by the private sector and the main labor federation to protest a number of decrees increasing government control of the economyChavez has also done much to alienate the United States and western countries. In 1999 he became the first leader to visit Iraq since the Gulf war, has denied the US permission to conduct anti-drug flights in Venezuelan airspace, has voted against censoring Cuba, Iran, and China for human rights violations, and denounced US imperialism in a speech in Beijing. He has visited Cuba and cultivated close ties between the two countries, also providing Cuba with oil. In October 2000 Chavez announced that Venezuela and Cuba would join to oppose US influence in the hemisphere. Chavez also has denounced Plan Colombia, and has maintained relations with the FARC and ELN rebels in Colombia. Two years ago Chavez wrote to Ilyich Ramirez (the famous terrorist also known as 'Carlos the Jackal') in his French prison expressing his admiration and "profound faith in the cause and in the mission." Venezuela's government has said that Carlos should be sent back to Venezuela, and the Venezuelan Defense Minister said that Carlos wasn't considered a terrorist since he hadn't been tried in Venezuela. Following this the general commanding the armed forces felt compelled to make a statement that a terrorist is a terrorist wherever he is convicted.

In conclusion, with economic problems mounting, with Chavez's popular support slipping among the poor and even the military, with Chavez threatening to rule by decree and to remain as president until 2021 even though this would violate the constitution, Venezuela looks headed for an extended period of political and economic turmoil.

The small type at the end of the advertising supplement says "This special advertising supplement was produced by FOREIGN POLICY's business department, and did not involve the editorial staff of FOREIGN POLICY." Given the enormous challenges facing Venezuela at this juncture it would seem that the business department should talk to the editorial department, given that there is a good possibility that future editions may soon have articles on negative developments in Venezuela!