Venezuela – Food Shortages, Oil & Colorful Politics

Francisco A. Laguna

Venezuela, the major petroleum producer whose state-owned petroleum company sent free heating oil to lower income residents of Massachusetts, is suffering from a severe food shortage. In terms of staples, Venezuela only has inventories of rice to last 44 days, white corn for 57 days, and sugar for 49 days. The Central Bank of Venezuela estimates food shortages for January 2013 rose to 20.4%. In a broader study, MIT economist, Roberto Rigobon, estimates that ~ 75% of food products and brands have disappeared from the Venezuelan marketplace over the past two years, leaving the consumer with limited dietary choices.

Venezuela will have a special presidential election on April 14. This will be first time since Hugo Chavez was elected in 1998 that the opposition stands any realistic chance of success. Regardless of the outcome, the new president of Venezuela will have plenty of economic issues to confront. Despite the steady (and high) price of oil, government spending has risen sharply; in 2012, public debt as a percentage of GDP climbed steeply to 49%. Some 32% of the population still lives below the poverty line, even after 14 years of Chavez’s 21st Century Socialism, meant to redistribute the country’s wealth among all sectors of society. In addition to food shortages, Venezuela is also plagued by energy shortages and badly aging infrastructure.

Venezuela’s nationalization of foreign company assets in the oil and other industries has also affected the country’s economic prospects. Investors are wary of making foreign direct investment in the country. Nationalized industries have not operated as efficiently as expected, which only continues the pressure on the petroleum industry to maintain and increase its level of productivity, while other sectors decline. Currently, petroleum exports account for ~ 95% of export revenues.

The new president will hopefully understand that the political rhetoric and diatribes against the United States and other nations should be toned down. After the death of Chavez, former US government officials who dealt with the Chavez regime reported that communications with Venezuela were often contradictory and non-productive: reasonable exchanges and steps forward being followed-up by public comments that negated possible progress. Business does not react well to that tension, or to the possibility of having their assets confiscated.

Now is a time for Venezuela to turn inward and fix its domestic economy. Trade and foreign investment will be critical components of future success. The country has to encourage innovation in such sectors as agribusiness and foods, biotechnology, construction, information technology and pharmaceuticals. This will require foreign company involvement. Uni-industry economies do not tend to do well over time. Venezuela has the opportunity now to create an environment that will attract companies to do business in the country.

TransLegal’s office in Caracas is available to answer questions about economic and legal realities on the ground in Venezuela. Over the past 2 years, we have worked with clients in the biotechnology, cosmetics, foods and pharmaceutical sectors.

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