Nationalisation: Lessons from Venezuala

Miguel Octavio

Miguel Octavio on the disastrous consequences of Hugo Chavez’s policies

When Hugo Chavez came to power in 1999, he said nothing about nationalisation. At the time, Venezuela was moving in the opposite direction, riding a wave of privatisation that had brought improvements in telephone services, steel production, and oil profits. Once he came to power, however, Chavez changed his mind. He realised that nationalising the private sector is neither about economics nor about improving the lot of citizens. Instead, it is about limiting and hobbling the private sector, and about increasing government power.

Since about 2003, Hugo Chavez has gone on a nationalisation spree that has extended across all sectors of the economy, from land, to milk production, to cement factories and to entire buildings. One enterprise after another has been brought under government control. The result? Just like everywhere else in the world where there has been nationalisation, Chavez’ policies have harmed firms and caused the country’s economy to suffer. 

Venezuela today produces less cement. Agricultural production has declined precipitously and there are regular shortages of staples such as flour and milk. And the production of the country’s most significant export, oil, has fallen year after year since Chavez took control of that industry. 

It is worth noting that although oil was already in the hands of the government before Chavez came to power, his administration not only fired the top 20,000 oil workers in 2003 for striking, but also nationalised the heavy oil crude projects. These projects had required huge investments in the 1990s. When the country simply did not have the money to continue investing, foreign oil companies were invited to form partnerships with government; but now they also have been nationalised. These cases are in arbitration and, given the increase in the price of oil, represent a huge liability for the country if large awards are given to those whose property was nationalised without compensation.

Perhaps two industries are emblematic of the effects of nationalisation on Venezuela: cement and telecommunications. The Chavez administration holds cement producers accountable for the lack of success in building housing, blaming shortages of raw materials rather than his government’s inability to build in one year what his predecessor built in any given year when oil was at US$11 per barrel. Since President Chavez nationalised the cement industry two years ago, not only have the shortages of cement intensified, but his government’s ability to build more houses has not improved at all. 

In telecommunications, the parastatal is able to remain barely competitive for the simple fact that it receives preferential access to foreign currency for imports. Its competitive position has been destroyed in a scant four years and the company is used by government to monitor the communications of the country’s citizens. 

A year ago, Chavez ordered unfinished building projects to be taken over for completion by his government. Not surprisingly, most of them are exactly where they were a year ago, untouched and unfinished. In many cases, they have been taken over by Chavez’s supporters, while those that paid deposits on the buildings have either lost their property or are clinging on hoping for some form of miracle.

Sidor, the country’s steel producer, was privatised and sold to an Argentinean concern in 1997. The company became profitable and productive and paid yearly dividends, giving to the government the money to pay over to the workers who had become shareholders when the company was privatised. And then, one day, Hugo Chavez decided to nationalise Sidor and the oil pipe factory next door. Sidor, today, is producing less and losing money, and the oil pipe factory has shut down. And what happened to that dividend for the workers? They have yet to collect. In fact, Sidor’s cash flow is so bad that the Venezuelan state oil company was forced to hand over US$800 million to prop it up temporarily. Except, of course, this subsidy will regularly be needed as, in its nationalised state, the company will always be inefficient and unproductive. 

Unionised workers play a central role in all of this and it does not present a pretty picture. It has been three years since the Chavez administration negotiated union bargaining agreements with any of these nationalised companies. Divide and conquer has been the rule of the day. Create a pro-Chavez union, delay and simply never reach a new agreement on new or improved benefits for workers. Some workers are happy because they get paid even if they do no work. Annual increases are guaranteed via the minimum salary. Others enter into personal deals and sell product on the side so that now there are huge mafia networks surrounding all of these companies. 

All of the above merely reinforces a concept that has been consistently proved true everywhere: The private sector may not be perfect at running enterprises, but the government is worse. Private enterprises, at least, have profits as their main objective. When governments run companies, the competition is between political and personal goals, which slows down vital decision-making. Time after time it has been proved that governments should stick to establishing a sound and impartial legal system to regulate the functioning of the private sector, and recognise that nationalisation only destroys value and helps to increase the power of already very powerful and inefficient governments. 

Hugo Chavez’s Venezuela is a clear example. Money was wasted in nationalising perfectly functioning enterprises. And money continues to be wasted in supporting these nationalised companies’ inefficiencies. Meanwhile, Venezuelans have to live with daily shortages and deal with distorted price systems. For the country to again become economically sound, in the end, some day, the solution will be to re-privatise all of these nationalised enterprises.

Meanwhile, millions of Venezuelans remain in poverty, victims of the power struggles and misguided ideologies

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