What socialism? Private sector still dominates Venezuelan economy despite Chavez crusade

CARACAS – CARACAS (AP) — It's President Hugo Chavez's biggest economic battle cry, and it's getting louder as Venezuela suffers a recession: "We're going to bury Venezuelan capitalism."

Yet creating a socialist economy is one of Chavez's most elusive goals — a stark example of the disconnect between the president's rhetoric and the reality on the ground. In fact, the private sector still controls two-thirds of Venezuela's economy — the same as when Chavez was elected in 1998, according to estimates by the Central Bank.

The reasons are political and practical: Chavez knows most Venezuelans recoil from the idea of Cuban-style state control, and his government is far from being capable of taking over and running a majority of the economy.

"Basically he recognizes that in this day and age in a global economy ... complete state control would just doom the country," said Michael Shifter, an analyst at the Washington-based Inter-American Dialogue.

So his strategy has been to selectively nationalize companies, set up state-run supermarkets and promote worker-managed businesses, while trying to convince Venezuelans to accept his vaguely defined brand of "21st Century Socialism."

It is a hard sell for a country hooked on consumerism.

Shopping malls are filled with middle- and upper-class Venezuelans browsing through Lacoste shirts, Guess jeans and Montblanc pens. Sales have declined in the recession, but just about everyone who can afford it seems to own a BlackBerry, and Scotch whisky flows liberally in upscale restaurants at the equivalent of $110 a bottle.

Just as Chavez has ramped up his anti-capitalism tirades, he finds himself facing one of the biggest scandals of his tenure involving a state-run food distributor. The company, PDVAL, left more than 2,700 shipping containers of rice, flour, milk, chicken, beef and other foods in a port rotting or beyond their expiration dates.

Its former chief and two others have been arrested, and some Venezuelans have begun to mockingly call the state company "Pudre-val," using the Spanish word for rotting. One newspaper cartoon depicted Karl Marx wearing a gas mask to ward off the stench.

It's a glaring example of the problems and delays that regularly plague Venezuela's government-run operations.

In a review of 15 state-run companies, economist Richard Obuchi found that all "were producing well below goals or production capacity."

The vast majority — some of which were nationalized by Chavez — now rely on government subsidies, said Obuchi, a professor at the Institute of Higher Administration Studies, or IESA, in Caracas.

One of the expropriated companies, industrial valve maker Industria Venezolana Endogena de Valvulas SA, or INVEVAL, has been limited to refurbishing old oil industry and water valves for years — instead of producing them as it once did.

Port workers in Puerto Cabello, where much of the rotten food was found, say six of the port's eight cranes are out of order and the pace of importing cargo has slowed since the government took over management last year.

The country's food imports have grown as the government has seized farmland, and periodic shortages of foods such as milk, beef and sugar have emerged in recent years.

People at a state-supported farming commune on the outskirts of Caracas say they have been waiting for a new well to water crops for more than a year since the first one went dry.

While production has declined, the public sector has swelled from about 1.4 million workers in 1999 to about 2.4 million in 2010, according to government figures.

"They don't have the capacity to manage any company," said Rafael Davila Guaricuco, a 34-year-old port crane operator. "They're destroying everything."

That is precisely the perception Chavez tries to fight in his speeches.

"The bourgeoisie is trying to convince Venezuelans that the path to socialism isn't viable, that all businesses in socialism go bust. It's the opposite," Chavez said.

He pitches cut-rate prices at subsidized state-run supermarkets like a salesman, and touts a successful state-run dairy factory, cooking oil plant and the nationalized telephone company.

State-run markets are part of Chavez's attempts to counter 31-percent inflation that has been battering the country, alongside a recession that shrank the economy 5.8 percent in the first quarter. Venezuela is now the only South American country with a shrinking economy, according to the latest figures available.

Tensions are growing between Chavez and business leaders, who blame his policies for prompting a sharp drop in investment.

Chavez's finance and communication ministers didn't respond to e-mails seeking comment about his efforts toward socialism.

Since 2007, Chavez has nationalized and expropriated companies in sectors he deems strategic, including the oil industry, cement, telecommunications, electricity, steel and food. But economists note that those businesses make up a relatively modest share of the economy.

And the balance between public and private sectors remains nearly identical to when Chavez took office in part because the private sector grew faster than the government between 2003 and 2006, when the economy was booming.

Last year the private sector accounted for 70 percent of gross domestic product, including 11 percent in taxes paid on products, according to Central Bank estimates. The public sector was 30 percent, a slightly smaller share than when Chavez was elected in 2008.

By international standards, Venezuela has long had a large public sector because it includes the oil industry. By comparison, the public sector in Sweden accounts for 25 percent of GDP, and in United States less than 14 percent.

Chavez could have moved more quickly toward bigger state control while the economy was growing, but he had other priorities, including consolidating his political power after a 2002 coup that ousted him for two days.

He now has a favorable congress and judges. But just as he turned to his socialist economic agenda, lower oil prices and the global economic crisis cut into the money he had to take over and run companies.

Polls have repeatedly shown Venezuelans oppose expropriations. Chavez now is focused on maintaining his majority in September congressional elections and on his own re-election in 2012.

He has repeatedly said he would not use Cuba or the collapsed Soviet Union as an economic model, noting that even his mentor Fidel Castro has advised him: "Chavez, remember this isn't 1960."

Victor Alvarez, an economist and former mining minister for Chavez, said the aim is to build a new sort of "social economy" sector made up of worker-managed companies, farming cooperatives and other community-run businesses.

"The objective isn't for the state to have the greatest weight in the economy, because that would be simply repeating the experience of 20th century socialism," said Alvarez, who has been studying the transition to socialism at a government-sponsored research institution.

A plan prepared in 2007 by the government projected that such "social economy" businesses and the public sector would together become larger than the private sector by 2013.

Chavez knows he is still very far from that goal.

But he says he won't give up, using one of his favorite mantras: "We invent or we fail."